THE CITIZEN'S HANDBOOK ON THE BUDGET
Second Edition
A Guide to the Budget Process in Kenya
INSTITUTE OF ECONOMIC AFFAIRS
Published By
Institute of Economic Affairs (IEA)
5th Floor, ACK Garden House, Ist Ngong Ave,
PO Box 53989-00200
Nairobi, Kenya
Tel: 2721262/2717402
Fax: 2716231
[email protected]
http://www.ieakenya.or.ke
Copyright (c) Institute of Economic Affairs 2007
First published 2002
ACKNOWLEDGMENTS .................................................................. v
LIST OF ABBREVIATIONS ............................................................ vi
FORWARD ......................................................................................... 1
1. CHAPTER ONE :BACKGROUND ........................................ 3
1.1 What is the Budget?......................................................................................................... 3
1.2 Principles of a good Budget.............................................................................4
1.3 Why is it important to understand the budget?..........................................................5
1.4 The Budget, a process of bargaining...............................................................6
1.4.1 The budget, a political tool.........................................................................6
1.5 The rationale for a budget................................................................................................7
1.5.1 The allocation function................................................................................7
1.5.2 The distribution function............................................................................7
1.5.3 The stabilisation function..........................................................................8
1.6 Ensuring fiscal transparency.........................................................................8
1.7 Components of the Budget...........................................................................................8
1.7.1 Sources of government money...................................................................8
1.8 Government expenditure............................................................................11
2. CHAPTER TWO: THE BUDGET PROCESS ......................16
2.1 Evolution of the Budget Process...............................................................................16
2.1.1 Program Review and Forward Budget.....................................................16
2.1.2 Budget Rationalization Program (BRP).................................................16
2.1.3 Public Investment Program (PIP)...........................................................17
2.1.4 The Medium Term Expenditure Framework (MTEF)...........................17
2.2 Major Players in the Budget Process..........................................................................18
2.2.1 Parliament..............................................................................................18
2.2.2 The Executive.........................................................................................19
2.2.3 Non-state players..................................................................................... 20
2.2.4 The Citizen responsibility........................................................................ 20
2.2.5 Development Partners and aid agencies..................................................... 20
2.3 Stages in the budget process..................................................................................................21
2.3.1 Phase One: Budget Planning and Preparation..............................................21
2.3.2 Phase Two: Budget Proposal, Debate and Approval.....................................21
2.3.3 Phase three: Budget execution (implementation)..............................................31
3.3.4 Phase Four: Budget Monitoring and Evaluation............................................34
3. CHAPTER THREE: BUDGET CONTROL............................................. 38
3.1 Why Budgetary Controls?.........................................................................................................38
3.2 Budgetary Controls....................................................... ....................................................... ....... 38
3.2.1 Executive Controls........................................................................................39
3.2.2 Parliamentary Controls..................................................................................42
3.2.1 Sector Working Groups..................................................................................46
3.3 The role of civil society and the Citizen in budget control..............................................46
3.4 Summary of Budgetary Controls......................................................................48
4. CHAPTER FOUR: BALANCED BUDGETS AND PUBLIC DEBT. . . . . . 5 1
4.1 Balancing the Budget.................................................................................................................51
4.1.1 Public Debt and How it is Generated..................................................................................52
4.2 Classification of Public Debt................................................................................................... 53
4.2.1 External Debt..............................................................................................53
4.3 Domestic Debt..................................................................................................54
4.3 Basic problems associated with a large public debt .............................................................55
5. CHAPTER FIVE: SOURCES OF BUDGET INFORMATION......56
5.1 Importance of information...................................................................................................... 56
5.2 Budget Documents ................................................................................................................... 57
5.3 Where to find the budget documents and information in Kenya .................................... 58
GLOSSARY ........................................................................................................ 59
FIGURE 1: ANNUAL MTEF PROCESS IN KENYA ....................... 65
APPENDIX 1: THE BUDGET CALENDAR IN KENYA................. 66
APPENDIX 2: LEGAL INSTRUMENTS THAT GUIDE THE
BUDGET PROCESS IN KENYA ............................................................. 69
END NOTES ................................................................................................... 72
ACKNOWLEDGMENTS
The Citizens Handbook was first published in 2002 to respond to demand for
a better understanding of the budget process. It was steered by the late
Gachukia Nyaga and reviewed by Joseline Ogai, S. M. Kiiru, Isaac Njuguna,
Sammy Mwendwa, Jacob Akech, Sekou Owino, Peter Gatere, the then IEA
Chief Executive Betty Maina and staff, Kwame Owino, Albert Mwenda and
Duncan Okello. Achim Chiaji, Wangui Mwangi and Irene Omari provided
editorial and graphic design support .
.
Since 2002, Kenya has introduced a number of changes to the budget process.
As a result, IEA has updated the Guide to reflect these changes. Much
appreciation goes to Njeru Kirira, Masinde Muyundo and Ben Kimani for
updating the Handbook. Appreciation also goes to IEA
Chief Executive, Albert Mwenda and staff Frederick Muthengi, John
Mutua, GK Ndungu, and Thitu Mwaniki for reviewing and editing the
document, and Tandi Mwandama for organising for its publication. Last but
not least, the IEA is grateful to CIDA, USAID Kenya, DFID, and SIDA for
the financial support that facilitated the production of this Guide.
LIST OF ABBREVIATIONS
A-I-A
AIE
AG-C
BSC
C&AG
CBO
CBK
CFS
DDC
DDP
EAD
EMU
FAAC
IMF
KENAO
KRA
MBC
MPC
MTEF
NDP
NGO
PAC
PAYE
PIC
PIP
PRSP
PS
SO
VAT
-
Appropriations in Aid
Authority to Incur Expenditure
Auditor General Corporations
Budget Steering Committee
Controller and Auditor General
Community-Based Organisation
Central Bank of Kenya
Consolidated Fund Services
District Development Committee
District Development Plan
Economic Affairs Department
Efficiency Monitoring Unit
Fiscal Appropriations and Analysis Committee
International Monetary Fund
Kenya National Audit Office
Kenya Revenue Authority
Ministerial Budget Committees
Monetary Policy Committee
Medium Term Expenditure Framework
National Development Plan
Non-Governmental Organization
Public Accounts Committee
Pay As You Earn
Public Investments Committee
Public Investment Program
Poverty Reduction Strategy Paper
Permanent Secretary
Standing Orders
Value Added Tax
FOREWORD
Budgeting is about choosing who pays for government goods and services,
who benefits, and where to allocate resources. All these decisions have
significant socio-polical 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.
The totality of institutions that govern the budget process attests to the
importance and significance of the Budget. However, the value of the
Budget as a means to achieve growth and development, the level of citizen
engagement and knowledge about the Budget and its process is relatively
low.
This Handbook is an attempt to provide a brief and succinct discussion of the
process and issues regarding Kenya's budget. It brings into focus the
importance of the National Budget as a significant policy tool which
government can use to improve the well-being of Kenyans. It takes the reader
through the major phases of the budget process, identifying the institutions
and provisions that are at play at every stage and posing pertinent questions
for enhanced understanding. The booklet further identifies different centres
of power in budgeting and comments on the manner in which these powers
have been exercised. Lastly, it identifies the different levels where
opportunities exist for citizens to engage in the budgeting process.
Chapter One explores the meaning of a budget and assesses its rationale and
importance. It further discusses the main components of the budget
identifying the various categories of government revenue and expenditure.
Chapter Two provides a brief overview of the evolution of the budget
process. It then proceeds to outline the major players in the budget process,
including the Executive, Parliament, citizens, and other stakeholder groups.
1
The chapter concludes by giving an account of the four major budget phases:
Budget Planning and Preparation, Budget Proposal, Debate and Approval,
and Budget Execution and Monitoring and Evaluation.
Chapter Three outlines the budget control regime by giving an overview
of the key budgetary control institutions; Kenya National Audit Office,
Internal Auditor General, Accountant General, Parliamentary Public
Accounts and Public Investment Committees, Parliamentary Departmental
.
Committees, and Civil Society.
Chapter Four examines the challenges of budgeting in an economy with a
large public debt. It also attempts to explain the phenomenon of public debt
and its attendant concepts such as balanced budgets, deficit financing and
budget surplus.
Chapter Five concludes the Handbook with the sources of budget
information and a summary of key budget documents.
A Glossary containing some key definitions and technical terms used in the
text is also included. Two appendices containing the budget calendar and the
legal instruments that govern the budget process are also located at the end of
the Guide.
Reading through this book, it becomes clear that for Kenyans to engage
meaningfully in the budget process, they need to take initiative. At the same
time, the process needs to be made more user friendly and accessible. The air
of impregnability that presently surrounds the national budget process needs
to be cleared based on the understanding that the budget is for the people.
What this Guide reveals is that whereas there may be some weaknesses in the
budget process, the bigger challenge lies in bringing about institutional
reforms. Through this handbook, we hope that people will begin to appreciate
the constraints facing public finance management and performance, and
identify areas for reform to enhance citizen engagement. This publication is
intended to be an easy read, useful for purposes of quick references and
advocacy on public finance issues. We hope that in its own small way, it will
contribute to fostering citizen interest and engagement in the budget process;
the very basis for democratic and transparent management of public finance
2
CHAPTER ONE
C
BACKGROUND
In this introductory chapter we shall look at:
 A definition of the budget
 The importance of understanding the budget
 Rationale for preparing national budgets
 Components of the national budget
1.1
What is the Budget?
th
The word budget appears to have been first used in the 19 century while its
legal definition can be traced back to French law in 1862. A budget can be
defined as a financial plan, which outlines the major sources of revenue and
how the money raised is to be used or shared amongst competing needs. At
the national level, the budget is a comprehensive document that shows the
governments' plans to mobilize revenues and how it intends to use the amount
so raised, to finance various competing needs for the benefit of its citizens.
While a national budget shares some functional similarities with personal and
household budgets, the former is much more complex. Personal or
household budgets are smaller, simpler and easier to prepare and manage
since they are not subject to many claimants and do not involve any laws,
procedures or regulations. The need and spread of accountability for such
budgets is therefore limited. The national budget on the other hand, is unique
in that preparation and presentation is a Constitutional requirement. Its
formulation involves more parties, players, interest groups, rules, laws and
procedures. Through the national budget, the Minister for Finance seeks
Parliaments' authority to raise resources and approve use of these resources in
delivery of services and goods to citizens. Indeed, it is through the national
budget that the government demonstrates its commitment to policy
pronouncements.
The budget outlines both, the expenditure and the financing strategy. The
main sources of finances for the government are:
 Ordinary revenue: which represents the amount of money raised in a
given period through taxes such as income tax, corporation tax,
stamp duties, Value Added Tax (VAT) and excise duties.
3





User charges: which are fees charged to consumers of goods and
services produced by the government. These are only paid by those
who use the services, such as birth certificates, driving licences,
passports and registration of real estate properties.
Sale of assets: which includes the sale of bonded goods and other
assets including shares in commercial enterprises.
Investment income: which represents income derived from public
commercial activities, e g. dividends and interest on on-lent funds,
from Central Bank and state corporations.
Grants from foreign governments: which are non repayable funds
provided by foreign governments for a specific purpose.
Borrowing: which are repayable funds loaned by foreign
government, donors or domestic markets.
1.2
Principles of a Good Budget
Due to the importance of the national budget, economists have endeavored
1
to develop principles of a good budget. According to Joachim et al (2004)
a good budget should have the following attributes:
 Comprehensiveness: which means that the budget includes all
fiscal operations, on receipts and expenditure sides, within a
sustainable macroeconomic framework.
 Predictability: which means that the budget should be predictable
within a medium term horizon. This enables economic actors and
spending units to plan way ahead thus enhancing efficient service
delivery to the citizens.
 Contestability: which means that economic actors compete fairly
for resources and can challenge or question the Government on any of
the items in the budget, or on any of its priorities.
 Transparency: which means that the budget should be prepared and
presented openly and information should be available on a timely
basis. Such information ought to be reliable, and sufficient to warrant
decision making. Moreover, budget information should be easily
understood by stakeholders.
 Periodicity: which means that that the budget should cover a specific
period of time, in most cases a year, or three rolling years, so that the
economic players know when to expect results.
2
Other economists add the principles of authority and accountability and r
4
3
allocative efficiency . The former means that those in charge of various
aspects of national budget should take responsibility for delivery of budget
promises and commitments therein and account for the actions. Allocative
efficiency means that expenditures are based on priorities and the
effectiveness of public programmes.
1.3 Why is it Important to Understand The Budget?
Many Kenyans consider the budget a distant and secret government
document and the budget process a preserve of government officials in the
Ministry of Finance. Yet, if there is one government document that has a great
impact on the day-to-day life of every Kenyan, it is the budget. It is
therefore necessary for Kenyans to understand the budget and its
impact on our welfare.
The Budget is about making choices on what to do, how to finance what is
done, who pays, and who benefits. The Government decides what taxes and
fees to levy, or whether it should borrow to raise resources to fund its
expenditures. The day after the Minister presents the Budget Proposals in
June, many people notice significant changes in the prices of goods and
services such as, petrol, transport and electricity, which is due to impacts of
changes in tax and duty rates. For instance, taxation measures may entail
raising or lowering the income tax rates, duty and VAT rates and therefore
determine consumption and investment behaviour of citizens. Similarly,
lowering import duties, may encourage importation of consumer goods and
force local producers to lower prices or face closure.
