In a significant ruling, Kenya’s High Court has upheld the validity of President William Ruto’s housing levy, a contentious tax measure aimed at generating funds for the construction of affordable homes. This decision marks a victory for Ruto’s administration in its efforts to address Kenya’s housing deficit and steady its finances amid a challenging economic landscape.

The ruling, delivered by Judges Olga Sewe, John Chigiti, and Josephine Mongare, affirmed that the new tax law, which requires all employees to contribute 1.5% of their gross earnings, matched by an equal amount from employers, is valid. The law had faced several legal challenges since its introduction, but the court found that petitioners opposing the tax had not provided sufficient grounds to overturn it.

This decision is expected to have a far-reaching impact on both the housing sector and Kenya’s fiscal strategy, as the government grapples with ballooning debt and economic contraction.

Background of the Housing Levy

The housing levy, first introduced by President Ruto in early 2023, was a cornerstone of his plan to provide affordable housing for millions of Kenyans. The plan aims to construct 200,000 affordable homes annually, addressing the country’s housing shortage, especially in urban areas like Nairobi and Mombasa, where housing demand far outstrips supply.

Ruto’s vision for affordable housing is part of his broader social and economic reform agenda, which also includes initiatives to boost job creation, support small and medium-sized enterprises (SMEs), and provide social safety nets for the country’s vulnerable populations.

However, the housing tax has faced significant resistance from both employees and employers, many of whom see it as an additional financial burden in a time of economic hardship. In 2023, Kenya’s High Court initially ruled the levy “discriminatory and unfair” because it applied only to those with formal jobs, a sector that comprises less than a quarter of Kenya’s total labor force. The court also criticized the government for not having the legal framework in place to support the tax at the time.

After the initial setback, the government revised the law to make the levy applicable to all taxpayers, expanding the revenue base and creating a new Housing Fund to manage the proceeds. Ruto signed the revised legislation in March 2024, triggering a fresh wave of opposition and legal challenges from various groups, including labor unions, civil society organizations, and opposition politicians.

The Court’s Decision and its Implications

In their ruling, the three-judge bench in Nairobi found that the new law was legally sound and did not violate the rights of workers. The judges rejected claims that the levy was unconstitutional or unfair, stating that the government had acted within its rights to impose taxes for the public good.

The decision clears the way for the government to continue collecting the housing levy, which has already brought in 54.2 billion shillings ($420 million) between March and June 2024. The government is targeting to raise 63.2 billion shillings in the fiscal year ending June 2025, with the funds earmarked for affordable housing projects across the country.

President Ruto, in a speech over the weekend, emphasized the importance of the housing program for Kenya’s long-term economic stability. He noted that approximately 124,000 housing units are currently at various stages of completion, and the construction projects have already created over 160,000 jobs in the construction industry.

Ruto also stressed that affordable housing is not just about providing shelter but also about stimulating economic growth by creating jobs and promoting industries related to construction, such as cement production, steel manufacturing, and real estate services.

Economic Challenges and Funding Gaps

Despite the court’s ruling and the progress made on housing projects, Kenya’s economy remains under considerable strain. The country’s public debt has soared in recent years, leading the International Monetary Fund (IMF) and the World Bank to classify Kenya as being at high risk of debt distress. Kenya’s debt stood at approximately 67% of GDP by mid-2024, prompting concerns about the government’s ability to service its loans without resorting to further austerity measures.

The housing levy is part of the government’s broader strategy to fill a significant budget gap. However, the administration has limited options for raising additional revenue after widespread protests forced it to backtrack on plans to introduce other new taxes. In July 2024, at least 60 people died in violent clashes between protesters and police, leading the government to abandon proposals for higher fuel taxes and a controversial tax on mobile money transactions.

With those revenue streams off the table, the $2.7 billion shortfall in the budget has left the government scrambling for alternatives. The housing levy, therefore, represents one of the few viable options for raising funds without further inflaming public discontent.

Construction Industry Slowdown

While the housing program is expected to have long-term benefits, Kenya’s construction industry is currently facing significant challenges. Data from the Kenya National Bureau of Statistics (KNBS) show that the sector contracted by 2.9% in the second quarter of 2024, as contractors abandoned several road and infrastructure projects due to non-payment by the government. The delay in settling arrears has led to a slowdown in the consumption of key construction materials, such as cement, bitumen, iron, and steel.

This slowdown is concerning because the construction sector has traditionally been one of the key drivers of Kenya’s economic growth, contributing about 6% to GDP and employing millions of people. The decline in construction activity is symptomatic of the broader fiscal challenges facing the government, which is struggling to meet its obligations while maintaining essential public services and investments.

Affordable Housing: A Key Pillar of Ruto’s Agenda

Despite the economic challenges, the affordable housing program remains one of Ruto’s flagship initiatives, and the president has staked much of his political capital on its success. The program is seen as a crucial element of his “Bottom-Up” economic strategy, which seeks to promote inclusive growth by focusing on the needs of ordinary Kenyans rather than elite interests.

Affordable housing, in particular, resonates with many Kenyans who have been priced out of the property market due to rising land and construction costs. According to a 2023 report by the World Bank, Kenya has one of the fastest-growing urban populations in Africa, with nearly 500,000 people moving to cities each year. However, housing supply has not kept pace with demand, resulting in a massive shortage of affordable homes.

The government’s goal of building 200,000 affordable housing units annually is ambitious, and experts say it will require significant private sector investment to succeed. Public-private partnerships (PPPs) are expected to play a key role in financing the construction projects, with developers providing the technical expertise and capital needed to build the homes, while the government provides land and infrastructure.

Future Prospects

The court’s decision to uphold the housing levy gives Ruto’s administration a much-needed boost, but the challenges facing the affordable housing program are far from over. The government will need to carefully manage its finances to avoid further debt accumulation while ensuring that the housing projects are completed on time and within budget.

Additionally, the success of the program will depend on the government’s ability to win public support for the housing levy, which remains deeply unpopular with many Kenyans. Critics argue that the tax disproportionately affects low- and middle-income earners, many of whom are already struggling with high living costs and stagnant wages.

Nevertheless, the affordable housing program has the potential to transform Kenya’s urban landscape and provide millions of people with access to decent homes. If successful, it could serve as a model for other African countries facing similar housing challenges, and bolster Ruto’s legacy as a leader committed to improving the lives of ordinary citizens.

The coming months will be critical as the government seeks to navigate Kenya’s economic challenges while delivering on its ambitious housing agenda.

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Photo source: Google

By: Montel Kamau

Serrari Financial Analyst

23rd October, 2024