The rise of big government as President Ruto starts second year

Government spending on social programmes such as universal health coverage (UHC) and affordable housing is set to rise in the second year of the William Ruto administration, setting up workers, households and businesses for a heavier tax burden. 

Dr Ruto, who marked his first anniversary as President mid last month, last week called for a speedy passage of the Social Health Insurance Bill to pave the way for the establishment of a fund to which salaried workers will contribute 2.75 percent of their gross monthly salary.

The Social Health Insurance Fund, which will replace the National Health Insurance Fund (NHIF), is expected to collect more than double the current Sh80 billion that the NHIF receives in premiums annually in light of the enhanced contributions.

The UHC is among the ambitious social programmes being implemented by the Ruto administration in a spending pattern that has drawn comparisons to that of a welfare state or big government.

“It is a welfare state… one we can’t afford,” said Johnson Nderi, Manager, Corporate Finance and Advisory at ABC Capital Ltd, an investment bank.

A welfare state is one in which the government provides basic economic security for its citizens such as unemployment benefits, free college education or healthcare.

Critics of big government also cite the effect of excessive state interventions crowding out the private sector.

As part of its programme to build affordable houses for the poor, including those living in the slums, the Ruto government started collecting a 1.5 percent housing levy on the gross pay of salaried workers with the enforcement of the Finance Act 2023 in July, which is to be matched by employers.

Speaking in Nairobi’s Kibera slums on Sunday, the President reiterated his government’s commitment to the affordable housing programme, vowing to eliminate slums in the city in 10 years.

“We are removing people from the slums. Kibera and all the other slums within Nairobi will not be there in 10 years. We will change it into an estate,” Dr Ruto said on Sunday.

Read: President Ruto’s first year: Hits, misses on economy

Housing levy deductions are expected to rise from Sh63.2 billion in the current fiscal cycle to Sh70 billion in 2024/25 and Sh78 billion in 2025/26, according to estimates in the Treasury’s draft Budget Review and Outlook Paper (Brop). They are expected to soar by 40.8 percent to hit Sh89 billion in the 2026/2027 financial year.

The Treasury in the draft Budget Review and Economic Outlook says that the focus is on agricultural transformation and inclusive growth, micro, small and medium enterprise, housing and settlement, healthcare, digital superhighway and creative industry.

“Implementation of these priority programmes aims at providing the greater majority of our citizens with much needed social security while expanding the tax revenue base and improving foreign exchange balance,” said the Treasury.

The National Social Security Fund (NSSF) has nearly tripled its monthly collections from Sh1.3 billion to Sh4 billion with the enforcement of a new law that has raised contributions by workers and employers.

This means that the NSSF will collect around Sh32 billion annually. If you factor in pay-as-you-earn (PAYE), the NSSF, the housing levy and the proposed Social Health Insurance Fund deductions, then the State is likely to take about Sh10,264 or 20.5 percent from those earning Sh50,000 gross pay, up from the current Sh8,460.

Meanwhile, Ikolomani Member of Parliament Benard Shinali has also come up with a Bill proposing to set up an Unemployment Insurance Fund to which an employee will contribute one percent of his or her gross monthly salary, to be matched by the employer.

Additionally, a levy to be paid by Kenyans going overseas for work—to be known as the Kenya Migrant Workers’ Welfare Fund—has also been proposed by the Labour Ministry.

In a bid to stabilise food prices, the government has also intervened in the retail market distributing subsidised fertiliser, cooking oil, rice, beans, sugar and wheat directly to consumers. Dr Ruto, who campaigned on the promise of uplifting the poor, has also created a Financial Inclusion Fund, popularly known as the Hustler’s Fund, aimed at extending cheap credit to low-income individuals and small businesses.

In the first fiscal year that ended in June, the Hustler Fund was allocated Sh20 billion. This has since been halved to Sh10 billion in the current financial year even as default rates rise.

Dr Joy Kiiru, a senior lecturer at the University of Nairobi’s School of Economics, noted the aggressive pursuit of taxes and levies by the Ruto administration stems from the fact that it found a country that was experiencing a fiscal crisis with high debt levels.

The only way out of this crisis for the new government, Dr Kiiru reckons, was to fund the several social welfare programmes as much as it can through increased taxation.

“And now, the joke is likely to be on them,” she said, noting that the high taxes have already pushed some employers to change the employment terms to reduce their liability.

The Finance Act 2023 also introduced the 32.5 percent tax rate for persons earning between Sh500,000 and Sh800,000 monthly and the 35 percent tax rate for persons earning above Sh800,000 monthly. Value-added tax (VAT) was doubled to 16 percent.

Read: Assessing President Ruto after first year

Dr Kiiru termed the proposal to have employers and employees contribute to the Unemployment Insurance Fund “ridiculous” due to the high dependency ratios in the country.

“Anyone earning a salary in Kenya is supporting another seven Kenyans already,” Dr Kiiru noted.

Gerrishon Ikiara, another economist, reckons that the government has big dreams, which could be fruitful later on.

“Sometimes what you think is reckless ambition can be useful,” said Mr Ikiara, who served as a permanent secretary in the Ministry of Transport in the administration of then-President Mwai between 2003 and 2008. “If not fulfilled, people could be so negative. But also that ambitious programmes could fire up imagination,” he added.

The late Kibaki’s major welfare programme was free primary education, which survives to date. His successor Uhuru Kenyatta expanded it further by launching the free day school while also launching cash transfers to the elderly, a programme that the current administration has retained setting aside some Sh17.5 billion for the senior citizens in the current fiscal year.

Mr Kenyatta also presided over one of the biggest government spending on social programmes during the Covid-19 pandemic.

Orphans and vulnerable children have been allocated Sh7.9 billion in the fiscal year ending June next year.

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