Since in majority of cases budgetary resources are limited compared to the
needs, there is need for proper allocation and efficient use of available
resources. This calls for a process that allows prioritization so that only high
priority needs are funded. In addition, allocations should go to agreed
priorities which address the country's national agenda such as poverty
reduction. In so doing, the government ought to give direction on macro
stability and encourage the bottom up approach in identification of funding
priorities. This recognition is critical, bearing in mind that, in the past, the
government has allocated resources to activities which did not address the
needs and priorities of the target groups or the electorate. In such cases,
allocations led to wastage of resources. In such circumstances, stakeholders,
whether religious bodies, Non-Governmental Organisations (NGOs),
interest groups, or citizens, ought to be informed enough to challenge the
5
government, help set proper priorities, or occasion a change in budgetary
allocations.
Given competing needs, the Budget Process is always a difficult balancing
act. However, in some cases, the amount of money allocated for various
projects alone, does not reflect government policy commitments and
priorities but what is feasible. Some priority sectors may have serious
implementation or capacity problems while other sectors may need resources
to enable them to become potentially self-sufficient. When analysing
resource allocations, it is important to look at the impact of resources
allocated to a sector over a period of time rather than one financial year.
1.4
The Budget, a Process of Bargaining
Since the Budget process is a bargaining arena, it requires all stakeholders to
have an opportunity to engage the government throughout the process.
However some interest groups such as manufacturers associations, trade
associations, employers' associations and professional bodies like
accountants, try and often manage, to use their knowledge, influence and
connections to lobby the government for their own interests. While this may
be a legitimate thing to do, if carried too far, it can lead to conflicts between
national and vested interests. For this reason, the national budget should be a
product of compromise between interest groups and the national needs
operating in an open environment.
1.4.1 The Budget, a Political Tool
As a general rule, the government of the day uses the budget to deliver its
agenda, which may sometimes lead to skewed resource allocations due to
political differences. This often occurs when the budgeting process is not
inclusive or transparent and does not allow for wider consultation to take
place. Since a national budget and its process touches on all lives, it ought not
to be left to politicians, government bureaucrats, vested interests or groups
alone. The ordinary citizenry and various governmental and nongovernmental agencies should be actively involved in the budgetary process.
However, for these players to participate meaningfully and effectively, it is
important that they have the correct information and understand the budget
dynamics and processes.
6
1.5
The Rationale for a Budget
As may be clear from the first section of this book, the national budget is
prepared to enable government to finance its operations in a focused and time
bound manner which influences the lives of citizens and the level of
economic activity in the country. The Government like any individual or
household, has to be concerned with ensuring regular financial inflows
(receipts) and accounted for outflows (expenditures) to ensure sustainability.
For this reason, the national budget spells out the government's annual plan
for;

Total receipts: which represent the amount of money the
Government plans to raise in a budget period, how and
when it is expected to be received; and

Total expenditures: which represent the amount of money the
Government plans to spend in a budget period, and on what.
While the national budget pays more attention to raising and spending the
money, it also gives consideration to possible consequences of government
operations, and how this impact on other vital functions as discussed under
the following broad categories:
1.5.1 The Allocation Function
The Government is the most critical agent in realising the development
objectives of a nation. It is through the national budget that the Government
influences or directs, through policy implementation and financial
allocations, development of the country. In the budget, funds are allocated
and used to finance projects to foster development.
1.5.2 The Distribution Function
This function deals with how the process of raising public money or
resources and allocating them affects different sectors and citizens. Taxes,
and expenditure distribute burdens and benefits of goods throughout the
economy. Thus the distribution function is achieved through the imposition
of tax burdens and the sharing of benefits of public expenditure. If the
distribution of tax burdens is to those who are able to pay, and expenditure
benefits go to those most deserving, then distribution is said to be fair and
equitable.
7
1.5.3 The Stabilisation Function
The stabilization function deals with the macroeconomic objectives that are
necessary for achieving an acceptable and sustainable rate of economic
growth, stable prices, including interest rates, and balance of payments.
Government uses the Budget to attain and maintain a desired level of
performance in the economy by ensuring that both taxes and expenditure are
sustainable in the long term. However, excessive taxation and borrowing can
be major sources of economic instability, which can undermine efforts to
redistribute incomes. Maintaining sustainable level of debt together with
efficient use of debt resources promotes economic stability.
1.6
Ensuring Fiscal Transparency
In recent times, governments have come under increasing pressure to ensure
transparency in the management of public affairs, especially as they relate to
public expenditure. Information contained in the budget should provide one
of the most explicit reflections of the government's commitment to
transparency or openness. With adequate, timely and reader friendly
information, citizens are able to challenge the government if there are
differences between the stated policies or public pronouncements, and
resource allocation and distribution.
1.7
Components of the Budget
A national budget has two main components. Namely, the financing side and
an expenditure side. Below we expound on the various sources of
government finances as well as the breakdown of expenditures.
1.7.1 Sources of Government Money
The government relies on the following sources of funds to finance its
expenditures; (i) taxes (ii) user charges (iii) borrowing (iv) grants (v)
investment revenue from public corporations and (vi) privatization proceeds.
Taxes: Taxes are compulsory payments that the government collects and
utilizes to fund its operations. Taxes comprise the largest portion of public
revenue and can be classified broadly into either direct taxes or indirect taxes.
 Direct Taxes: The main direct taxes are income tax which is
collected as Pay As You Earn (PAYE), paid at various rates, on
8
items like individual employment income, withholding taxes on
interest and dividends, corporation tax (which is levied on the
profits of public and private companies), and stamp duties. The
largest portion of stamp duties is generated from charges on real
estate transactions with the balance coming from charges on other
transfers such as unquoted shares and stocks.
 Indirect Taxes: The main indirect taxes are import duties (also called
customs tariff or duties), excise duties and Value Added Tax (VAT).
These are taxes levied on production and consumption and are
collected from traders and industry (otherwise referred to as “taxable
persons”). Indirect taxes are included in the prices of goods and
services paid by consumers. Thus the tax burden is passed on to the
final consumer of the taxable goods and services. Unless the invoice
shows the tax separately, consumers may not even know that they are
paying a tax.
User Charges: These are fees charged to consumers of certain goods and
services provided by the government. User charges differ from taxes in that
they are only imposed on the consumption of particular goods and services
provided by government. Services that attract user charges include
processing of a trade license or driving license, lodging of court cases and
paying a court fine. These charges are only imposed on those who consume
the specified goods or services.
Borrowing: There are two categories of borrowing; domestic and external.
Domestic borrowing is done through the sale of government securities in the
4
form of Treasury bonds or Treasury bills in the local money market. The
most popular external borrowing is from multilateral institutions, like IMF
and World Bank, which lend cheaply, or on concessionary terms, i.e. terms
that have lower interest rates or longer maturity periods. Funds obtained from
external commercial sources, usually foreign commercial banks, tend to be
much more expensive.
When borrowing externally, the government has a choice between program
and project loans. A program loan goes to finance the budget and may be tied
to a specific financial year or years. On the other hand, project loans are tied
to financing specific projects, which means, that each loan is monitored on
actual implementation of the project. It is important to note that both program
and project loans can be concessional or non concessional, i.e. commercial,
9
meaning the loan is expensive.
Before a country decides to borrow either domestically or externally, the
impact of debt repayments in future should be assessed and considered
carefully. This may include an evaluation of the activities to finance using the
borrowed resources, the interest rates and the repayment period. Some
countries are highly indebted today due to past borrowing that was not used to
finance activities with high economic returns and where the supply of
resources by the donor was more important than considerations of whether
the resources were needed or not. It is important for stakeholders to engage
with government on why the foreign resources are borrowed and how they
are used.
Grants (Aid): Grants, popularly referred to as “foreign aid” are nonrepayable finances given by foreign governments and other financing
institutions. They can be subject to conditionalities and performance
benchmarks just like loans. For instance, Kenya has benefited from
substantial grants for HIV/AIDS mitigation programs, Universal Primary
Education program, and humanitarian assistance during famines. Similarly,
governments, and institutions have assisted Kenya in form of scholarships
for Kenyan students in various fields. Previously, this source of government
funding was directed to ministries for specific programs and/or projects.
External aid is now shifting to the Sector Wide Approach (SWAP), which
emphasizes a comprehensive sectoral approach to funding. Whereas foreign
aid may be cheaper, it is often subject to various conditionalities, which can
unduly interfere with national priorities and preferences. It is also subject to
exchange rate risks.
One major emerging trend, is the use of grants to supplement recurrent
expenditures. With time, these expenditures become entitlements and once
the development partner withdraws the funding, the displacement of other
funded activities, disruption or discontinuation of services can result.
Investment income: This source of public revenue includes dividends paid
by government and other corporations where the Government is a
shareholder. Although it is paid out by Government, it is still called revenue
because it starts off as a government receipt. All government receipts except
debt money are classified as revenue. A large share of this income comes
10
from dividends from Central Bank of Kenya, loan interest and repayments,
and similar receipts. Previously, this source of income had dwindled
significantly due to poor performance of state corporations. However,
following the introduction of performance contracts, the situation is fast
improving. State corporations which for years were a drain on the Treasury,
have shown remarkable improvements.
Privatisation proceeds: This is not a regular source of public revenue but it
comes in handy when the Government privatizes part of its commercial
operations. For instance, the 2006/2007 budget included about Kshs18
billion of expected receipts from the privatization of the Kenya Electricity
Generating Company (KENGEN) Ltd, Mumias Sugar, and Kenya
Reinsurance Corporation. However, one school of thought argues that such
proceeds, arising from sale of assets, should be used to retire public debt and
create capital, rather than fuel consumption. This argument is based on the
belief that an expansion of recurrent expenditures creates future costs which
are not sustainable.
1.8
Government Expenditure
Government expenditure comprises of recurrent and development
expenditures. The recurrent expenditures are those provisions made to meet
government operations, such as compensation to employees (salaries and
wages), transport operating expenses, repairs and maintenance of equipment.
Recurrent expenditure consists of two categories; non-discretionary and
discretionary expenditures. Non-discretionary expenditures are those
expenses that are pre-determined by the Constitution or an Act of Parliament,
and which constitute a direct charge on revenues e.g. debt service payments
(both principal and interest), pensions, salaries and wages for constitutional
officers. These expenses are referred to as Consolidated Fund Services (CFS)
because they are charged directly to the Consolidated Fund. They are also
known as mandatory expenditures which must be paid. Since they are predetermined by law, they are a first charge on revenues, and thus, they reduce
the flexibility in budgeting for other needs. Discretionary expenditures are
those expenses used by various agencies to produce goods and services for
citizens. Since these are not pre-determined by law, they can be adjusted
upwards and downwards depending on government's long-term policy and
availability of revenue.
11
They comprise of recurrent and development expenditures. Most of the
recurrent expenditures are part of the Recurrent Budget and most of
development (capital) expenditures are accounted for in the Development
Budget.
Development expenditures are provisions made for the creation of new
assets. These include expenditures such as, construction of roads,
rehabilitation and construction of water installations, and transfers from
government to other agencies for capital expenditures. This category
includes investments in public enterprises and private-public commercial
enterprises.
Sometimes a ministry or department, which collects revenues in form of
taxes, fines, fees, other charges, or receives donor funds for direct financing
of a project, is allowed, by the Treasury, to apply or use the money received,
to finance its own operations, instead of waiting for disbursements from
Exchequer. When this happens, the amount spent is deducted from approved
budget. The amount so allowed is referred to as Appropriations-in-Aid (AI-A), however, if the amount is not authorized as expenditure or when
receipts exceed the A-I-A, the excess must paid to the Consolidated Fund.
(This fund is described in Chapter 2)
Among the major concerns on development expenditure in Kenya are;
adequacy of funds, and long delays in implementation. With regard to
adequacy, there is concern that Kenya does not invest enough. For example
since 1998, gross (public and private) domestic investment (at current prices)
ranged between 15% and 19%, which is too low to finance the level of
investment necessary for high and sustainable economic growth capable of
generating enough employment. This is also indicated by the low ratio of
development to recurrent expenditure. From financial year 2002/03 to
2005/06, the gross approved development expenditure averaged 16% of the
total budget. This compared badly with an average of 84% of the total Budget
for recurrent expenditure. In the current financial year, i.e. 2006/07, there is
significant improvement in development-recurrent expenditure mix.
Estimated development expenditure is 25% of the total budget. The actual
expenditure will be released on Budget Day in June 2007.
12
Following is the Gross Approved Expenditure for Fiscal Years 2000/01 to
current Fiscal Year, 2006/07. The process of approving expenditure is
explained in the next chapter. 'Gross' means that the expenditure includes
Appropriations in Aid and donor funds.
13
Source: Estimates of Expenditure for Fiscal Years 2003/04, 2004/05,
2005/06 and 2006/07.
14
On delays of project and program implementation, the Government
experiences long setbacks between the decision to invest and the actual
investment, mainly due to protracted procurement systems that existed prior
to 2004. In addition, due to financial indiscipline and poor implementation
very few public projects and programs were completed in time or at all in the
1990s. Indeed, by 1997, the public sector hardly completed 3% of its projects
or programs. Poor budgeting together with incidents of poor governance
were blamed for this situation. Too many projects were started but
inadequately provided for in the budget.
