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Ideas & Debate

Why recurrent expenditure has become a big Budget problem

Budget: Treasury Cabinet Secretary Henry Rotich
National Treasury Cabinet Secretary Henry Rotich poses for a photo outside The National Treasury Building ahead of the 2018/19 budget presentation at Parliament on June 14, 2018. PHOTO | DIANA NGILA | NMG 

The budget for financial year 2018/19 revealed the divide in expenditure as follows: recurrent expenditure will amount to Sh1.55 trillion, development expenditure is projected at Sh625 billion, and transfers to counties Sh376.4 billion. Development expenditure will only be 24 per cent of total expenditure — below the 30 per cent threshold, recurrent about 60 per cent and transfers to counties 15 per cent.

To be clear, public spending in itself is useful in principle because it increases the level of aggregate demand in an economy and can compensate for failings in other components of aggregate demand, such as a fall in household and private sector spending.

That said, the government has a development expenditure problem where the development-recurrent ratio always favours recurrent, both at national and county government level not only in terms of allocation but also in terms of actual spending. The first supplementary budget for financial year 2017/18 was submitted to Parliament last September in which development expenditure was reduced by Sh30.6 billion.

As the Parliamentary Budget Office points out, this reduction translates to a slower implementation of some projects leading to higher project costs and accumulation of pending bills as well as delayed returns on investment.

At the same time, net recurrent expenditure increased mostly to cater for the repeat presidential election, enhancement of Free Day Secondary Education, drought mitigation measures as well as the implementation of collective bargaining agreements in the education sector. Thus, the first problem is that the original development-recurrent ratio is not respected or followed.

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The second problem is that a reduction in development expenditure juxtaposed with a rise in recurrent expenditure is deeply worrying. Government’s narrow fiscal space has led to a large bulk development expenditure being debt-financed. Thus, it is fair to ask whether if through supplementary budgets, where development spending is reduced and recurrent increased,

Kenya is using debt to finance recurrent expenditure. If so, this is going against both basic common sense and fiscal prudence.

Finally, the supplementary budget above is not the first time development spending has lost out to recurrent; the question is why? Given deep development needs in Kenya, where the infrastructure deficit alone stands at $2.1 billion annually, and significant development spending required, why does recurrent remain the winner? The first factor is the bloated wage bill, a reality that is well known and very difficult to change. Another factor is how spending is classified, which can be confusing because it makes the tracking of types of spending difficult.

Public debt accrued in the development docket one year is shifted into the recurrent the next year.

Development expenditure covers expenses incurred for the purchase or production of new or existing durable goods, while recurrent expenditure, includes wages and salaries, other goods and services, interest payments, and subsidies. Therefore, the broadening yearly financial needs of recurrent spending are informed by debt binges of previous years.

As Kenya continues to accrue debt, interest payments on all the debt will be tabled under recurrent leading to a further bloating of this component of spending.

This shift in allocations can make it difficult to determine whether development spending is ever used efficiently through its entire project lifetime.

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