Cars belonging to governors parked at a Nairobi hotel. Counties have been pressing for higher revenue allocations from the national government despite undercollecting revenue locally and spending unwisely. PHOTO | FILE
What you need to know:
Counties concentrated budget execution on recurrent spending, especially personnel emoluments, at the expense of development spending.
While devolution is working in important areas of progress — such as legislation and the Transition Authority — massive problems have emerged in three areas of public finance: low revenue effort at county level, low absorption of allocated revenues, and inappropriate priorities verging on fiscal indiscipline.
As governors test the ground in the quest for more public resources, they are not exactly running on empty. Reports on the past year of spending sound warnings to Kenyans to appraise the process closely.
“Pesa Mashinani” is exclusively about money dressed as a referendum. It is also a classic display on how wrong-headed economic policy attracts abuses of knowledge even by professionals.
Figures reported by the Controller of the Budget in the Annual County Budget Implementation Report FY2013/14 show that counties’ target budget for the year was Sh261.1 billion. Some Sh224 billion was made available.
County revenues at Sh26.3 billion contributed a paltry 11.7 per cent of resources availed, less than half of the targeted Sh54.2 billion. Yet, sub-national taxation efforts are pivotal to successful devolution. Governors hardly mention this poor showing, or press for support to widen their tax base.
With a disbursement of Sh189 billion this fiscal year, counties absorbed Sh169.3 billion, some 89.6 per cent of the release and only some 64.9 per cent of the budgeted amount of Sh261.1 billion.
Nearly half of county spending (Sh82.6 billion) took place during the last quarter. The rest of the year saw low spending. Counties concentrated budget execution on recurrent spending, especially personnel emoluments, at the expense of development spending.
Overall, personnel emoluments reached Sh77.4 billion, averaging nearly half of total spending.
Development spending
Embu County allocated about 70 per cent of its total spending on this item alone. Notable exceptions were Machakos, Wajir and Turkana that led in development spending.
Also worrisome is spending on domestic and foreign travel, especially by county executives and assembly members. Migori, Murang’a, Kwale, Vihiga and Kirinyaga incurred significant overruns on the item.
It also seems paradoxical that counties are following the old constitution internally. Spending concentrates on county headquarters at the expense of towns, wards and villages. This replicates the spending centralisation at the national government in the old order, what the new Constitution intended to correct.
The report gives another hint – cars acquired in county budgets, a favourite spending spree, are not driving too far out of county headquarters.
If revenues are not collected locally and allocations from national government go substantially unspent, gaps emerge in spending. This can disrupt national economic management.
What happens if counties undercollect locally, spend unwisely and underspend amounts allocated by national government yet press for higher revenue allocations?
John Maynard Keynes at a turning point in the theory of macroeconomics and economic policymaking in 1936 explained the paradox. If an economy possesses a higher potential to grow its GDP, it is necessary for the government to step in and put underused savings to work through government spending.
This spending is permissible even beyond the extent of revenues collected. Spending to raise GDP to a new level may justify a fiscal deficit financed with government borrowing domestically or abroad. Why?
In Keynesian theory, some decisions such as not investing and not spending on the goods and services produced by the economy, if taken collectively by a large proportion of individuals and firms, can lead to outcomes where the economy operates below its potential output and growth rate.
The dynamic quality of government spending is that shilling for shilling, it achieves a greater potential output and growth than the value of shillings spent due to a relation named the government expenditure multiplier effect.
This dynamic remains the crux of modern fiscal policy. It allows governments to stimulate economies out of recession to higher employment and growth of output and to reverse gears when the economy runs at an above-trend rate of economic growth, with unsustainable performance.
Tax base
Therefore, the failure of counties to widen their tax base, collect own revenues, combined with underspent national allocations could undermine fiscal policy, pulling down Kenya’s ability to grow GDP.
If the Pesa Mashinani foray succeeds and the Treasury arithmetic then calls for increased taxes to meet the increase in allocations, this will deepen the management and anti-growth dynamic in the economy.
A spending multiplier calculation shows the tax multiplier, unlike the government expenditure multiplier, is negative and, therefore, reduces the march of the economy.
A way out of doom: The framers of the Constitution foresaw that counties would have challenges of capacity in executing spending and delivering public services. The Fourth Schedule of the Constitution mandates the national government to help build this capacity.
A massive programme under the schedule needs to be designed and implemented to match spending with functions and to expand county tax bases, efficiency, effectiveness and transparency while coordinating functions at the national, county, ward and village levels.
Dr Wagacha is senior economic adviser in the Office of the President and acting chairperson, Central Bank of Kenya.
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