A Public Finance Management Reform Strategy was finalised in 2006. This
strategy has 6 pillars; (i) financial sustainability and budgeting (ii) resource
mobilization (iii) budget execution (iv) procurement, (v) oversight and
evaluation and(vi) cross-cutting issues which are electronic service delivery
and Integrated Financial Management Information Systems (IFMIS), public
financial management legal framework and academic training, professional
accreditation and conditions of service. Under procurement, the Public
Procurement and Disposal Act was enacted in 2005 to assist in streamlining
procurement. A Public Procurement Oversight Authority has been
established under the act to ensure compliance with the Act, monitor and
report on the procurement system, assist implementation and operation of the
public procurement system and initiate public procurement policy. It is
expected that reforms in public finance management as well as others
discussed in chapter 3 will improve the situation.
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CHAPTER TWO
THE BUDGET PROCESS
In this chapter we shall review the major phases of the budget process
under the following sub headings:
 Evolution of the Budget Process
 Stages of the Budget Process
 Major Players
2.1
Evolution of the Budget Process
The Kenyan budget system has changed severally since independence,
mainly in response to problems of the day. Government has attempted to
make the budgetary process more coherent, efficient, participatory and propoor. However, there is still room for improvement as new challenges emerge
to complicate the budget process. An overview of the main reforms is
presented below:
2.1.1 Program Review and Forward Budget: These reforms were initiated
in the 1970s with the objective of designing and developing a comprehensive
list of public sector projects and programs on a multi year basis. The reforms
sought to provide guidelines for an integrated system for appraising and
evaluating projects and programs before they were included in the budget.
Specific objectives included to (i) generate data that would facilitate the
monitoring of project and program implementation by the ministries (ii)
facilitate identification of the funding agency or funds (iii) contribute to more
prudent decision making and (iv) create a data base for design of a system
data base.
2.1.2 Budget Rationalization Program (BRP): The BRP arose from the fifth
national development plan of 1984 which reiterated the need for longer term
guiding principles of economic development. This reform was in response to
economic shocks which occurred in the 1970s and 80s (both externally and
internally e.g. the first oil shock). To operationalize the Fourth Development
Plan, Sessional Paper 1 of 1986 was developed which envisaged the overall
Budget Rationalization Program (BRP). The objectives of the BRP were to
(i) improve productivity of public expenditures, by channeling the available
resources to priority areas (ii) strengthen planning and budgeting in Treasury
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(iii) increase contribution to budgetary resources from user fees and other
non tax revenues, (basically cost-sharing), and (iv) structure external
assistance more rationally.
2.1.3 Public Investment Program (PIP): The PIP was initiated in the early
1990s to address problems which existed in connection with implementation
of public projects. It aimed to: (i) examine the project portfolio and rank
them, then provide clear statements of project and program priorities (ii) link
those priorities to both available domestic and external finances, and macroeconomic strategies and circumstances, and (iii) concentrate scarce
budgetary resources on selected core (or the most central or critical)
investments. However, after introduction of MTEF, PIP is no longer part of
the budget.
2.1.4 The Medium Term Expenditure Framework (MTEF): This is a three
year rolling budget framework that was born out of the recommendations of
the 1997 Public Expenditure Review (PER'97). The PER concluded that
there was no link between budgeting and planning. MTEF was not introduced
until 2000. The primary objective of MTEF was to create the link between the
two processes, budgeting and planning. The three year rolling budget
process has been widely adopted by developing countries with the assistance
of multilateral donors, especially the Brettonwoods Institutions, the World
Bank and the International Monetary Fund. The first year represents the
current year financial plan while the two outer years represent tentative fiscal
plans. The MTEF seeks to (i) link policy making with planning, budgeting
and implementation of programs and projects; (ii) maintain fiscal discipline
by establishing hard budget targets (iii) and facilitate expenditure
prioritization. Following introduction of the Economic Recovery Strategy
for Wealth and Employment Creation (ERS) in 2003, policies and
expenditure proposals, in the budget, are now required to target poverty
reduction within the MTEF budgeting cycle.
MTEF planning and budgeting cycle allows for wider consultations to ensure
that budget formulation, implementation and oversight benefits from the
input of the diverse economic actors and interest groups in the economy and
output of both the national and district planning processes. Since its
introduction in 2000, the MTEF has changed a few times, necessitated by
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among other things, an early start of the budget process and a need to make it
more inclusive. The current budgeting process starts early and benefits from
more stakeholder input and participation such as budget hearings and wider
circulation of Budget documents such as Budget Outlook paper (BOPA) and
Budget Strategy Paper (BSP). These documents are explained in Chapter 5.
2.2
Major Players in the Budget Process
The budget process is a collective function that benefits from the contribution
and input of a wide variety of economic players and actors. These include
government ministries, the Treasury, Kenya Revenue Authority (KRA) and
the Central Bank of Kenya (CBK), Parliament, interest groups and the
citizens in general. Of special interest is the participation of apex trade and
professional associations like the manufacturing fraternity, bodies like the
Kenya Private Sector Association (KEPSA) and Institute of Certified Public
Accountants of Kenya (ICPAK).
2.2.1 Parliament
The credibility of the budget is only achieved when it is capable of providing
effective and politically anchored mechanisms to mobilize resources (funds)
and agree on funding priorities. Constitutionally, the power of the purse lies
with Parliament. For this reason, the Executive cannot raise or spend funds
without the approval of Parliament. This requirement gives Parliament a
prominent and potentially highly effective role to ensure the available
resources are used in ways that maximize benefits for all Kenyans.
Parliament is therefore expected to ensure accountability to citizens.
Parliament is also expected to provide assurance to Kenyans that the systems
employed by the executive to mobilize, allocate and utilize resources are
effective and that the executive is not being compromised either internally
(by ruling party) or externally (say by donors).
As citizen's representatives, parliamentarians keep check on the Executive
according to the principle of “no taxation without representation” as well as
the principle of separation of powers. Under the Constitution, Parliament is
the sole authority on taxation, borrowing and spending of public funds. The
Minister for Finance, on behalf of the Executive, presents the budget before
parliament in June, every year. Under the Standing Orders, Parliament
allocates time to discuss the government's budgetary proposals as a matter of
priority. In this regard, Parliament retains the power to approve or reject
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revenue and expenditure proposals filed by the minister. To deal with the
Budget, Parliament has three key standing committees; the Fiscal Analysis
and Appropriations Committee (FAAC), the Public Accounts Committee
(PAC) and the Public Investment Committee (PIC). The FAAC was
established in 2006 with the responsibility of scrutinizing policies that drive
the budget, tax proposals, resource allocations and budget execution.
Both PAC and PIC are long established institutions which deal with overall
budget outcomes, i.e. whether budgeted expenditures are utilised according
to parliamentary authority and approval and whether they are compliant with
the law and procedures. In addition, there are currently eight Departmental
Committees of Parliament, which play complementary roles by scrutinizing
the budgets of specific ministries and sectors, that fall within their mandates.
All these Committees are required to report to Parliament and make specific
recommendations on their mandates.
2.2.2 The Executive
The Executive arm of the government implements public policies and
proposals as approved by Parliament. The role of the Executive in the Budget
Process, is therefore to propose fiscal policy, define the budgetary policy, in
line with the broad national socio-political and economic objectives and
priorities and propose implementation measures for Parliament to decide
upon.
The Kenya Revenue Authority (KRA) is the government body charged with
the responsibility of collecting the major taxes and most of the other fiscal
charges mandated by Parliament, while the CBK is the government banker
and advisor on monetary matters. It is also the custodian of all government
revenues. The Treasury refers to the institution that is identified by the
Constitution as having delegated powers to propose measures to raise and
allocate resources. Besides being the lead player in the budget process,
Treasury is the finance manager for public finance responsible to oversee
budget formulation, execution, collection and custody of revenues and
expenditure management. It evaluates budget proposals by government
agencies before drafting and presenting the Budget to Parliament. On its
part, the Ministry of Finance provides support to Treasury function and is
responsible for implementing policies, programs and projects which support
all ministries and other government agencies, e.g. pensions department, and
ICT support services.
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2.2.3 Non-State Players
Among the key players in Budget process are the major economic actors who
are well organized and informed. They include associations like the Kenya
Association of Manufacturers (KAM), Kenya Private Sector Alliance
(KEPSA), Institute of Certified Public Accountants of Kenya (ICPAK),
Farmers Association, and a host of NGOs among others. All these bodies
actively lobby the Government and Parliament for more enabling fiscal
policies. They make submissions to the Finance Minister on various fiscal
issues, i.e. on expenditure and taxation, mainly on matters that concern them.
2.2.4 The Citizen Responsibility
Citizens pay taxes and are the ultimate beneficiaries, or the reason for the
budget. Notwithstanding their representation in parliament by their elected
representatives, citizens have a direct duty to ensure (oversee) that all the
other players in the budget process act in their best interest, a responsibility
that they cannot delegate. Through various lobbies (in NGOs),
manufacturers' associations, business organizations, community-based
organizations (CBOs), and trade unions, citizens have the opportunity to
participate and generate budget proposals. More importantly, they should
ensure budget implementation is monitored for their benefits. Devolved
funds such as Constituency Development Fund Education Bursary and Aids
Funds, and the District Roads Fund, can be used as a way of budget
monitoring by citizens.
2.2.5 Development Partners and Aid Agencies
Development partners or donors do have a significant influence on the
Budget Process. This is particularly true of the IMF and World Bank. Given
their influence, these two multilateral bodies have become major
stakeholders in national budgets and affect, the structure, content and
sometimes the timing of the Budget activities. Some of the major reforms
such as those associated with structural adjustments, cost sharing and
liberalization, originated from these two institutions.
2.3
Stages in The Budget Process
Many Kenyans perceive the national budget process as a one time event
marked by the budget speech, delivered by the Minister for Finance, in the
month of June every year. Yet the budget speech is merely the culmination of
a year long exercise involving a wide cross-section of actors from within and
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outside the government. The Kenyan budget cycle passes through the
following four major phases:
 Budget planning and preparation
 Budget proposal, debate and approval
 Budget execution (implementation, supervision and audit)
 Budget monitoring and evaluation
2.3.1 Phase One: Budget Planning and Preparation
The formulation of the annual budget is preceded by the preparation of both
the National and District Development Plans. This is usually done by the
Ministry for Finance and the Ministry of Planning and National
Development, alongside other players. The Plans provide the broad policy
directions for the next five years. As part of the annual planning process, each
district develops a District Plan Annex, which contains the development
priorities and aspirations at the district level. These District plans are
supposed to be a product of consensus reflecting the district's policies and
development priorities. These plans are expected to benefit from broad-based
participation by the local citizens. Once complete, the District plans are
expected to be feed into the national plan.
The planning process however has been consistently taken over by the
development of sessional papers and other medium term strategy papers. It is
currently guided by the Economic Recovery Strategy for Wealth and
Employment Creation (ERSWEC)5 Paper which borrowed largely from the
District Poverty Strategy Papers of 2001/2002. It has now been indicated that
the Vision 2030 will be the main policy document when completed.
Since the adoption of the Medium Term Expenditure Framework, the budget
preparation process now takes approximately eight months. The actual
preparation of expenditure budget begins in the month of September with the
launch of Sector Working Groups and the start of preparation of Ministerial
Public Expenditure Reviews (MPERs) which are later summarized into the
Public Expenditure Review (PER). The SWGs prioritise their activities
based on input from the line Ministries which are expected to link to the
districts through the Ministerial district departmental activities. It is expected
(attested by instructions in Treasury budget guidelines and circulars on
district involvement in budgeting process) that the priorities of the district
departmental heads, through coordination of Ministry of Planning and
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National Development and those of districts consultative meetings get
incorporated into the sector reports. However, the extent to which input
from community level consultation get incorporated into the sector and
Ministry reports remains a key challenge.
Based on the inputs received from Ministries, the Sector Working Groups are
expected to cost activities, projects and programs; review expenditures of the
sectors; and determine key priorities for the next three years. However, the
costing function is yet to be institutionalized. Currently there are nine sectors
with the Macro working group forming the tenth. The distribution of
Ministries into sector is per the table 2 given below:
22
Source: Treasury publications
23
The Sector Working Groups are coordinated at technical level by the Ministry
of Finance. The private sector and donors are expected to join the SWGs of
their choice, participate and give budget input. Citizens are expected to
participate in the sector working group through NGOs or the private sector
associations. This can be done by contacting the SWG Convenor who is
located at Treasury, and expressing an interest in joining a SWG. There is no
fee charged to join. SWGs draw heavy representation from the government
officials and are structured in such away that there is a convener from
Ministry of Finance and a co-convener from Ministry of Planning and
National Development. The Chair of the SWG is a Permanent Secretary of
one of the ministries that fall within the SWG. Each SWG is expected to
deliberate on its issues and prepare a sector report.
The next step entails preparation of the Budget Outlook Paper (BOPA),
which gives an elaborate medium-term fiscal framework. BOPA is a key
budget document that is published by the Ministry of Finance usually six
months before the Minister for Finance tables the Budget in Parliament. It
elaborates the medium term fiscal framework that determines the overall
resource envelope and provides the background for the preparation of the
budget. It an important policy document as it signals the budget policy intent
to stakeholders outside government such the private sector, civil society and
development partners. The BOPA however has limited consultation as it is
developed by the Macro working group which is a highly technical group that
has no membership from outside Government. In addition, the only
consultation made on BOPA is by circulating the draft within government and
a few selected development partners. As this is a key budget document that
sets the initial parameters there is need for more involvement of key
stakeholders, especially those who can give opinions of the ordinary citizen.
