Why debt in any form is just deferred tax

Debts are ultimately paid for by taxes or investment income. Donations come from taxes in the donor country! Let us peel the onion together.

All nations rely mainly on tax revenues to finance their national budgets. In most cases, the entire budget is financed from them. There are a few exceptions, where a sizeable portion of the annual budget is financed from investment income.

Norway and Singapore are the leading examples. Both have significant cashflows in dividends and interest income from investments.

At $2,000 billion, Norway’s Government Pension Fund Global is the world’s largest sovereign wealth fund. It is primarily funded from oil revenues and has invested in 8,500 listed companies around the world. It also invests in bonds and real estate. Last year, the fund generated $252 billion, a tidy 13.1 percent return.

Singapore has the Government of Singapore Investment Corporation (GIC) and Temasek, both investment corporations that were funded from budget surpluses over several decades. They generate substantial revenues from financial assets and direct investments.

The Kenyan equivalent is the Kenya Development Corporation (KDC). It recently paid Sh57 million in dividends to the National Treasury.

The government has also invested directly, owning, for example 34.9 percent of Safaricom, and 19.76 percent of KCB Group, the top most profitable Kenyan companies.

That yielded Sh16.8 billion and Sh9.6 billion in dividends respectively, from last year’s trading results.

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Some countries, while not having sovereign wealth funds, have good revenue streams from royalties on natural resources.

Australia and Canada used their extensive mineral resources to build broad-based economic development. Chile is highly reliant on copper exports, while Botswana has diamonds. There is a downside to over-reliance on minerals. When global prices drop, cashflows decline.

The best estimates I can find are that Singapore finances about 20 percent of its annual budget from investment income. The portion, while significant, is slightly less for Kuwait, Qatar and Norway.

Loans are made on the basis of future cash flows. The reliance on future cashflows to pay debt is not unique to the public sector. It is exactly the same in the private sector.

To extend a loan, we start by examining the future cash flows as estimated by the sponsors and management of the borrowing entity, to see if they will be sufficient to repay the loan.

Because these are estimates of future cash flows, it is standard practice to present upfront, the assumptions underlying the projections, because in the end the veracity of those cash flows will very much depend on those assumptions.

To complete the picture, we conduct sensitivity analysis, by varying each key assumptions at a time, and then in combinations, to see the impact on profitability and debt service ability.

Similarly, when we estimate expected tax revenues, we make assumptions about the likely level of economic activity – measured usually as GDP growth. We also make assumptions on the levels of inflation, interest and exchange rates, as well as expected taxes from any new tax policies.

If the actual conditions vary considerably from those expected, the outcomes follow suit. When we raise more tax revenue than expected, government borrows less. When we raise less than expected, government borrows more.

For the year to June 30, 2025, Kenya spent Sh1.91 trillion on debt repayments. Of this, Sh809.57 billion was for principal repayments, and Sh1.01 trillion for interest payments, most (Sh750 billion) being domestic interest payments.

Liability management operations are quite common for governments and large corporations. They are intended to deleverage when financing costs are too high, extend maturities, minimise financing costs and optimise the capital structure. Extending maturities is basically rolling debt over, which means trading debt whose repayment dates are near with new debt of longer term.

Whereas governments routinely roll over debt, it is not recommended to borrow to pay interest. Countries, companies and individuals who do that are in debt distress.

That is because debt service has overtaken the repayment capacity by that point. To be clear capacity is from revenues. Any final settlement of debt comes from revenues. Debt is therefore, deferred tax.

Ndiritu Muriithi is an economist and Partner at Ecocapp Capital, an advisory firm. He is also the chairman of KRA and former governor of Laikipia County. Email [email protected]