Budget Credibility Trends and the need for Fiscal Discipline in Kenya
Category: Fiscal Discipline
By: Faith Nzomo,
The recent submission of budget estimates to Parliament marks a crucial step in the annual budget cycle, but the true measure of their success lies in their credibility, a key determinant of whether these projected figures will truly translate into the planned delivery of public goods and services. Credible budgets refer to budgets which displays minimal deviation from approved allocations (PEFA,2019). Budget credibility is therefore measured by comparing levels of actual spending and revenue receipts against the projected or approved estimates.
The resultant deviation can manifest as underspending or overspending or even in form of unrealized or surpassing revenue targets. The extent to which governments are able to execute their approved budgets as planned indicates their ability to effectively deliver public goods and services as well as achieve their set development goals.
Global Trends
Budget credibility is the first pillar in the world bank’s Public Expenditure and Financial Accountability (PEFA) framework and is usually accessed using the UN SDG indicator 16.6.1 or the WDI indicator “Primary government expenditures as a proportion of original approved budget”. This metric gauges the alignment between actual expenditures and the initial budget allocations outlined in government documents and fiscal reports. Smaller deviation between actual and planned expenditures signifies effective government budget management and, consequently, more credible budgets.
Chart 1 above illustrates the results of the PEFA analysis conducted by the World Bank on budget credibility, using data from 2010 to 2021. The analysis found that a bigger proportion (75%) of countries in Europe and central Asia have more credible budgets compared to their Africa (39%) counterparts. The analysis further found performance in budget execution improved with income since middle- and high-income countries found in Europe had less than 5 percent budget deviations compared to poorer countries predominantly found in Africa who witnessed more than 5 percent budget deviations.
Unreliable budgets impede efficient provision of public goods and services. Research on budget credibility has revealed that underspending is a significant issue affecting governments worldwide with national budgets being underspent by as much as 10 percent. The problem is more prevalent in low-income countries where over 14 percent of the total budgets are underspent.
Factors Contributing to Unreliable Budgets in Low-income Countries
Low and Middle-income countries face considerable challenges in managing their public finances which contribute to budget credibility issues stated above. These economies often grapple with scarce resources, shortage of crucial skills and information for effective public resource management, an increasing accumulation of unmet needs, and insufficient reserves to cushion against economic and natural crises.
Consequently, the resulting constrained fiscal space often manifests in form of budget deficits and elevated debt levels. This contributes to the weakened commitment to fiscal rules and discipline, the extensive allocative and operational inefficiencies in spending and widespread mismanagement of public resources witnessed in these countries.
According to Schick (1998), low-income countries often employ harmful budgeting practices which collectively contribute to unreliable budgets. These practices include:
- Unrealistic Budgeting. This is the creation and implementation of budgets that are unattainable because they authorize expenditures exceeding the government’s financial capacity.
- Escapist Budgeting. This practice stems from unrealistic budgeting and involves the government knowingly authorizing spending that will not materialize. The intention is to create a false impression of responsiveness to demands for social improvement.
- Hidden Budgeting. This involves concealing the actual budget, including the actual spending and revenues
- Repetitive Budgeting. Involves frequent revisions of the budget throughout the fiscal year.
- Cashbox Budgeting. Involves spending which is usually based on the availability of cash rather than adhering to the established budget.
- Deferred Budgeting. Concealed the true liabilities especially the unpaid ones, leading to accumulation of arrears.
Trends in Kenya
In Kenya, the National Treasury drafts the annual budget known as the Estimates of Revenues and Expenditure for the executive arm of the government. The estimates are then presented to Parliament for review and approval. Once approved, the budget is enacted and executed from the start of the financial year, following the timelines set in the budget calendar and adhering to the stipulations of the 2010 Constitution of Kenya and the Public Finance Management Act of 2012.