The BOPA is issued to line ministries around December-January, and is
distributed to ministries together with the MTEF guidelines which define the
broad parameters of the budget while setting tentative expenditure ceilings.
The MTEF circular requests line ministries to forward estimates of
expenditure outlining the proposed projects in the coming financial year.
Negotiations follow between the line ministries and Treasury on the proposed
allocations they have made. These proposals are presented and discussed
with the Treasury, mainly to confirm consistency with the guidelines and also
to ensure they are within the ceilings. On their part, Ministries use these
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negotiations to justify their resource needs in line with guidelines and
national development priorities. However, preference is given to programs,
projects, and expenditures with the highest possible potential for poverty
eradication6 starting with those already on-going. Ministerial estimates do
not always marry with the SWG reports and national development goals.
After the negotiations, the Budget Steering Committee prepares the Budget
Strategy Paper (BSP) which provides an update of available resources and
sets firm ministerial ceilings and expenditure priorities to be included in the
Budget. These form firm commitments which are first approved by Cabinet
before being made public. When approval is granted, the Ministries prepare
their detailed estimates which are reviewed by Treasury for inclusion in the
Printed Estimates. These Estimates together with the revenue budget
constitute the Annual National Budget, the highlights of which are included
in the Budget Speech. The whole MTEF Process is as summarized in Figure
1. “KENYA MTEF PROCESS.”
The Revenue Budget
The BOPA which is issued in December/January includes the aggregate
expected (projected) revenues. Detailed work on the revenue budget starts
around January when Treasury invites the key public and private sector
players to submit tax proposals for consideration by the minister. The
technical budget team comprising of the Treasury, KRA and later on the AG's
Chambers examines all proposals and make recommendations to the
Minister. During the financial year, many regulatory agencies, tax
departments under KRA, the Central Bank, Insurance Commission and
Retirement Benefits Authority identify issues and suggest changes to tax and
money laws. When accepted the proposals lead to amendments to their
respective laws.
From end of February to April, the Revenue Budget Team receives and
discusses proposals from various players and stakeholders. Thereafter, the
team summarizes the proposals and makes recommendations for discussion
by the Minister, and senior technical officers. By about the end of March or
early April, legal experts from the Attorney General's Chambers join the
Revenue Budget Team to start legal drafting on approved proposals which
need legal instruments. The latter prepares the legal amendments and notices
necessary for budget approval by Parliament.
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Other than discussing proposals, the revenue budget process is a closed affair
that is conducted by the Ministry of Finance who only consults with the
organized private sector and multinational manufacturers on specific
matters. But the Revenue budget is as important as the estimates of
expenditure and thus, it is important for other stakeholders to be involved.
Determination of Financing of the Budget
In finalizing the revenue estimates and the detailed budget proposals, the
Ministry of Finance also considers other financing options available, if the
Government is not able to achieve a balanced budget. This a critical issue as it
has far reaching impacts on the economy. The citizens may rejoice when
major allocations are made for various activities but if these activities are
funded by expensive loans from outside the country, this means a large share
of future resources has been committed to service the debt. If the loan
financed activities do not generate enough returns, there will be less
resources or capital available in the economy requiring higher taxes or
additional debt to pay both interest and principal.
Presentation of Budget to Parliament
From practice, the Annual Printed Estimates of expenditure must be laid
before Parliament at least two Parliamentary days before the Minister reads
his Budget Speech. The revenue raising proposals detailed in the Finance
Bill, Revenue Booklet, Provisional Collection of Taxes Order, subsidiary
legislations, and any other amendments to tax and money laws, are all tabled
in Parliament on Budget Day after the Minister reads Budget Speech. The
Figure below describes the key steps in the budgeting process.
26
THE BUDGET CYCLE
Development of a macroeconomic framework for projection of revenues and expenditures over three years.
The development of a forecasting model is useful in linking economic forecasts to fiscal targets and
checking the policy framework for inconsistencies. The formation of a Macroeconomic Working Group
would complement and enhance the modelling effort.
Undertake sector review to provide a basis for allocating resources. If a civil service reform program
has, for example, been undertaken, it should provide a good foundation for this part of the MTEF process
by defining the role and core functions, activities, services and programs of government in each
At this stage, sector reviews are presented to the treasury to ensure that all programs have been
accurately costed and the objectives, outputs and activities fully specified.
Using the macroeconomic framework and the sectoral reviews, the ministry of finance prepares a
strategic expenditure framework and undertakes a trade-off analysis to determine inter-sectoral
allocations that maximize the expected contribution to the achievement of national development objectives.
The strategic framework and the sectoral ceilings are presented to the Cabinet for discussion and
approval. The criteria for determining inter -sectoral shares should receive explicit consideration and
political endorsement before each sector is informed of its resource envelope, which sets a firm ceiling
for the budget year and an indicative ceiling for the subsequent years of the MTEF Period.
Ministries prepare detailed three-year estimates based on the priorities and costs established in their
sector review and consistent with their allocation of the sectoral ceilings.
The Ministry of Finance reviews the ministerial estimates, prepares the detailed budget and MTEF
documents and presents them to parliament for approval.
Source: Budget Outlook Paper (BOPA) 2006/07-2008/09
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 What role do the district level participants play in determination of
both the national and sectoral resource envelope?
 Is there a deliberate mechanism for soliciting and integrating proposals
of the Sub-locational, Locational and Divisional Development
Committees into the district budgetary priorities?
 Do sector working groups have any influence on sector priorities and
allocations?
 Do stakeholders play any role in determining the composition of
various budget committees at the national, ministry and district levels?
 Are ministerial budget processes open to public and/or interested
parties?
 Does the budget preparation process receive any form of deliberate
publicity?
2.3.2 Phase Two: Budget Proposal, Debate and Approval
The Budget proposals are presented before Parliament during the second or
third week of June, each year and should be approved by end of October.
This makes the period June -October the most active phase of the budget
process, with a very tight program. First the Minister for Finance is required
to present the Budget Speech on or before 20th June in accordance with the
Constitution and Parliamentary Standing Orders. The Speech provides a
summary, which emphasizes on broad policy changes and the major tax and
expenditure highlights for the ensuing fiscal year. The Speech is tabled
together with the Financial Statement, and the Revenue Booklet. Other
documents attached for information include the Statistical Annexes to the
budget which contain, an analysis of various economic indicators, e.g. on
growth, inflation and public debt. After the Minister's Budget Speech the
debate on the financial statement starts on the next Parliamentary Day and
lasts for the next seven days. During the period, Parliament debates the
Financial Statement on Annual Estimates. This is followed by three days
28
during which the Committee of Ways and Means discusses the new taxation
proposals and changes. After the three days debate, the Parliament
constitutes itself into Committee of Supply to discuss the Vote on Account,
(VoA). The VoA is a provisional Parliamentary approval, for the
Government, to spend not more than 50% of money in Printed Estimates
pending formal approval of the Annual Estimates, which must be approved
th
before 26 June. This authority enables the government to commence
st
operations on 1 July when new Financial Year starts.
Under current procedures, the debate on the Financial Statement cannot be
interrupted. However, due to lack of adequate understanding of the issues and
policies in the Budget, most MPs spend the period immediately after the
Budget Speech discussing general political and economic issues. It is on
account of this experience that many observers of the Budget process, feel
that preparation of the Budget should start earlier and MPs should be
provided with the necessary background information in all major policy
areas, except tax rates. In addition, it is observed that the lack of a Budget
Office within Parliament, incapacitates the members of Parliament. This
arises because, many MPs have neither the experience nor the technical
capacity to analyse the budget Proposals laid in Parliament.
It has therefore been proposed that the budget documents such as BOPA,
MPERs, PERs and BSP, be availed to MPs early enough so that they can
have a better understanding of current economic, and public expenditure
issues and policies. This will make it possible for them to contribute to the
Budget Process more constructively. During this stage ordinary Kenyans
have no opportunity to contribute unless they go through their Member of
Parliament.
Once Vote on Account is approved and the new financial year starts, the
Parliament turns to the Annual Expenditure Estimates under Committee of
Supply, which must be approved before end of October. Since not all
departments constitute a ministry there are more approved Votes than the
number of ministries. In budget for 2006/07, there were forty six votes and
these included the Judiciary and the Electoral Commission of Kenya.
Twenty days are set aside for the purpose of discussing the Estimates with a
maximum of two days allocated to each ministry. This means that Parliament
targets to debate up to any ten votes, while the remaining votes are approved
in a block (a process referred to as guillotine). This means the votes are not
29
scrutinized critically. The approval given to a ministry is for both recurrent
and development expenditures and lasts for one year, which means that it
expires on 30th June of the following year. When the financial year comes to
an end, all unspent moneys are surrendered to Treasury.
During the debate, Members of Parliament have the opportunity to propose
nominal reductions on specific items (sub-votes) as a sanction for nonperformance of the Ministry in question, but they cannot reject the budget for
a ministry. Under the current practice, rejection of the Budget would
constitute a Vote of No Confidence necessitating fresh elections. As with all
motions, the budget is debated and votes cast, either by acclamation or actual
division with the majority prevailing or carrying the decision before the
budget proposals sail through.
Food for thought
 Do MPs have enough time to study the budget prior to presentation by
the minister?
 Can parliament conduct a stakeholders consultation on the budget
prior to debate on the budget?
 Do citizens have easy access to all budget documents during and after
the debates in parliament?
 Are MPs sufficiently sensitised about the various sectoral interests and
topical issues before the Budget debates begin?
 Is the budget taken to Parliament for information or for approval?
 Does Parliament have sufficient powers to alter budget proposals in
any way it may deem necessary?
 Should votes be debated in a particular order?
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2.3.3 Phase Three: Budget execution (implementation)
Though budget approval is given around October, execution commences
st
from 1 July when the financial year starts. Two major legal instruments are
effected to commence execution. These are the Publication of the
Provisional Collection of Taxes Order and the Vote on Account (VoA).
Publication of the Provisional Collection of Taxes Order is a legal notice
issued under The Provisional Collection of Taxes and Duties Act, Cap 415
and published on Budget Day. This publication enables the Minister to start
collecting taxes and duties pending approval by Parliament. If Parliament
does not approve tax proposals, they expire the day the Parliament passes the
Finance Bill but not later than end of December or six months from
publication. The Vote on Account (VoA) is a provisional authorization
th
granted by Parliament, not later than 26 June, to spend up to 50% of money
in Printed Estimates pending the approval of funds. Once Parliament
approves the Budget, the total amount in the VoA is legalised through
publication and approval of the Appropriations Bill (much later), which
becomes the Appropriations Act.
Once these two measures are in place, the Government is authorized to
commence Budget execution pending formal approval later on. As soon as
Printed Estimates are approved and the Finance and Appropriation Acts
passed by Parliament, the whole Budget is effectively authorised. Revenue
raising measures are legally enforceable and the authority is granted to spend
the money in accordance with the approved estimates.
On the revenue side, the Financial Secretary to the Treasury is the receiver of
revenues while KRA collects the major taxes. For the minor revenues, the
Permanent Secretary to the Treasury appoints the other Permanent
Secretaries / Accounting Officers as collectors of revenues falling under their
docket. Revenues are collected and remitted to the Exchequer and accounted
on a weekly basis by submission of the necessary supporting documents.
A committee coordinated by the Director of Economic Affairs in Treasury,
and comprising of officials from KRA and Central Bank monitors revenue
collections and regularly advises the Exchequer Committee, which is chaired
by the Financial Secretary, on flows. The flow of information on revenue
collection to the Exchequer Committee is essential since this Committee is
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responsible for disbursing money to line ministries to finance their
operations. It is therefore critical that the Committee has accurate
information on inflows of revenue before it authorizes ministries to spend.
This is particularly because, under the Central Bank Act, the Bank can only
provide overdraft facilities to Treasury up to 5% of its latest audited revenue
receipts.
On the expenditure side, once the Appropriation Act is passed and given
Presidential Assent, the President issues a general warrant which authorizes
withdrawal of money from the Consolidated Fund to finance operations.
The ministries are now free to spend money subject to all withdrawals being
approved by the Controller and Auditor General (C&AG). Once the money is
released, each Accounting Officer is responsible for implementing his/her
budget, provided they follow the law and regulations issued by Treasury, and
comply with Parliamentary approval on use of such funds.
Civil Contingency Fund
The Civil Contingency Fund (CCF) was established by section 102 of the
Constitution to finance any unforeseen or unexpected emergencies.
Ministries can withdraw up to Kshs 2 billion from the Fund to finance
emergencies which occur in the course of the year. The Minister for Finance
has authority to grant a ministry money from the CCF. However, that
ministry is expected to source for the funds through the revised budget and
th
reimburse the CCF by 30 June in the same financial year. The Ministry of
Finance has for the last few years, ensured that in addition to this facility,
there is provision for a similar amount in the Printed Estimates which
ministries can access in order for them to repay what has been borrowed from
CCF.
