The Kenyan Finance Bill 2024 proposes significant tax hikes aimed at increasing government revenue, a move that has ignited widespread public outrage and protests. Concerns about the high cost of living and increased tax burdens have dominated public discourse. This article aims to compare the economic projections under the Finance Bill 2024 with alternative analytical recommendations, focusing on the impact on GDP growth, inflation, employment, and sector performance. Drawing from data provided by the World Bank, Kenya National Bureau of Statistics, and the Central Bank of Kenya, we present a comprehensive analysis, as completed on Google Colab [link here] and on Replit using the instructions for code (KESimulation1.jl) at the simulation section of this article.
Impact on GDP Growth
Under current economic policies without the Finance Bill, Kenya's GDP growth rate is projected to remain steady at 5.6%. This stability stems from moderate consumer spending and effective economic policies that support consistent expansion. However, with the Finance Bill's proposed tax hikes, the GDP growth rate is expected to decrease to between 4.5% and 5.0%. The increased taxes are likely to reduce consumer spending and raise operational costs for businesses, leading to slower economic growth.


Recommendations: To counteract this, it is essential to implement targeted tax incentives and infrastructure investments, which would encourage business expansion and attract foreign investment, thereby sustaining or even enhancing the GDP growth rate. It is crucial to consider the tax elasticity of GDP, which measures how changes in tax rates affect economic output. Research from KESimulation1 indicates that, while a 1% increase in tax rates beyond the 30% limit reduces GDP growth by 0.1% to 0.3%, as supported by Laffer Curve analyses.
Impact on Inflation
Without the Finance Bill, the inflation rate is projected to stabilize at 6.5%, benefiting from controlled government spending and stable consumer prices. However, the Finance Bill is expected to push the inflation rate to between 8.0% and 8.5%. This increase would result from broad VAT hikes and new taxes on essential goods and services, driving up consumer prices and exacerbating inflation.


Recommendations: To avoid such inflationary pressures, the government should refrain from broad VAT increases and instead focus on measures to reduce costs, such as improving supply chain efficiencies and lowering production costs. An analysis from KESimulation1 of the tax elasticity of inflation can provide insights into how tax changes impact inflation rates.
Impact on Employment
The employment rate is projected to increase, reaching 94.7% by 2034 under the current economic trajectory without the Finance Bill. This growth is driven by sectoral expansion and moderate business growth. In contrast, employment rates could stagnate or decline to 94.0% with the Finance Bill, as the higher tax burden may lead businesses to cut costs, including layoffs.


Recommendations: To stimulate job creation, the government should support SMEs and innovation through grants and low-interest loans. This approach will foster entrepreneurship and lead to new job creation, sustaining high employment rates. Analyzing the tax elasticity of employment from KESimulation1 can help understand how tax policy changes affect employment levels.
Impact on Sector Performance
The retail sector is expected to contract with the Finance Bill due to reduced consumer spending, whereas steady growth is anticipated without it. The finance and digital economy sectors are projected to experience slower growth with the Finance Bill because of new taxes on digital marketplaces and financial transactions. Without these taxes, robust growth is expected as digital adoption continues to rise. Similarly, the manufacturing sector's competitiveness is likely to be reduced under the Finance Bill due to higher production costs, while steady growth is expected without it.




Recommendations: To enhance sector performance, the government should implement targeted tax incentives and increase infrastructure spending, which will improve business conditions and foster growth. Sector-specific elasticities from KESimulation1 can provide insights into how different sectors respond to tax changes.
Laffer Curve Analysis
The Laffer curve illustrates the relationship between tax rates and tax revenue, suggesting that there is an optimal tax rate that maximizes revenue without excessively burdening the economy. In Kenya's context, studies show that the current tax rate is nearly surpassing the upper threshold of the Laffer curve (30% tax rate), indicating that further increases could lead to diminishing returns in revenue and negative economic impacts.

For instance, Wangare Njoroge's study (2023) on Kenya's proposed tax increases demonstrates that while initial hikes might boost revenue, they eventually reduce GDP growth and overall economic productivity. This is due to decreased consumer spending and higher operational costs for businesses. By understanding the Laffer curve's implications, policymakers can aim for a balanced approach that avoids excessive taxation while ensuring sufficient government revenue.
Conclusion
The Finance Bill 2024 poses several risks, including higher consumer costs, reduced spending, and slower economic growth, potentially undermining Kenya's economic stability and long-term growth prospects. Conversely, implementing analytical recommendations based on KESimulation1 can lead to sustainable growth, stable inflation, and increased employment. Targeted tax incentives and infrastructure investments will support business expansion and job creation, fostering a resilient economy.
It is imperative to adopt socially inclusive and economically beneficial policies for long-term prosperity. By focusing on sustainable growth strategies and addressing public concerns, Kenya can achieve robust economic development and improved quality of life for its citizens. Adopting these recommendations over the Finance Bill 2024 will ensure that Kenya remains on a path to sustainable economic growth and social stability.
Simulations
Kindly free to run the Julia code hyperlinked (KESimulation1.jl) on Replit. You will have to download the datasets and upload them to your environment, then update the paths appropriately before running. For the python simulation on Google Colab, everything is set up in the hyperlinked file, waiting for a run and/or audit.
Summary
The current state of Kenya’s Economic data

The projections based on the analytical recommendations above.

Comparison between the current baseline projections and the analytical recommendations above

Comparison between the baseline projections and the Financial Bill 2024 projections.

10 year Laffer Curve Projections

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