Data from the World Bank reveals a concerning trend regarding budget credibility in Kenya. The declining trend of the primary government expenditure as a proportion of the original budget signifies a growing divergence between the intended budget and the actual executed budget. The country’s range of deviation has, for the last decade, averaged between 5 and 15 percent (See figure 1 below), meaning therefore a need for reforms in the budget making and budget implementation practices in Kenya to reduce the deviation to the ideal rate of less than 5 percent.
According to the Office of the Auditor General, several factors contribute to Kenya’s budget credibility issues. These include inaccurate data used in projecting expenditure estimates, leading to overestimation; under-collection of revenues resulting in late disbursements; and the unplanned delivery of services and implementation of development programs. Additionally, unprecedented occurrences like the COVID-19 pandemic and climate change calamities such as floods and droughts have also played a role.
Examining the expenditure side, it’s clear that the actual spending of Kenya’s national government has consistently fallen short of approved estimates. Over the nine fiscal years from 2014/15 to 2022/23, an average of 9 percent of the national budget remained unspent. This trend is particularly concerning given that the percentage of underspent budgets doubled from 6 percent to 12 percent between FY 2020/21 and FY 2022/23.
Under-execution of expenditure often leads to citizens missing out on planned services or goods. A deeper analysis of the under-spending patterns in Kenya shows that it is more prevalent during the implementation of development budgets with the trend worsening between FY 2021/22 and FY 2022/23. This is concerning given that government investment is argued to drive economic growth, reducing poverty and boosting productivity. This worrisome trend could therefore have adverse implications on the overall growth and development of the economy.
Credibility issues unmasked from the revenue side shows underperformance in revenue collection. The past decade has witnessed under performance in revenues collection with shortfalls reaching highs of 8.8 percent of the projected targets. The situation has not changed post covid as the poor trend in ordinary revenue collection persists. This is despite efforts to reform tax policy and tax administration.
Conclusion
Better PFM practices are paramount for more reliable budgets (PEFA, 2019), and more reliable budgets enable governments to align available resources with service delivery-for long-term achievement of the set policy goals and objectives. The current administration is implementing the Bottom-up Economic Transformation Agenda (BETA) with priorities designed to support realization of Vision 2030. Fiscal pressures witnessed in the recent past have necessitated implementation of these policies alongside a fiscal consolidation strategy aimed at reducing deficits and debt to GDP ratios.
Reducing budget deficits requires accurate expenditure forecasting and revenue projections with minimal deviations. This can only be achieved through enhanced fiscal discipline and reforms geared towards improving compliance with the set PFM laws including Fiscal Responsibility Principles (FRPs).
Fiscal discipline in Kenya which is key in the achievement of credible budgets has been undermined with both national and county governments struggling to adhere to the set FRPs while key institutions tasked with the responsibility of oversight of budget formulation, implementation and auditing failing to perform their mandate on account of inadequate resources.
According to Budget Guide for the Financial Year 2024/25, several constitutional and independent bodies such as the Commission of Revenue Allocation, Salaries and Remuneration Commission and the Office of the Controller of Budget received less budgetary allocation in the current financial year which raises concern about governments commitment towards oversight and accountability initiatives. Additionally, the Office of Auditor General will be expected to execute its mandate of auditing use of public resources while facing over Ksh 2 billion funding gap.
Addressing these challenges necessitates reforms in both budgetary institutions and the law itself. Specifically, oversight and accountability bodies must implement clear sanctions for non-compliance with PFM laws. These sanctions, ranging from withheld funds to dismissals or prosecutions, would serve as crucial deterrents against disregarding established fiscal rules. Furthermore, the government should ensure optimal budgetary allocation to institutions tasked with overseeing the allocation and use of public resources. Enforcing these measures will significantly improve spending patterns, enhance overall budget execution, and ultimately lead to the realization of government goals and development objectives.