Consolidated Fund
This is the fund into which all government revenues paid, whether in form of
loans, loan recoveries and tax receipts. According to the Constitution, all
withdrawals from the Consolidated Fund can only be effected with authority
of Parliament. To ensure compliance with Parliamentary authority, the C &
AG is required to approve all withdrawals from the fund. Budgetary
resources are disbursed to line ministries and departments on request through
exchequer releases. In this regard, the C&AG acting on behalf of Parliament
performs the role of a controller to ensure money is withdrawn from the
32
Consolidated Fund for approved purposes and within the budgeted limits.
Consequently, C&AG cannot authorize release of money for a purpose not in
the approved Budget or in excess of amount in the Budget.
Disbursement Reforms
Recent reforms in disbursement procedures have resulted in the introduction
of a cash management system that gives credit lines for each ministry and
allows a ministry to operate zero balance accounts. This allows line
ministries to make commitments up to the monthly credit limit and the
Central Bank keeps on updating the account as soon as the Ministry makes a
withdrawal. The Ministries cannot spend more than the credit limit as
Central Bank will not honour any cheques after credit is exhausted. However,
they can spend less than the limit depending on their absorptive capacity.
This system is good in that it does not allow ministries to access and keep
excess money which they are not able to use immediately. Consequently any
unspent balances from previously authorized spending period, remain in the
pool for subsequent disbursement to all ministries depending on their cash
needs. In all cases, money must be spent for approved purposes and in
accordance with Treasury instructions and relevant procedures. As part of
disbursement requirements, ministries must submit regular expenditure
returns cash book, reconcile their bank accounts and submit a report of the
status to Treasury on a regular basis. Any Ministry which fails to submit the
required reports does not get the next Exchequer authorization and their
credit limits may be frozen.
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Figure 2: Budget Execution (Flow of Budgetary Resources)
TREASURY
 Solicits C& AG approval for all withdrawals from the Consolidated Fund
 Allocates and disburses funds to ministries, local authorities and other user departments
 Issues guidelines on financial management and methods of record and account keeping
LINE MINISTRIES AND DDCs
 Open ministry Vote Books and Cash Books
 Disburse funds to user units and departments
 Issue AIEs to the district treasury (as per the Government Financial Regulation)
covering expenditures related to specific ministries.
THE CITIZEN AND OTHER BENEFICIARIES
 Benefit from goods and services
 Provide feedback on services
End and Beginning of Financial Year
At the end of each financial year, 30th June, the authority to spend expires.
Therefore line ministries must close their books and return any unspent
balances to the Treasury. On 1st July they open fresh Vote Books, for the new
financial year. All Exchequer releases and expenditures are recorded in the
fresh Vote Book. Permanent Secretaries to the Ministries and other
Accounting Officers assume full responsibility for budgetary resources once
money is disbursed. In line with this responsibility, they are permitted to
grant Authority to Incur Expenditure (AIE) to their departmental and District
heads, autonomous bodies under their docket, and any other officers in
furtherance of ministry programs. Transfers to autonomous bodies,
corporations, under line ministries, are usually one item.
2.3.4 Phase Four: Budget Monitoring and Evaluation
As the ultimate financiers and beneficiaries of government policies and
actual budgetary allocations, citizens can play a unique role in monitoring the
implementation and impacts of the Budget and its programs. Over the 20032007 plan period, the Government has attempted to track progress of
34
implementation of its blue print, the Economic Recovery Strategy for Wealth
and Employment Creation (ERSWEC), through the Annual Progress Report
of the Investment Program for Strategy. These annual reports are based on a
multi-faceted strategy to support economic growth, equity, poverty reduction
and good governance
Under the Economic Affairs Department in Ministry of Finance, the
Government has established a Budget Monitoring Unit that is mandated to
prepare Quarterly Budget Reviews which monitor and report on
implementation of Budget through a Budget policy matrix. In addition, the
unit prepares monthly out turns and analyses development in revenue,
expenditure, and financing. The unit also monitors and tracks adherence to
government priorities. In addition to monitoring and reporting, the
Government has created the Monitoring and Evaluation Department in the
Ministry of Planning and National Development. This department is tasked
to develop and oversee the implementation of a national and sub-national
Monitoring and Evaluation (M&E) system, which includes, analysis of
reports from central and sub-national structures; the preparation of national
M&E reports in liaison with relevant stakeholders. In addition, the
department oversees the M&E activities in all line ministries7 down to the
district level.
These efforts are complimented by the Efficiency Monitoring Unit (EMU)
which is mandated to undertake systems and management audit of
government institutions. The EMU audit is not routine but serves as a prompt
oversight and corrective action. As part of governance concerns, EMU
evaluates and coordinates public officers wealth declaration exercise in
collaboration with other government agencies such as the Kenya AntiCorruption Commission (KACC).
Besides these measures, the Government has carried out some expenditure
tracking surveys to assess the flow of funds from Treasury, through line
Ministries down to the targeted beneficiaries. All these efforts should make
M&E an important part of the Budget Process.
Decentralization of central functions to lower government units has, in the
recent past, become an important element for ensuring budget monitoring
and evaluation. Through fiscal decentralization, the citizen is able to
participate in decision making and oversight of Government resources, ore
35
including, the Constituency Development Fund, Constituency Bursary and
AIDS Funds. It is hoped that decentralization can promote local preferences,
and achieve more efficient and transparent delivery of services.
Introduction of Government Finance Statistics (GFS)
The budgetary coding and chart of accounts are the most fundamental
building blocks of a government's public finance management system. They
are the means by which a government informs itself, and reports to
Parliament and the population. Decisions related to the choice of
classifications systems can therefore have very far reaching consequences, as
they can either enhance or inhibit government's ability to plan, oversee,
allocate, prioritize, manage, control, account, audit, and report on the
collection and use of public funds. In the year 2005/06 Budget, the
Government adopted the international classification of government statistics
referred to as the “Government Finance Statistics” (GFS). This follows a
framework that was adopted worldwide in 2001. This classification seeks to
harmonize presentation, accounting, and reporting of government budget
data at international level.
Classifications fall into three distinct areas namely (i) administrative/
institutional (ii) functional and operational (iii) economic or object/input.
 the administrative classification identifies who is responsible for
collecting/spending public resources, from the overall responsibility
down to the individual operational unit or project.

the functional classification, and the related classification systems
aim at identifying operations of government, identify what the
government is doing and how these relate to government priorities,
objectives and long term plans.

the economic classification identifies how the funds are to be
collected or spent, i.e. which tax or administrative fee is being applied
or what mix of inputs is required in order to deliver a particular public
service.
GFS facilitates cross-country comparison of budgets which is important and
also because accuracy and relevance of the budget data is crucial for
enhancing decision-making. It is an analytical framework, which provides
policy analysts with the appropriately structured data to undertake credible
analysis. It also presents standardized codes and descriptions that ensure
36
transparency, thus providing clear details for policymaking, accounting,
auditing and monitoring. Furthermore, it provides an avenue for budgeting,
which offers a wide enough field to capture all possible transactions within
structured parameters for ease of accounting, reporting and analysis.
Food for thought
 Are stakeholders sufficiently consulted and represented at the DDCs
and other grass root planning organs?
 Are these committees effectively integrated in the entire project
management and life cycle?
 How are resources disbursed to the district level and who controls
district and ministry level withdrawals?
 Do implementing agencies generally comply with government
guidelines on procurement and use of government assets,
disbursement and accounting for funds at ministry and district levels?
 Whereas GFS affords the Executive a chance to compare budget lines,
does it help parliament and the citizen know where resources have
been allocated?
 What is the link between the recommendations of the monitoring and
evaluation reports and the entire budget process?
37
CHAPTER THREE
BUDGET CONTROL
This chapter discusses the various controls inherited in the Budget process
and the role of various players in monitoring its implementation. In this
context the following issues are discussed:



Why budgetary controls
Levels of budgetary controls
The role of the citizen and the civil society in budgetary control
3.1
Why Budgetary controls?
In the foregoing section, we explained the dilemma of adopting different
budgeting approaches. In so doing, it was taken for granted that the budgeted
resources will be efficiently applied to target uses for the benefits of the
citizens. More often than not this assumption is predicated upon an ideal
scenario of finance and managerial probity. Governments tend to operate
more in accordance to their rules and procedures with lots of secrecy. It is
therefore necessary for organised stakeholders to demand integration of their
interest and concerns, in the budget, and to ensure performance for
achievement of the intended results and impacts. To achieve these objectives,
controls become an order to avoid resource diversion and poor execution of
projects and programs.
A critical requirement of control is to enhance transparency in the context of
democracy and ensure parliament, citizens and other stakeholders are able to
assess whether the government delivered on its plans and promises. Budget
controls should therefore seek to ensure that planned and approved
expenditures eventually materialise and that those responsible for budget
implementation do not engage in unauthorised activities. And when they do
not comply with the law, procedures and best practices, they are held to
account.
3.2
Budgetary controls
Controls on the budget can be exercised at five levels:
 Executive (governmental) controls mainly by the Treasury and Senior
Management of line Ministries.
38




Internal controls by a semi autonomous government agency.
Audits by external independent agencies like the Kenya National Audit
Office.
Parliamentary control, mainly by select Committees e.g. FAAC, PAC,
PIC and OFA.
Citizen controls through civic lobbies, advocacy and “whistle
blowing” in the event of financial impropriety by government officers.
3.2.1 Executive Controls
The most elaborate range of control measures on Budget execution
originates from the Treasury in the Ministry of Finance. This is effected
through operational instructions circulars monitoring directives and
regulations issued to accounting officers in line ministries and departments
on a regular basis. Treasury controls seek to operate through Permanent
Secretaries / Accounting Officers, who are in charge. Failure to adhere to core
requirements such as cashbook and bank reconciliations and expenditure
returns leads to suspension of disbursements.
Controls may take any of the following forms:
 Government financial regulations and procedures, which regulate the
whole range of financial operations of the government, including
payment procedures.
 Government procurement guidelines, which regulate purchases of
goods and services by the government agencies.
 Internal audits, which check and monitor compliance with financial
regulations and directives on an-ongoing basis.
 Regular Treasury circulars and directives introducing new financial
and budgetary control measures.
Internal Controls by Semi Autonomous Government Agencies
The Accountant General (AG):
The overarching role of this department is to facilitate planning, developing
and implementing Government accounting policies, systems and
procedures. It monitors revenue collections in liaison with Economic Affairs
Department (EAD) and expenditures as approved by Parliament. Though
established as a department within the Treasury, the mandate of the AG
includes reporting on the whole government.
39
Internal Auditor General (IAG)
This officer plays an important role in Budget control and execution. IAG
auditors check financial management systems, expenditures and advise
accounting officers and AIE holders as appropriate. They have an important
role to ensure compliance with Parliamentary approvals, compliance with
the letter of law and financial regulations. Properly enabled and used the
IAG can have significant impacts in risk avoidance and mitigation since his
auditors are on the ground. They can advise Accounting Officers when the
financial management system is not meeting its objectives. Of late the IAG
has embarked on risk based internal audits that aims to identify and mitigate
financial leakages and other irregularities in the course of the financial year,
as opposed to annual audits which come to the scene long after the financial
year has closed. For this reason IAG has the potential to assist in mitigation
of current year financial and other operational risks.
Audits by external independent agencies
Kenya National Audit Office
The Kenya National Audit Office, formerly the office of Controller &
Auditor General Department reports directly to Parliament. Following recent
legal changes, KENAO has two distinctive functions namely; the control
function, and audit function. It audits government ministries, local
authorities, departments, law courts, public corporations, statutory bodies,
and commissions. KENAO has been made autonomous to make it function
more efficiently. The chief executive of KENAO is the Controller and
Auditor General (C&AG). Under the control function, C&AG scrutinizes
and if satisfied, authorises withdrawal of money from the Consolidated Fund
to finance government activities in line ministries and agencies, as approved
by parliament. If C&AG is not satisfied with a request for withdrawal she/he
turns it down, which means the money should not be released from the
Consolidated Fund. Under the audit function, the C & AG examines, inquires
into and audits accounts of all accounting officers and receivers of revenue,
and all persons entrusted with the collection and receipt, custody, issue, sale,
transfer or delivery of stamps, stores and other government property.
Although the Controller and Auditor General is appointed by the President,
the Officer is independent of the executive. This independence is guaranteed
by the Constitution which also guarantees the office access to all information
and records that may be required to perform the duties assigned to KENAO.
40
In conduct of his/her duties, the C & AG acts at the behest of Parliament and
not the Executive arm of government.
The Constitution requires the Controller and Auditor General to report to the
Parliament at least once every year on the public accounts of the government.
Any material or important findings arising from audits, including the
financial statements, are reported to the ministries through management
letters issued immediately after the audit work is completed. Each
Accounting Officer is invited to explain such matters and unclear or
questionable circumstances. If the matters cannot be satisfactorily explained
and resolved, they are included in the Annual Report and submitted to
Parliament through Ministry of Finance.
In addition to the Annual Reports, the Controller and Auditor General is
empowered to present special reports to the Parliament at any time on any
matters related to his powers and functions. As the Government finance
manager, the Treasury can and does request C&AG to carry out special audits
and report as and when need arises.
Upon receipt of the KENAO audit, the Parliament refers the reports,
statements and accounts to the Public Accounts Committee (PAC) and Public
Investments Committee (PIC) for detailed scrutiny to report back with
recommendations. If Parliament accepts the PAC and PIC reports and
recommendations, the Government is required to implement them and take
corrective actions.
