During the opening quarter of the current fiscal year, Kenya’s payroll taxes deviated significantly from the established target. This marked the most substantial shortfall since the onset of the Covid-19 pandemic. The Kenya Revenue Authority (KRA) revealed that they collected Sh123.04 billion on workers’ earnings between July and September 2023; however, this fell short by a substantial 13.91%, equivalent to Sh19.88 billion, compared to the anticipated collection of Sh142.93 billion during that period.
The current downturn, reminiscent of the fiscal year 2020/21—a period marked by pronounced impacts from Covid-19 relief measures—illuminates the daunting challenges confronting our labor market. The results reflect an admirable 11.38 percent growth in Pay as You Earn (Paye), reaching Sh110.47 billion; however, they also signify businesses grappling with job creation and providing salary increments.
In its Budget Review and Outlook Paper (BROP), the Treasury attributes the primarily underperforming Paye receipts to “delayed disbursements to various Government entities.” These delays directly affect payroll remittances from the public sector. The long-standing moratorium on new civil service employment, in place since 2013 as a measure to control the wage bill, significantly restricts growth in government entities’ payroll taxes.
Escalating operational costs pose a significant challenge to private enterprises, particularly Micro, Small, and Medium-sized Enterprises (MSMEs). A multitude of taxes and levies have compelled numerous smaller businesses to join the informal sector, fueling the growth of unemployment in Kenya.
The Executive Director of the Federation of Kenya Employers (FKE), Jacqueline Mugo, emphasized that MSMEs face significant challenges; she articulated this and underscored how many businesses now find formal employment financially inaccessible. As a result of this shift – employers favoring cost management over expansion – it directly increases the count of unemployed Kenyans: an insight into consequential priorities impacting workforce dynamics.
Also significantly shaping the current economic landscape is a dwindling demand for goods and services. Since July, corporations have reported slowed sales—coinciding with additional taxation measures’ enforcement amidst rising inflationary pressures. However, a notable exception emerged in August: bipartisan talks between President Ruto and opposition leader Raila Odinga ignited a temporary boost in business confidence, thus marking an increase in business optimism.
The optimism, however, quickly dissipated: escalating fuel and electricity costs—coupled with rising taxation—forced a freeze in employment by September. Attributing this halt to the soaring cost of living and inflationary pressures was Stanbic Bank Kenya’s Purchasing Managers Index (PMI).
In October, the labor market notably toughened: companies reported job cuts at an unprecedented rate—unparalleled since June 2020 when Covid-19 restrictions peaked. They cited reasons such as non-replacement of departing employees and staff reductions resulting from diminished workloads.
Businesses grapple with escalating material and energy costs; a weakening shilling—coupled with dollar scarcity. They have reported not only reduced demand for their offerings but also marked drops in the face of elevated inflationary pressures: these have eroded consumers’ purchasing power—a factor that leads to constrained new investments and decreases consumer demand.
Further illustrating the challenges in other tax categories, Treasury data reveals: excise duty falls short by 13.20 percent; value-added tax underperforms—lagging behind at 3.23 percent; corporate income tax lags considerably—a deficit of 7.87 percent—and import duty experiences a significant shortfall of 21.51 percent.