References
- https://books.google.co.ke/books?hl=en&lr=&id=6k6_DwAAQBAJ&oi=fnd&pg=PP1&dq=PEFA+2016+framework&ots=Kn9rJVmvJ9&sig=SSVxTkoo-atWrjiodIUn1K2WRE8&redir_esc=y#v=onepage&q=PEFA%202016%20framework&f=false
- https://inesc.org.br/wp-content/uploads/2019/06/how-governments-report-on-and-justify-budget-deviations-ibp-2019.pdf
- https://ieakenya.or.ke/?wpdmdl=3443
- https://datatopics.worldbank.org/world-development-indicators/stories/government-budget-credibility-and-the-impact-of-covid-19.html#:~:text=Looking%20at%20countries%20by%20income%20levels%2C%20two%2Dfifths,improves%20markedly%20in%20middle%2D%20and%20high%2Dincome%20economies.
- https://www.oagkenya.go.ke/wp-content/uploads/2024/06/AUDITOR-GENERALS-SUMMARY-REPORT-ON-NATIONAL-GOVERNMENT-2022-2023-with-cover.pdf
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Budget Credibility Trends and the need for Fiscal Discipline in Kenya
| Post date: Mon, May 19, 2025 |
| Category: Fiscal Discipline |
| By: Faith Nzomo, |
The recent submission of budget estimates to Parliament marks a crucial step in the annual budget cycle, but the true measure of their success lies in their credibility, a key determinant of whether these projected figures will truly translate into the planned delivery of public goods and services. Credible budgets refer to budgets which displays minimal deviation from approved allocations (PEFA,2019). Budget credibility is therefore measured by comparing levels of actual spending and revenue receipts against the projected or approved estimates.
The resultant deviation can manifest as underspending or overspending or even in form of unrealized or surpassing revenue targets. The extent to which governments are able to execute their approved budgets as planned indicates their ability to effectively deliver public goods and services as well as achieve their set development goals.
Global Trends
Budget credibility is the first pillar in the world bank’s Public Expenditure and Financial Accountability (PEFA) framework and is usually accessed using the UN SDG indicator 16.6.1 or the WDI indicator “Primary government expenditures as a proportion of original approved budget”. This metric gauges the alignment between actual expenditures and the initial budget allocations outlined in government documents and fiscal reports. Smaller deviation between actual and planned expenditures signifies effective government budget management and, consequently, more credible budgets.
Chart 1 above illustrates the results of the PEFA analysis conducted by the World Bank on budget credibility, using data from 2010 to 2021. The analysis found that a bigger proportion (75%) of countries in Europe and central Asia have more credible budgets compared to their Africa (39%) counterparts. The analysis further found performance in budget execution improved with income since middle- and high-income countries found in Europe had less than 5 percent budget deviations compared to poorer countries predominantly found in Africa who witnessed more than 5 percent budget deviations.
Unreliable budgets impede efficient provision of public goods and services. Research on budget credibility has revealed that underspending is a significant issue affecting governments worldwide with national budgets being underspent by as much as 10 percent. The problem is more prevalent in low-income countries where over 14 percent of the total budgets are underspent.
Factors Contributing to Unreliable Budgets in Low-income Countries
Low and Middle-income countries face considerable challenges in managing their public finances which contribute to budget credibility issues stated above. These economies often grapple with scarce resources, shortage of crucial skills and information for effective public resource management, an increasing accumulation of unmet needs, and insufficient reserves to cushion against economic and natural crises.
Consequently, the resulting constrained fiscal space often manifests in form of budget deficits and elevated debt levels. This contributes to the weakened commitment to fiscal rules and discipline, the extensive allocative and operational inefficiencies in spending and widespread mismanagement of public resources witnessed in these countries.
According to Schick (1998), low-income countries often employ harmful budgeting practices which collectively contribute to unreliable budgets. These practices include:
- Unrealistic Budgeting. This is the creation and implementation of budgets that are unattainable because they authorize expenditures exceeding the government’s financial capacity.