While the C&AG enjoys security of tenure (i.e. constitutional
independence), the office has for a long time lacked institutional and
operational independence. For instance, in the past the C&AG did not have
authority to hire and fire his own staff, determine staff terms and condition of
service and draw up the budget for the audit office. These factors resulted in
the ineffectiveness of this otherwise constitutionally important office.
Following the enactment of the Kenya National Audit Act in 2003 the office
has been made autonomous with an independent Board of Directors which
includes the head of official oppositions in Parliament. These changes have
led to substantial improvements of auditing of public sector, to the extent that
past audit arrears are almost cleared. However, implementation of both PAC
and PIC recommendations has yet to be institutionalized and those
responsible held to account. With audits almost updated, the C&AG has been
41
able to conduct investigative audits and filed reports before Parliament with
copies going to KACC, as with Anglo-Leasing type of cases.
3.3.2 Parliamentary Controls
As the legitimate representative arm of government, Parliament is the only
body empowered to approve revenue and expenditure measures. Under the
Constitution, the Executive arm of government is only obliged to make
proposals, on plans to raise and utilize money from taxes or other sources
during the financial year. Should the money voted for a specific purpose not
be enough, the Minister for Finance is required to prepare supplementary
estimates after the first half of the financial year and seek Parliamentary
approval. The Supplementary Estimates also include expenditures incurred
from the CCF which need reimbursement.
With regard to reporting, the Minister for Finance is required within four
months after end of financial year (between July and October), to present
government accounts and statements of all government ministries and
departments to the C &AG for audit before presenting them to Parliament.
To facilitate compliance with preparation of accounts, Treasury issues
circulars to all public corporations and other statutory bodies requesting them
to present their accounts to the Auditor General. Parliament, working through
its Committees of PAC and PIC, exercises the ultimate oversight role on the
budget. This is done at two levels; (i) debate and approval of the budgeted
proposals on revenue and expenditures and (ii) analysis of the audit report
before making recommendations to the government.
At the level of approval, the government seeks Parliamentary authorisation
for all its revenue (taxation) measures and expenditure allocations in any
given financial year. For this reason, the Budget has to be presented to
parliament before the commencement of the new financial year. In this
regard, the Constitution provides that no monies may be withdrawn from the
Consolidated Fund without approval of the Controller and Auditor General
except money already authorized by an existing law (specific funds).
Similarly, only authorised and approved taxes and levies can be collected.
However, once approved taxes remain in force until they are changed and this
can only occur approved with the Parliament.
Currently, Parliament has eleven departmental committees which oversee
42
operations, management etc over various sectoral ministries. These
committees review sectoral priorities as expressed through budget
allocations and other policy documents. These committees also prepare
reports and recommendations for Parliament. Unfortunately, there is no legal
obligation on the government to implement such recommendations, but
Parliament if it so wishes, can enforce compliance through the power of the
purse. The Committee reports deal with all matters of interest to parliament,
whether on irregularities, omissions and commissions or complaints by
public. The Committees help the House form opinions and adopt positions on
matters in their reports. In the past, Parliament made many
recommendations, including barring some public officers from holding
public office based on their past performance or activities. Unfortunately
there are instance where there recommendations have not been adopted.
The Public Accounts Committee (PAC)
The Public Accounts Committee (PAC) examines the KENAO Reports on
accounts of government ministries, local authorities, departments and law
courts mainly focusing on irregularities and omissions. In so doing, it seeks
to ascertain whether approved expenditure limits were complied with and
whether funds were used properly to provide goods and services as approved
in the budget. Given recent assertiveness by Parliament, there is much
expectation that public financing management will continue to improve.
The Public Investments Committee (PIC)
The PIC is a standing Committee of Parliament tasked to monitor and oversee
operations of public government owned corporations and statutory agencies.
It scrutinises accounts and any other matter of public interest or concern
including investments. The Committee assesses the quality and management
of portfolios of such corporations and agencies and reports to Parliament. Its'
major source of information are the annual accounts. However it can also
scrutinize operations if need be.
Departmental Committees
Parliament has established eight designated departmental committees which
are grouped by subject and departments according to the structure of the
current government. These committees have wide mandates to monitor and
scrutinize policies, projects and programs of Ministries and departments, e.g.
the defence and foreign relations health, education and agriculture. They
43
have the capacity to stop projects or procurement where there are enough
concerns. The establishment of these committees is one of the recent
developments which also saw the formation of FAAC, both of which reflect
Parliamentary assertion on the power of the purse.
Table 3. Parliamentary Committees and their mandates
44
Challenges of Parliamentary oversight on the budget
Once Parliament approves tax measures and expenditure estimates, the
appropriate bills go to the President for assent. However, the President can
reject and send the approved Bill back to Parliament for reconsideration. In
addition, under the current Constitution Parliament cannot increase taxation,
neither can it waive or forgive debt. Similarly, it cannot increase allocations
of resources, it can only reduce. These provisions make Parliament appear
like the junior partner in the Budget process. But this arrangement may not all
be negative as demonstrated by countries with greater parliamentary powers
over the budget like the USA.
In addition, there is some concern of possible politicization and conflict of
interest of the Budget if politicians get powers to allocate resources. Finally,
given the capacity of Parliament to understand and comprehend the
intricacies of fiscal policy, there is concern as to what would act as the basis
for MPs to allocate budgetary resources. Parliament needs to understand
policies and impacts of tax and allocation proposals so that it can stamp its
authority and reject budget proposal that will not result in tangible benefits.
For instance, if Parliament were to require future sectoral budget approvals
subject to implementation of past recommendations, it would have major
effect on public financial management.
In the past, there was a specific Estimates Committee which used to
scrutinize proposals in detail before parliamentary approval. However, this
Committee was abolished in 1997 which weakened Parliamentary role in the
Budget process. Besides, since Parliament is not involved in agenda setting,
it gets “ambushed” with voluminous copies of the Annual Estimates of
revenue and expenditure such that as debate starts, it has no time to study and
understand the rationale let alone the budget implications. As an example, the
Budget Speech is read on a Thursday and debate on it commences on next
Tuesday giving MPs no time to comprehend its totality. This situation is
complicated by the fact that only two days are allocated to discuss a ministry,
including the large ones like Health Education and Agriculture which means
MPs can only speak on generalities. More importantly, the use of Guillotine
Method applied to pass a large portion of National Budget without scrutiny of
individual votes, means the ministries and departments concerned get
approval as proposed, no questions asked. These factors pose a major
challenge to credibility of Parliament in Budget Process.
45
Parliament lacks both research and information gathering capacity to
effectively engage the executive on Budget proposals. In any case, the
current Budget Process does not provide any mechanisms for a continuous
monitoring of the budget by Parliament. As a result, Parliament can only rely
on C&AG Reports and those of PIC and PAC. PIC and PAC reports are postmortems which are done long after the effect. More significantly, the
Committees recommendations are hardly adopted or implemented.
Recently however, PIC and PAC have began to raise questions around
irregularities. This could be due to increased democractic space and a bolder
press. As part of rising Parliamentary assertiveness, a Parliamentary Service
Commission has been established to hire and fire, and supervise Parliament
employees. In addition, a Fiscal Appropriations and Analysis Committee
(FAAC), was established in November 2006 for the purposes of scrutinizing
and analysing budgets, money bills and other fiscal policies. In addition,
Parliament resolved to establish an Office of Fiscal Analysis to be staffed
with experts in economic and financial matters to advice the FAAC and other
parliamentary departmental committees on budgetary issues. Currently,
work is on-going on a Fiscal Management Bill to entrench the FAAC into
law.
The FAAC will analyze these bills and policies and file reports on fiscal and
economic performance to the House and make its recommendations. These
developments are the result of a lobbying and discussions between the
Executive and the Legislature which are still in process. Currently, the
Executive is drafting a Public Finance Bill that also proposes ways to
enhance public finance management in Kenya.
3.2.1 Sector Working Groups
Sector Working Group reports are supposed to contain sector achievements
and spending performance. The Sector Working Groups therefore provide a
good opportunity for citizens and civil society to engage in monitoring
budget execution, related matters.
3.3
The Role of Civil Society and the Citizen in Budget Control
Civil society comprises of actors outside government, among them
community based organizations (CBOs), NGOs, trade unions, professional
associations, and youth and women groups. These groups have a critical role
46
in monitoring the implementation of the national budget. Citizen based
monitoring takes place at three levels namely;
 Budget preparation and allocations;
 Disbursements;
 Implementation of programs and projects; and
 Impact assessment, of implemented programs on the target groups.
At the first level, citizens can and should make budget proposals. These
proposals can and should touch on spending, revenues and debt. Citizens can
engage in SWGs, write to Treasury or lobby their MPs and the press. On
implementation, citizens can lobby through their MPs and the press. On a
number of occasions, citizens have complained of slow project execution and
gone as far as demonstrating in the streets. Such incidents remind the
Executive of the need to ensure the budget measures to address and resolve
the people problems. Since no government can ignore the people and hope to
be re-elected, this kind of monitoring can be effective if well organized.
At the second level, citizens should ensure that allocated and approved
budgetary resources are disbursed to relevant user ministries and used for
intended purposes and that they solve problems on the ground. Though this
level of monitoring may require certain specialised skills, it guarantees that
funds are only applied to budgeted and approved purposes. Areas of interest,
at this level, include evaluating the quality of financial and other resource
management, procurement procedures, manner of usage of materials and the
extent of non-governmental participation in planning and decision-making.
There is also the need to ensure that timeliness of resource flows, and the need
to check if such disbursements are being effected in a timely manner and in
stipulated quantities. Again, citizens can engage in SWGs, write to Treasury
or lobby their MPs and the press.
Finally, monitoring the implementation of the budget may involve the
assessment of the quality and competence of human resource employed by
the government in relation to the tasks allocated as well as their effectiveness
in realising the set objectives. It is for this reason that Public Expenditure
tracking surveys are undertaken with the aim to assess the extent to which the
funds flow from Treasury to the beneficiary. These surveys also seek to assess
the utilization of the funds on the said purpose. Such surveys are becoming
popular, especially where civil society is involved, as they assist in providing
47
government with useful feedback on the success of public programmes.
Another method is the Citizen Report Card (CRC) or Community Score Card
(CSC) which is now being used by a handful of CSOs.
It is noteworthy that the budget monitoring does not merely end with the
implementation of the project. The extent to which implemented projects
attain the desired objectives of initial allocation is an important consideration
for all budget beneficiaries. Since civil society groups are closely integrated
within grassroots and among stakeholders, they are strategically positioned
to assess whether the project was useful, acceptable and sustainable. There is
need for greater and deliberate integration of local communities and other
grassroots stakeholders in the implementation and decision-making in the
entire budget process.
Summary of Budgetary Controls
The following chart below summarises the budgetary controls by various
agents in the Budget process.
48
49
Food for thought
 Is there room for integrating previous years (PAC and PIC Reports)
recommendations into the current and future budgets?
 How effective is the government audit function?
 Is there any form of collaboration and cooperation between the
multiple financial oversight bodies e.g. KENAO KACC and the
Efficiency Monitoring Unit (EMU)?
 Do the oversight offices have sufficient constitutional and operational
independence to enable them execute their mandates?
 To what extent are the two watchdog Committees (PAC and PIC)
empowered in their oversight work?
 What is the role of SWGs in post budget planning?
 Is there room for the proposed OFA, in Parliament to act as a link
between SWGs and the National Assembly?
50
CHAPTER FOUR
BALANCED BUDGETS AND PUBLIC DEBT
This chapter looks at the challenges of budgeting in an economy that has
experienced a large public debt. The following main issues are discussed:




Balancing the budget
Public debt and how it is generated
Classification of public debt
Basic problems associated with a large public debt
4.1
Balancing the Budget
A balanced budget is that budget where Expenditures are equal to revenues
including situations where Revenues are defined as ordinary revenues. Thus
a budget is considered balanced when the government is able to finance its
outlays/expenditures using its own generated revenues from taxes or user
charges. Though there is merit in balancing the Budget, such a policy needs to
be considered together with the need for equity between current and future
generation. A balanced budget makes sense if the Government is not engaged
in long-gestation capital projects such as power generation dams, road
construction, airports etc. However when the government is engaged in such
projects it can use deficit financing as long as the assets created are equal or
more than the debt. This means the nation is increasing the capacity to finance
or repay the debt from the additional capacity that is created. But where
deficit is used to finance current expenditure or consumption type of
expenses, in such a situation government should live within its means and
balance the Budget, subject to maintaining macro-economic stability.
Ideally, the Government should balance recurrent expenditures or
consumption through ordinary tax revenues to avoid imbalances which hurt
both present and future generations.
When a government is unable to raise sufficient resources to cover its
recurrent and development obligations (the shortfall is called a budget
deficit), which may necessitate borrowing from both domestically and
external sources.
A budget surplus is generated when revenues exceed total expenditure in
51
any budget year. This is a rare occasion in many countries but it is the path to
general economic stability in a country.
