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The Nature and Policy/Legal Foundations of Budgeting

  • By Sarah Makena
  • June 21, 2019
  • 0 Comment

The Nature and Policy/Legal Foundations of Budgeting

National budgeting involves the making and implementing of public decisions regarding resource mobilization, allocation and utilization. The budget is a good indicator of a government’s policies and priorities. It serves the functions of ‘collection and allocation of scarce resources to priority sectors, provision of goods and services and redistribution of incomes. The Institute of Economic Affairs notes: 

Budgeting is about choosing who pays for government goods and services, who benefits, and where to allocate resources. All these decisions have significant socio-political implications. Thus, the Budget is an important policy tool for influencing the direction of investments, consumption, and growth. It is the means through which Government raises revenues allocates resources, costs, and benefits to support policy programs and priorities that a government has committed to.

In Kenya budgeting is primarily driven by the national long-term development agenda-vision 2030- and the Constitution. While Vision 2030 has set out the national aspirations in terms of democratization and development in the three key areas – economic, social and political- the Constitution has established the normative foundations and structures, systems and process for governance of the state. The Constitution provides for the principles and systems of public finance. Pursuant to the constitution, the Public Finance Act, The Audit Act and the Public Procurement Act have been enacted reviewed to facilitate a more transparent, budget making, implementation and financial reporting on the budget.

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The Public Finance Act sets out the process of budget making. It and provides for the preparation and publication of the key policy papers- the Budget Review and Outlook Paper (BROP) and the Budget Policy Statement (BPS) which set the foundation for the budget preparation. Both papers are prepared by the national treasury and submitted to the Cabinet for review and then submitted to parliament for approval.

The Budget Review and Outlook paper (BROP)

The BROP reviews the implementation of the previous budget in terms of the fiscal outcome and forecasts the fiscal outlook for the coming years. Its primary contents is: actual fiscal performance in the previous financial year compared to the budget appropriation for that year; updated macro-economic and financial forecasts with sufficient information to show changes from the forecasts in the most recent Budget Policy Statement; information on how actual financial performance for the previous financial year may have affected compliance with the fiscal responsibility principles or the financial objectives in the latest Budget Policy Statement; and the reasons for any deviation from the financial objectives together with proposals to address the deviation and the time estimated to do so. The PFM Act sets out the principles of fiscal responsibility principles for responsible budgeting including:

i) Over the medium term, a minimum of 30% of the national budget shall be allocated to development expenditure

Over the years, most of the public resources have been spent on recurrent expenditure thus starving development programmes of funding. The Constitution seeks to remedy this situation by requiring minimum expenditure on development. The prudence of this provision is demonstrated by the current public outrage at massive public expenditure on foreign trips and allowances by the county governments.

ii) The national government’s expenditure on wages and benefits for public officers shall not exceed a percentage of the national government revenue as prescribed by the regulations

The public wage bill has been rising exponentially over the last few years and has now reached unsustainable levels. Although the government has expressed its concern over the wage bill, no tangible progress has been made in containing the wage bill. It was estimated that that by end of the financial year in 2013 the wage bill to national revenue ratio was 50% against the international desirable standard of 40%.

iii) Over the medium term, the national government’s borrowings shall be used only for the purpose of financing development expenditure and not for recurrent expenditure

Public debt can be a serious challenge to macro-economic stability. Government borrowing often crowds out the private sector borrowing seriously undermining development. Debt repayment can seriously undermine the states capacity to provide services hence the wisdom of containing public debt. A public debt management office has been established under the Public Finance Management Act. Unfortunately, public debt has continued to pile up under the new constitution despite these provisions. Currently the debt stands at.

iv) Public debt and obligations shall be maintained at a sustainable level as approved by Parliament (NG) and County assembly (CG)

This provision seeks to subject the executive’s borrowing powers to parliamentary oversight. It empowers parliament to set a ceiling for public debt. A ceiling has now been set under the public management act/ regulations.

v) fiscal risks shall be managed prudently

The Constitution seeks to ensure a stable micro-economic environment by requiring fiscal prudence. To facilitate this the central bank has been granted considerable independence from the executive under the Central Bank Act.

vi) a reasonable degree of predictability with respect to the level of tax rates and tax bases shall be maintained, taking into account any tax reforms that may be made in the future.

To ensure sustainable development, the Constitution provides for a predictable tax regime to can allow economic actors to plan and budget.

The Budget Policy Statement (BPS)

The BPS sets out the broad strategic priorities and policy goals for the new budget for both the national and county governments for the coming year and the medium term. The basic content of the BPS is:

1. An assessment of the current state of the economy and the financial outlook over the medium term, including macroeconomic forecasts
2. The financial outlook with respect to Government revenue, expenditures and borrowing for the next financial year and over the medium term                     
3 . The proposed expenditure limits for the national Government, including those of Parliament and the Judiciary and indicative transfers to county government
4. The fiscal responsibility principles and financial objectives over the medium-term including limits on total annual debt.

During the preparation of the BPS, the national treasury is required to consult: The Commission on Revenue Allocation;(b) County governments;(c) Controller of Budget;(d) The Parliamentary Service Commission;(e) The Judicial Service Commission;(f) The Public; and (g) Any other interested persons or groups. The BPS must be published and publicized by the National treasury. It is required by PFM Act to be submitted to parliament by 15th February every year. Parliament discusses the BPS and makes recommendations to the treasury on how the Budget should be prepared.

The Medium Term Expenditure Framework (MTEF)

The budgeting process is guided by the Medium-Term Plan (MTP) (for implementing vision 2030) and the Medium-Term Expenditure Framework (MTEF). The MTP identifies the policies, programmes and projects the government will implement within its electoral mandate period of five years. The MTP is developed through a participatory process involving expert input, sector consultations and public hearings. The MTEF indicates the projected resource requirements/allocations for the three-year period projected from the current financial year on a year on year rolling period.

MTEF has improved allocation of resources to strategic government priorities. The MTEF seek to enhance allocation of resources to strategic government priorities through macro targets prediction/estimation, determination of sectoral priorities and financial programming. According to the World Bank’s Public Expenditure Management Handbook (1998a: 46), “The MTEF consists of a top-down resource envelope, a bottom-up estimation of the current and medium-term costs of existing policy and, ultimately, the matching of these costs with available resources…in the context of the annual budget process.”

Challenges in Effective Budgeting

Like most developing countries, Kenya faces serious challenges in budgeting arising from the inability to integrate the development agenda, government priorities and budget allocations. Ideally the budget should be used as a development tool that optimally allocates and utilizes resources in a manner that addresses the key national social and economic challenges including poverty and unemployment. Unfortunately, over the years this has not been achieved due to many factors including the mismatch between professed priorities and actual budget allocations; poor execution of the budget; mismanagement of resources and corruption.

A Researcher has noted that despite the change from a command and control state-led development to a liberalized economy the question still remains ‘who gets what, when and how?’ and that ‘Kenya still faces the challenge of figuring out a fair, equitable and legitimate framework of harnessing, distributing and managing its resources’. Although there is greater stakeholder participation in the development of the budget, following recent reforms, a lot remains to be done to ensure the budget genuinely reflects the real national and sectoral needs and priorities. Political considerations, sectoral interests still play a disproportionate role in determining allocation of resources.

By Sarah Makena