- Escapist Budgeting. This practice stems from unrealistic budgeting and involves the government knowingly authorizing spending that will not materialize. The intention is to create a false impression of responsiveness to demands for social improvement.
- Hidden Budgeting. This involves concealing the actual budget, including the actual spending and revenues
- Repetitive Budgeting. Involves frequent revisions of the budget throughout the fiscal year.
- Cashbox Budgeting. Involves spending which is usually based on the availability of cash rather than adhering to the established budget.
- Deferred Budgeting. Concealed the true liabilities especially the unpaid ones, leading to accumulation of arrears.
Trends in Kenya
In Kenya, the National Treasury drafts the annual budget known as the Estimates of Revenues and Expenditure for the executive arm of the government. The estimates are then presented to Parliament for review and approval. Once approved, the budget is enacted and executed from the start of the financial year, following the timelines set in the budget calendar and adhering to the stipulations of the 2010 Constitution of Kenya and the Public Finance Management Act of 2012.
Data from the World Bank reveals a concerning trend regarding budget credibility in Kenya. The declining trend of the primary government expenditure as a proportion of the original budget signifies a growing divergence between the intended budget and the actual executed budget. The country’s range of deviation has, for the last decade, averaged between 5 and 15 percent (See figure 1 below), meaning therefore a need for reforms in the budget making and budget implementation practices in Kenya to reduce the deviation to the ideal rate of less than 5 percent.
According to the Office of the Auditor General, several factors contribute to Kenya’s budget credibility issues. These include inaccurate data used in projecting expenditure estimates, leading to overestimation; under-collection of revenues resulting in late disbursements; and the unplanned delivery of services and implementation of development programs. Additionally, unprecedented occurrences like the COVID-19 pandemic and climate change calamities such as floods and droughts have also played a role.
Examining the expenditure side, it’s clear that the actual spending of Kenya’s national government has consistently fallen short of approved estimates. Over the nine fiscal years from 2014/15 to 2022/23, an average of 9 percent of the national budget remained unspent. This trend is particularly concerning given that the percentage of underspent budgets doubled from 6 percent to 12 percent between FY 2020/21 and FY 2022/23.
Under-execution of expenditure often leads to citizens missing out on planned services or goods. A deeper analysis of the under-spending patterns in Kenya shows that it is more prevalent during the implementation of development budgets with the trend worsening between FY 2021/22 and FY 2022/23. This is concerning given that government investment is argued to drive economic growth, reducing poverty and boosting productivity. This worrisome trend could therefore have adverse implications on the overall growth and development of the economy.
Credibility issues unmasked from the revenue side shows underperformance in revenue collection. The past decade has witnessed under performance in revenues collection with shortfalls reaching highs of 8.8 percent of the projected targets. The situation has not changed post covid as the poor trend in ordinary revenue collection persists. This is despite efforts to reform tax policy and tax administration.
Conclusion
Better PFM practices are paramount for more reliable budgets (PEFA, 2019), and more reliable budgets enable governments to align available resources with service delivery-for long-term achievement of the set policy goals and objectives. The current administration is implementing the Bottom-up Economic Transformation Agenda (BETA) with priorities designed to support realization of Vision 2030. Fiscal pressures witnessed in the recent past have necessitated implementation of these policies alongside a fiscal consolidation strategy aimed at reducing deficits and debt to GDP ratios.
Reducing budget deficits requires accurate expenditure forecasting and revenue projections with minimal deviations. This can only be achieved through enhanced fiscal discipline and reforms geared towards improving compliance with the set PFM laws including Fiscal Responsibility Principles (FRPs).
Fiscal discipline in Kenya which is key in the achievement of credible budgets has been undermined with both national and county governments struggling to adhere to the set FRPs while key institutions tasked with the responsibility of oversight of budget formulation, implementation and auditing failing to perform their mandate on account of inadequate resources.