Budget deficits are responsible for the growing debt obligations of the
government. Economists however argue that developing countries may still
have to rely substantially on debt financing as a way of stimulating growth
through capital investments. In their view, the challenge of economic
planners is to maintain public debt at some sustainable level without
necessarily eliminating it. However, total investments (in capital projects)
should exceed or equal the deficit. But if recurrent expenditure exceeds
revenues, this means the current generation is financing its consumption
through deficit financing, thus passing the debt to the future generation. This
is inequitable and should be discouraged.
4.1.1 Public Debt and How it is Generated
The origin of debt is the gap between expenditure and revenues, i.e. the
deficit. Borrowing is one of the ways that government uses to finance the
deficits. The borrowing can be either from domestic or external sources.
When deficit financing persists, this leads to debt accumulation. The concern
in such a situation is the build-up of stock of debt together with its negative
consequences.
Normally, public (or national debt) falls into two categories, namely; shortterm and long-term. Short-term debt, is the borrowing that is refinanced
within one year. In our case it is financed through the 91 and 182 day Treasury
Bills, which are normally for 91 to 180 days. In an ideal situation, short-term
debt should be used to close the revenue gaps caused by revenue collection
seasonalities, which means that in one season revenues may be less than
expenditures but in another, receipts exceed expenditures. In such cases, the
short-term debt is liquidated when excess receipts flow in.
Long-term debt describes debt liabilities that go beyond one year and could
be for as long as 40 years. Such debt obligations whether domestic, or
external should be used to finance costs and projects which generate benefits
over a long term.
Evidence shows that a large portion of Kenya's short-term debt has been
rolled over since early 1990s. Attempts to lengthen maturity of this debt
affects the liquidity in the economy and takes credit away from private sector.
52
If the Government seeks a lot of money for its long-term bonds, this means
there will be less money for its private sector borrowers. The result is a rise in
interest rates which hurts economic activity. The reverse is also true, that if
government takes less money in form of debt, then much more is available for
private sector. In that situation, the tendency is less pressure on interest rate to
rise or even fall.
The decision as to whether we should borrow more externally or not should
depend on what we intend to do with the debt resources. If the projects we
invest in can generate benefits or returns in excess of the cost of the debt,
borrowing is in order. The decision to borrow or not to borrow should also be
influenced by our ability to service the debt and also the behaviour of the
exchange rate between the Kenya shilling and the currencies of the debt. If
the shilling depreciates, the debt burden rises. On the other hand if the
shilling appreciates, it lowers the cost of debt but makes our exports less
competitive compared to imports. Therefore we need a health balance.
4.2
Classification of Public Debt
Public debt is broadly classified under two broad categories;
 External debt
 Domestic debt
4.2.1 External Debt
External debt denotes the external resources that are owed by the government
to bi-lateral donor countries such as the UK, Japan, Germany, USA etc as well
as multi-lateral financial institutions such as World Bank or other
independent foreign financiers. External debt accrues through external
financing which may take the form of project or program loans. Government
may also receive grants which the government is under no obligation to repay.
For the foreign loans, these are repayable with interest.
Generally, grants and loans can be either project specific (i.e. project grants
and project loans) or program loans or grants, which are applied to general
budgetary support (i.e. program grants and program loans). There may also
be commercial loans, mainly suppliers' credits which are usually for shorterterm but very expensive.
When a loan is granted or borrowed on terms and conditions which are more
53
favourable than commercial terms, it is classified as concessionary. For a
long time multilateral agencies such as IMF have classified external loans
that charge interest at less than 3.5% and provide grace period in excess of
five years as concessionary while others are classified as commercial.
4.2.2 Domestic Debt
National domestic debt basically refers to government's borrowing from
local individuals and institutions. Domestic debt can be viewed as
marketable or non-marketable debt. This debt is either short-term or longterm. Short-term debt is mainly in form of Treasury bills which are issued for
either 91 or 182 days. The other component is the longer-term Treasury
bonds which vary from one year to as long as ten years.
 Marketable debt: this is represented by both Treasury bills and
bonds which are issued to local individuals, corporations or other institution.
They are called marketable because they can be traded in local money and
financial markets. In other words, the initial buyer can sell the debt to another
person.
 Non-marketable debt: this includes debt borrowed directly from
commercial banks, overdraft from the Central Bank of Kenya which cannot
be transferred to third parties. In the past, the Government has also accrued
expenditure arrears, some of which were converted into bonds. However, the
later type of borrowing represents fiscal indiscipline as ministries make
expenditure commitments which are not provided for in the Budget. On its
part overdraft from CBK represents printing of money and requires stringent
controls. Currently, the CBK overdraft is restricted to no more than 5% of the
latest Central Government revenue receipts, which is necessary to sustain
macro-economic stability.
Debt repayment depends on agreed terms, for example, Treasury bills mature
and are repaid after 91 or 180 days. In case of Treasury bonds, repayments
vary from one year to over ten years. The debt is said to mature or become due
and payable on the day the term expires in which case the government must
pay or incur penalty. In case of external long term debts, in majority of cases,
the debt may be repayable in equal instalments either annually or quarterly.
As explained earlier, the amount payable is charged direct from the
Consolidated Fund and does not require to go through the normal budgetary
process.
54
4.3
Basic Problems Associated With a Large Public Debt
A large public debt tends to compromise economic growth potential and
reduces the range of economic choices available for economic planners
because debt cost is a first charge on revenues. Therefore, repayments of
interest and principal, take a large chunk of revenues leaving less money to be
used to finance other public needs (e.g. the construction of schools, provision
of medical services and improvement of infrastructure etc.). Secondly,
through high taxes, the repayment of the public debt burdens not only
present, but also future generations of taxpayers. Thirdly, for Kenya,
increasing taxes while still in both EAC and COMESA would mean raising
the cost of doing business, since the county already has higher tax burden
than the partners in the common market, which would encourage relocation
of business to our partner countries.
As the state continues to borrow from the domestic financial markets, it limits
the amount of money that private sector (business people) can borrow,
particularly in a country where access to funds from offshore (external)
financial institutions is still limited. In other words, higher domestic
borrowing, by the Government, discourages economic growth. In addition,
excessive public debt destabilises the domestic economy through possible
increases inflation, and the rise in interest rates on loans to households and
companies.
55
CHAPTER FIVE
SOURCES OF BUDGET INFORMATION
This chapter attempts at identifying the major sources of budget information
in Kenya and the various ways of gathering information on the budget
process. It addresses the following:




5.1
Importance of information
Sources of budget information
Where to find budget documents in Kenya
Key players.
Importance of information
Availability of information is critical to participating in the Budget Process.
Therefore, access and understanding of Budget information on a regular basis
is useful for citizens especially those wishing to get involved. Individual
citizens, corporations, community organisations, interest groups etc need the
opportunity to study and examine budget documents before The Budget is
finalized and also soon after the Minister for Finance tables them in
parliament. To participate effectively, they need information on both sides of
the Budget, i.e. Revenue and Expenditure. Such information would give
them a balanced view of the Budget. In the absence of accurate and timely
information, it is impossible to contribute meaningfully to public debates on
important policy issues. Worse still, a less informed citizenry cannot
challenge the government on its priorities and performance or provide
information to enable government correct omissions.
Vital budget documents issued prior to Budget preparation includes, the
Economic Survey, BOPA and BSP, the Central Bank Monthly Economic
Review, and the Budget documents like the Budget Speech, the Financial
Statement, Estimates of Revenue, the Finance Bill, Estimates of Recurrent
Development Expenditures, and related documents. It is only by examining
such documents and understanding their contents that one can, confidently,
participate in discussions on the Budget Process.
We shall briefly examine some of the important budget documents.
56
5.2
Budget Documents
Budget Outlook Paper (BOPA): Prepared by the Ministry of Finance, the
document provides tentative sector ceilings as well as indicative ceilings for
the individual line ministries. It also provides the macro economic indicators
e.g. projections of the exchange rate, the projected economic growth,
revenues, inflation etc. This document is normally published in DecemberJanuary and circulated to key players.
Budget Strategy Paper (BSP): Prepared by Finance Ministry and provides
an update of the available resources and fiscal framework for the
Government budget for that year and the medium term. It also sets firm
ministerial ceilings in line with indicative sector ceilings provided in BOPA
and outlines government key strategic objectives as set out in other relevant
government policy documents and commitments in the medium term.
th
Budget Speech: Read by Finance Minister not later than 20 June, the speech
gives an overview and summary of the main economic and broad policy
proposals for revenues generation, expenditures and financing strategies
included in the next financial year, including an elaboration of the
government's Medium Term Expenditure Framework (MTEF).
Printed Estimates: These are consolidated estimates from Ministries
prepared and published by the Ministry of Finance. They contain the
estimates or provisions for activities both for both recurrent and development
expenditures and a detailed listing of external donor funding. Once the
Parliament approves these estimates, an Appropriation Bill is tabled in the
House, which once approved becomes the legal authority to spend.
Finance Bill: This bill is prepared by the Ministry of Finance and contains
proposals on how the government intends to raise monies to finance the
budget, changes to, tax rates, tax, money, and finance laws, e.g. Banking Act
Insurance, RBA etc. Therefore the finance Bill contains proposals touching
on the various tax laws (Income Tax Act, Customs and Excise Act, the VAT
Act, and stamp duty Act) and other tax-related changes to the laws such as
KRA Act as proposed in the budget. But only where changes are proposed.
Financial Statement: It contains the expected movements in the Exchequer
Account for the current financial year (year about to end) and a forecast for
the coming financial year, together with a summary of the revenue proposals
57
as contained in the Finance Bill. This document is prepared by the Ministry of
Finance
Estimates of Revenue (The Revenue Booklet): Contains a detailed
breakdown of sources of revenue, collections of the previous and current
financial years and forecasts for the coming year. This is also prepared by the
Ministry of Finance.
Government Finance Regulations and Procedures: Contains financial
regulations and procedures that govern government. It was published in 1989
by Ministry of Finance.
Ministerial Public Expenditure Review (MPER) Reports: These are
reports that contain the analysis of expenditures by government ministries
and departments, highlighting budget various and programs achieved,
including outputs realised.
Sector Working Group Reports: Prepared by each of the ten budget sector
groups. They provide details of sector achievements, priorities, challenges
and resource needs (including pending bills) for the next 3 years which are
derived from the MPERs. They also have recommendations aggregated from
line ministries, in that group, to enhance collaboration in the sector. The
reports do not mention mechanisms for financing resource needs
Statistical Annex: This is a statistical summary prepared by the Ministry of
Finance and it contains key indicators on the government budget, both past
and present, as well as the trends on national debt and international trade. It is
particularly useful for people interested in economic studies and trend
analysis. It is not a legal requirement but has become almost a tradition to
include and circulate it at Budget time.
Treasury circular: a document issued by the Treasury that contains
information such as guidelines, definitions and updates on annual reporting
and financial matters.
5.3
Where to find the budget documents and information in Kenya
Documents and information on budget can be obtained from the following
sources, among others;
58
GLOSSARY
Annual Estimates: The whole annual proposals of expenditure and taxation
presented to Parliament, in June, for approval by the Minister for Finance as
part of the annual budget. They are presented to Parliament in form of
Printed Estimates and the Financial Bill.
7
Appropriation : It is the act of setting apart something for its application to a
particular usage, to the exclusion of all other uses. It typically refers to the
legislative designation of money for particular uses, in the context of a budget
or spending bill.
Appropriations in Aid: It is revenue in the form of receipts from user
charges, collected by ministries or departments that is over and above the
required amount and is spent by the entity that raised the revenue.
Appropriations Bill: This is a Bill tabled in Parliament soon after Parliament
approves the Printed Estimates. It outlines all expenditure proposals
covering various votes for government goods services, such as payment of
salaries and other operational expenditures for each ministry. The Bill,
contains both Estimates of recurrent and development expenditures. It seeks
the legal authority to spend funds in the Printed Estimates.
Appropriations Act: Once the Appropriation Bill is approved by Parliament
and given Presidential Assent, it becomes the Appropriation Act. It provides
legal authority for spending money in Printed Estimates, including money
authorized and spent as Votes on Account.
Appropriations Account: This is the annual account of receipts and
expenditure of the Government for a financial year. It is prepared by the
Government and audited by C&AG and report filed to Parliament. PAC
scrutinizes it and report back to the House.
Authority to Incur Expenditure (AIE): This is the authority or permission
granted by the Accounting Officer of a line ministry to Heads of Departments,
the district heads or heads of spending units, etc to enable them spend money
allocated for activities under them. An AIE specifies the amount allocated as
59
well as the range of authorised or eligible expenditures. It is converted into
real cash when money is disbursed. While AIE may be issued for up to six
months or one year, actual cash in form of exchequer releases come in shorter
intervals, say monthly.
Budget amendments: These are changes to the budget. Changes to the
budget must be laid before Parliament. Amendments in Printed Estimates of
Finance Bill may seek to increase or decrease the amount proposed for one
vote. In Finance Bill, amendments may result from representations made to
the Minister after the Bill is tabled or from contributions by MPs. They aim to
change the tax rate or legal provision, increase, decrease or add a new
provision. Under the current constitute on Parliament can only reduce
allocations or tax rate, it cannot increase either tax or allocations.
Budget: The Budget is the total annual expenditure comprising estimates of
annual revenue receipts and expenditures as presented and approved by
Parliament, in the Finance Act and Appropriation Act. The Constitution
requires the budget be approved by parliament before it takes full effect.
