Kenya Economic Update: How Kenya is using tax revenues to enhance access to education and healthcare for low-income families
Efforts to cushion the most vulnerable Kenyans from extreme poverty have been successful, with more than 60% of direct cash transfer benefits reaching the poorest 40% of the population, according to the World Bank’s latest economic update for the country.
The 18th Kenya Economic Update (KEU), In Search of Fiscal Space: Government Spending and Taxation; Who Benefits?, projects real gross domestic product (GDP) growth to rise to 5.7% in 2018 – up from 4.9% in 2017 – and continue to increase steadily to 5.8% in 2019, and 6.0% in 2020. The rebound is attributed to a recovery in agriculture, steady pick-up in industrial activity and continued robust performance of the services sector.
The pick-up in Kenya’s economy is also reflected in improved household consumption and a developing recovery in private investment. Household consumption is supported by strong remittance inflows and improved rains which has led to better harvests and lower food prices. Similarly, private sector investment is buoyed by improving investor sentiment and the availability of previously pent-up investment demand after a challenging 2017.
Further, with benign inflationary conditions, a stable exchange rate, and healthy accumulation of reserves, the stable macroeconomic environment has been broadly supportive of the economic recovery. Nonetheless, with private sector credit growth remaining subdued at 4.3% this pick-up is being curtailed by limited access to credit, as well as headwinds from fiscal consolidation.
“The Bank lauds the government for embarking on needed fiscal consolidation to safeguard macroeconomic stability and help crowd in private sector investment”said Carlos Felipe Jaramillo, World Bank Country Director for Kenya. “Further recalibrating the slowdown in expenditures between recurrent and development spending in favor of the former should allow fiscal consolidation to become more growth friendly.”
Since the 2017 announcement of the “Big 4” development agenda, which prioritizes food security, housing, universal health coverage and manufacturing, Kenya has made some progress in instituting policies that crowd-in private sector engagement, particularly within the affordable housing pillar.
The legal and regulatory framework for the Kenya Mortgage Refinance Company (KMRC) has been completed, the Stamp Duty Act providing an exemption for first-time home buyers has been signed into law, and standardized forms to register a change in property ownership have been introduced. Further reforms are needed to advance the goals of food security and nutrition, universal health coverage and manufacturing competitiveness, to maximize the inclusiveness of economic growth.
“While progress is being made to advance the “Big 4”, given the ambitious nature of these objectives, it calls for accelerating the pace of structural reforms, particularly in areas that helps crowd in the private sector to advance the “Big 4,” said Allen Dennis, World Bank Senior Economist and Lead Author of the KEU.
Building on the options to enhance domestic revenue mobilization, as outlined in the 16th economic update, the special section of the KEU examines the distributional consequences of government’s spending and taxation measures. The analysis could provide input for designing pro-poor policies and describes the rate at which economic growth translates into poverty reduction.
The report finds that personal income tax is progressive with the poorest 40% of Kenya’s population contributing 14.3% of market income, but less than 1% of direct taxes. In contrast, 80% of the tax incidence is borne by the richest 10% of the population. This factor is largely driven by the progressive nature of Kenya’s tax system and the limited access to formal sector jobs among poor people.
The special section also examines which benefits of social spending accrues to the poor. For example, cash transfer programs are well-targeted because a large fraction of the benefits is captured by the poor.
“We are glad to see that Kenya continues to invest in social protection programs. They are extremely important to support poor Kenyans, and protect vulnerable households,” said Utz Pape, World Bank Senior Economist of and lead author of the economic update special section on fiscal incidence analysis. However, cash transfer schemes in Kenya cover only a small portion of the population and could be expanded further to increase their poverty-reducing effect.
The economic update notes that many poor Kenyans still remain without support from direct cash transfer programs due to small coverage of existing programs. As a result, the report says there is only a very modest impact of direct cash transfer programs on poverty and inequality. To reduce poverty in Kenya more strongly with direct cash transfer programs, the report recommends that they be expanded, but cautions that it will require enhancing revenue mobilization to pay for the bill.
Commitment to Equity
Public education is an area where Kenya shows strong commitment to equity, according to the report. A disproportionately larger share of children from poor households benefit from spending on public education, compared to children of higher income households, who more often enroll in private primary education institutions. However, the report notes that spending on higher education increasingly benefits those who are better-off, as lower-income households often do not pursue higher education.
The KEU also examines equity impacts of public spending on health by analyzing outpatient care in lower-level facilities. Poor people are less likely to consult health providers, the report notes, and when they do, they are more likely to consult public facilities, particularly lower-level facilities such as dispensaries and health centers. Conditional on uptake, public health spending on out-patient care is pro-poor, according to the report. However, the associated user fees and over-the-counter purchases are regressive, meaning that low-income households pay a larger share of these costs than high-income households, relative to their market income.
The KEU recommends shifting public resources from higher-level health facilities to lower-level facilities, as this is likely to benefit poor people while also improving access. However, the report warns that the absorptive capacities of these facilities might be limited, potentially constraining the impact of increased spending at a certain point.