According to Budget Guide for the Financial Year 2024/25, several constitutional and independent bodies such as the Commission of Revenue Allocation, Salaries and Remuneration Commission and the Office of the Controller of Budget received less budgetary allocation in the current financial year which raises concern about governments commitment towards oversight and accountability initiatives. Additionally, the Office of Auditor General will be expected to execute its mandate of auditing use of public resources while facing over Ksh 2 billion funding gap.
Addressing these challenges necessitates reforms in both budgetary institutions and the law itself. Specifically, oversight and accountability bodies must implement clear sanctions for non-compliance with PFM laws. These sanctions, ranging from withheld funds to dismissals or prosecutions, would serve as crucial deterrents against disregarding established fiscal rules. Furthermore, the government should ensure optimal budgetary allocation to institutions tasked with overseeing the allocation and use of public resources. Enforcing these measures will significantly improve spending patterns, enhance overall budget execution, and ultimately lead to the realization of government goals and development objectives.
References
- https://books.google.co.ke/books?hl=en&lr=&id=6k6_DwAAQBAJ&oi=fnd&pg=PP1&dq=PEFA+2016+framework&ots=Kn9rJVmvJ9&sig=SSVxTkoo-atWrjiodIUn1K2WRE8&redir_esc=y#v=onepage&q=PEFA%202016%20framework&f=false
- https://inesc.org.br/wp-content/uploads/2019/06/how-governments-report-on-and-justify-budget-deviations-ibp-2019.pdf
- https://ieakenya.or.ke/?wpdmdl=3443
- https://datatopics.worldbank.org/world-development-indicators/stories/government-budget-credibility-and-the-impact-of-covid-19.html#:~:text=Looking%20at%20countries%20by%20income%20levels%2C%20two%2Dfifths,improves%20markedly%20in%20middle%2D%20and%20high%2Dincome%20economies.
- https://www.oagkenya.go.ke/wp-content/uploads/2024/06/AUDITOR-GENERALS-SUMMARY-REPORT-ON-NATIONAL-GOVERNMENT-2022-2023-with-cover.pdf
More Blogs
Kenya’s National Budget: A Matatu Ride Reflecting Fiscal Volatility and Structural Inefficiencies
Introduction The matatu metaphor can be used to analytically frame Kenya’s budget as a system that is subject to binding constraints, evolving expectations, and continuous adjustment to shocks. Like the matatu sector, fiscal policy reflects a balancing act between efficiency and quick action seeking to respond to public service delivery while constrained by competing sector […]
NTSA Should Not Regulate Public Service Vehicle Fares
Introduction Imagine paying the same fare to travel at 6 a.m. as you would at 6 p.m., even though the matatu is half-empty in the morning and packed in the evening. At 6 a.m., there may be more seats available than passengers willing to pay for them. By 6 p.m., the situation is reversed. Hundreds […]
What Would It Mean for a Hypothetical Listing of Space X On Nairobi Stock Exchange?
Absurd hypotheticals are useful precisely because they stress-test a system until its constraints become visible. This note asks what would break first if SpaceX, now a public company following its record-breaking Nasdaq debut in June 2026, with a post-IPO market value of approximately US$ 2.5 trillion, sought a secondary cross-listing on the Nairobi Securities Exchange. […]
The Arithmetic of Ambition: What Kenya’s First-World Dream Really Requires?
Kenya’s proposed post-2030 Vision commits the country to high-income status “within a generation.” One positive issue that should be emulated is that the document seeks to solve the most important policy decision and the foundational problem in economics, which is to expand output and labour. Skeptics ask the most important question, why would this plan […]
Kenya’s Debt: Borrow Today, Pay Tomorrow
According to the Annual Debt Report 2024/25, as shown in Chart 1 below, Kenya today is such that for every one hundred shillings the Kenyan government raises in tax revenue, approximately ksh71 goes directly into servicing existing debt before a single hospital is staffed, a classroom is built, or a kilometre of road is constructed. […]