Budget deficit: In the context of public finance, a deficit is the excess annual
expenditure over annual receipts of revenue. This means for that year,
Government will spend more than what it expects to raise in revenues. This
difference is financed through borrowing.
Budget beneficiaries: Budget beneficiaries are people or institutions that
benefit from measures in Budget Proposals on tax side, if proposals include
tax reductions, those affected will benefit. On expenditure side, beneficiaries
represent people or institutions which receive funds, goods or services from
the budget.
Capital projects: These are projects which involve expenditure with long
term benefits that last longer than one financial year such as computerisation,
building of schools, installation of water supply systems or road
construction. They are financed through the development expenditure.
Consolidated Fund: This is the fund into which all government revenues
paid, whether in form of loans, loan recoveries and tax receipts. According to
the Constitutions, all withdrawals from the Consolidated Fund can only be
60
effected with authority of Parliament. To ensure compliance with
Parliamentary authority, the C & AG is required to approve all withdrawals
from the fund.
Consolidated Fund Services (CFS): These are services which are
authorized, by the Constitution, to be charged direct into the Consolidated
Fund. They include; debt service, both principal and interest payments,
payment of salaries and wages of constitutional offices holders, i.e. judges of
the High Court and the Attorney General.
Civil Contingency Fund: This is a fund created to cater for urgent and
unforeseen expenditures which may arise in course of a financial year, e.g.
national calamities. The law requires that withdrawals from this Fund
refunded within the year after Parliamentary approval, of that expenditure,
through Supplementary Estimates.
Departmental Committees:
These are Parliamentary Committees
established under the Parliamentary Standing Orders to assist Parliament
supervise and analyze issues falling under various ministries and sector in
which they operate. The issues they handle may be on expenditure,
management or other matters. After due consideration, these committees file
reports and make recommendations to Parliament.
Development Expenditure: These are expenditures that relate to long term
investments such as roads, schools and hospitals. It is also known as capital
expenditure.
Expenditure (Printed) Estimates: These are the expenditure proposals
covering both recurrent and development for the financial year. They are
usually presented to Parliament as Printed Estimates but once approved, an
Appropriation Bill file tabled for formal approval.
Exchequer: This is a bank account maintained for the government at Central
Bank of Kenya from where all withdrawals and deposits in the name of the
government are managed.
Finance Bill: A bill presented to Parliament by the Minister for Finance
containing the proposed revenue raising measures through taxes, levies, fees,
and other charges on various users of government services. It also, contains
61
amendments to tax, finance and money laws e.g. KRA Act, tax laws, Banking
Act, Insurance Act and RBA Act etc.
Finance Act: This is the Finance Bill after approval by Parliament and given
Presidential Assent.
Fiscal year: Sometimes called the financial year, is the period covering a
complete government financial year. In Kenya the fiscal or financial year
st
th
begins on 1 July and ends on the 30 of June the following year.
Grant: Monies, goods and services advanced to the Government mainly by
other Government and multilateral financial institutions as a gift, for which
no repayment is expected.
Government Finance Statistics (GFS) 2001: GFS is an international
classification which harmonizes the presentation of government finances,
accounting, and reporting across the countries. The classification enables
governments to classify its revenues and expenditures according to a
common economic use.
Local government: This is the branch of government comprised of local
authorities such as county councils, municipalities, and town councils. These
units are semi- autonomous and prepare their own budgets from the revenues
collected through council levies and rates.
Line Ministries: These are Ministries other than the Ministry of Finance
which are charged with the responsibility of implementing budgeted and
planned activities related to a particular service, sector or sub-sector. Each of
the line ministries presents budget proposals for consideration to the Ministry
of Finance.
Macro-working group: The members of the Macroeconomic Working
Group (MWG) include such key agencies (as departments of the Ministry of
Finance, Ministry of Planning, CBK, KRA, CBS and KIPPRA), which are
involved in various aspects to determine the aggregate level and composition
government of revenues and expenditures. The main task assigned to this
Group is to prepare a Budget Strategy Paper (BSP) which sets out the optimal
levels of aggregate revenue and expenditure, a deficit strategy, and a
financing strategy. The success of a macroeconomic framework is to impose
62
fiscal discipline. The MWG endeavours to make sound and timely forecasts
of likely economic outcomes.
Ministerial Budget Committees (MBCs): Committee established by every
line ministry to coordinate, collect and collate budgetary proposals and
facilitate preparation of the ministry budget.
Medium Term Expenditure Framework (MTEF): A budgetary system
that seeks to link policy making, planning and budgeting to a three years
rolling plan. MTEF is implemented through the annual budgets, which are
aligned to a five year National Development Plan.
Kenya National Audit Office: This is the supreme auditing body,
established under the Kenya National Audit Act. It audits government
ministries and agencies for compliance with the financial laws, procedures,
regulations, and Parliamentary approval.
Public Accounts Committee and Public Investment Committee (PAC
and PIC): These are Parliamentary Standing Committees established by
Parliament to oversee Government compliance with Budget as approved by
Parliament, law and operating procedurals. Whereas PAC scrutinises the
annual accounts and audit reports from the Controller and Auditor General,
PIC examines the accounts of all public bodies and other statutory
corporations as reported by the Auditor General (Corporations). They both
prepare reports and make recommendations to Parliament.
Programme Review and Forward Budget: Programme reviews
implementations of ministerial programmes and projects, principally to
assess how they relate to problems being addressed, set priorities and targets.
The reviews inform preparation of the three-year rolling forward budgets,
however, under the MTEF framework forward budgets have become less
significant.
Public Investment Program: This was a three-year ministry programme
covering new and on-going projects, which categorised projects into three
categories; “core”, “high priority” and “other”. However, with introduction
of MTEF, PIP is no longer in practice since the Budget is expected to focus on
priority areas.
63
Recurrent Expenditure: These are expenditures that relate to operations of
a ministry it includes expenditures such as compensation to employees in
form of salaries, stationery, transport and other related expenditures .
Resource Envelope: This refers to the absolute maximum, or total amount of
resources available for a financial year.
Supplementary or Revised Estimates: These Estimates reflect changes in
the Budget previously approved by Parliament. These mainly comprise
reallocation and adjustments in the Budget under implementation. The
adjustments are made within votes but may entail additional expenditures,
e.g. emergencies funded fro CCF. The law requires that parliamentary
approval of these estimates not later than February of the current financial
year. In some cases, these Estimates reallocate resources form slow spending
ministries to those spending fast.
Treasury: The Minister for Finance and officers deputed to perform
functions assigned to Treasury by law. This includes those organs in the
Ministry of Finance that are responsible for management of public finance,
property and the formulation of economic policies. Treasury presides over
the preparation and execution of the budget. It supervises implementation of
the approved Budget and other policies, and is responsible for reporting and
accounting for all public moneys and property.
Vote on Account: This is the authorisation by Parliament to Government to
spend not more than half the funds required to finance government services
expenditures, as presented in Printed Estimates before the Budget formally
approves the Budget. While the current practice is to authorize half of total
resources in Printed Estimates, there is no reason why this should not be less.
On revenue side, immediate imposition of proposed taxes is effected through
publication of the Provisional Collections of Taxes Order. This legal notice
is published on the Budget Day.
Vote Book: A record of all financial transactions of a ministry detailing the
balances available from each of the budget heads. Each page in the Vote Book
represents an item in the Printed Estimates.
64
FIGURE 1: ANNUAL MTEF PROCESS IN KENYA
Projection of Macro
Economic Targets
Old MTEF Plan
(Financial Plan)
Total resource envelope (Both
Domestic and External)
Review of old MTEF
Plans in the Line
Ministries
Sectoral Review of old
Sector Reports (Policy and
Program Reviews)
Sectoral resource envelopes
Policy priorities and
spending needs
Decision making
on the allocation of
resources among
competing needs
Preparation of itemised Budgets
by Line Ministries
Review and finalization of
Budget Estimates by Treasury
Laying of Annual MTEF
Estimates before Parliament
65
APPENDIX 1:
THE BUDGET CALENDAR IN KENYA
66
F
M
F
67
Note: The above calendar is rarely followed this format since it generally
depends on how timely the MTEF process is expedited.
Note: In order to ensure full incorporation of local input into the Budget,
District strategic plans should feed into departmental and ministerial
strategic plans. In turn, the National Strategic Plan should incorporate input
from ministerial Strategic plans but also include cross-cutting issues and
national interests in a three year MTEF Rolling Plan.
68
APPENDIX 2:
LEGAL INSTRUMENTS THAT GUIDE
THE BUDGET PROCESS IN KENYA
The Constitution
The Constitution is the first law of the land which provides the framework for
the entire budget process. It apportions mandates and responsibilities to each
of the key players namely the Executive, Parliament and C & AG and
Accounting Officers. Parliament is the supreme guardian of public finances
with extensive constitutional role throughout the entire budget process.
Section 48:
Reserves the power to propose imposition of taxes
withdrawal of money from Consolidated Fund or any other
fund, remission of government debt except President
Through a minister. Parliament not authorized to
initiate money or tax bills. However the proposals can not be
.
enforced until Parliament approves them.
Section 99-105: Requires all public money be paid into Consolidated Fund.
Parliamentary is the only authority empowered to approve
withdrawal of money from the Consolidated Fund.
Establishes the Office of the Controller and Auditor General
which acts a watchdog on behalf of parliament to authorize
withdrawals from the Consolidated Fund to finance approved
Expenditures.
Internal Loans Act (Cap 420) and External loans and Credit Act (Cap
422): Provides for procedures and regulations on government borrowing,
both local and external. Money so borrowed is to be used as approved by
Parliament.
Cap 412: The Exchequer and Audit Act: Establishes an autonomous Office
of the Controller and Auditor General (C&AG) whose mandate is to audit and
report on the accounts of all government institutions as well as the accounts of
all local authorities and other public bodies. Recently the C&AG has been
incorporated into a specific law under KENAO. Cap 420 confers the
Treasury with the power to preside over all budgeted funds and other finances
of the state.
Cap 413: Paymaster General Act: is an officer created by the Paymaster
69
General Act, Cap 413. The officer is subordinate to Treasury and through
him Treasury controls issue or release of funds (money) from
Consolidated Fund, to ministries in accordance with Parliamentary
approval in the Budget. In other words the Paymaster General manages
the cash flow subject to prescribed regulations. Presently, this function is
performed by the Financial Secretary.
Government Financial Regulations and Procedures (Financial Orders):
Issued by the Treasury, these regulations define the broad operational
guidelines regarding the issue, use, custody and reporting on all government
finances and assets. These Regulations together with the Treasury Circulars
serve to inculcate discipline and order in the utilization and accountability for
all budget and non-budget funds of the government.
Parliamentary Standing Orders: These are operating procedures
formulated by Parliament to guide and govern conduct of business in the
House, including handling of the National Budget and other money bills.
The following standing orders are of particular relevance in the budget
process.
S.O. 132-135: These Orders deal with general provisions on establishment
Committee of Ways and Means and Committee of Supply as a
select Committees of Whole House with an extensive
mandate to discuss matters of taxation and expenditure and
other matters related to receipts and payments, into and out of
Consolidated Fund Require the Annual Estimates be tabled
not later than 20th June.
S.O 136-140 These orders deal with procedures for handling taxation
proposals under the Committee of Ways and Means, which is
responsible for raising revenues. This Committee has three
days set aside for taxation proposals in the financial statement
S.O. 141-144: Establish the Committee of Supply as a Committee of Whole
House to debate Printed Estimates, the proposed budgetary
allocations for various votes. They also provide for Vote on
Account to be put before the House before June 26th. Require
st
disposal of debate on Votes or Expenditure approvals by 31
70
October or before.
S.O. 147:
Establishes a Public Accounts Committee (PAC) and
mandates it to scrutinize appropriation account i.e. the annual
Audit Report and the Appropriation Accounts of the
government as presented by the Controller and Auditor
General. Requires the PAC to table its report and
recommendations before the House.
S.O. 148:
Establishes the Public Investment Committee (PIC) which is
mandated to examine Report of the Auditor General on public
investments and report to Parliament on its findings.
Requires the PIC to file its report and recommendations
before the House. Before enactment of the Kenya National
Audit Act, 2003 public investments were audited by the
Auditor General Corporations. However, in 2003, this
function was reincorporated into C & AG.
S.O. 151:
Empowers Parliament through the Business House
Committee to Establish Departmental Committees to deal
with issues on management, activities and administration of
designated ministries or departments. The Committees are
mandated to examine effectiveness of implementation of
ministerial policy objectives. They are also free to enquire
into anything brought to the attention of the House and report
back.
71
END NOTES
1. Joachim, W. and Byanyima, W, (2004). “Parliament, the Budget and
Gender, a Handbook for Parliamentarians”, World Bank
2. Public Expenditure Management Handbook, 1998, World Bank.
3. Allen Shick, A Contemporary Approach to Public Expenditure
.
Management,1998, World Bank Institute.
4. Treasury bills refer to debt instruments with a maturity period of less
than a year whereas Treasury bonds are debt instruments that have a
period of maturity of more than a year.
.
5. It is important to note that the ERS 2003-07 is the Poverty Reduction
Strategy Paper for (PRSP) Kenya.
.
6. The allocation follows the
and Employment Creation.
Economic Recovery Strategy for Weal
.
7. Wikipedia Free Encyclopaedia
72
http://en.wikipedia.org/wiki/