Ideas & Debate

Read budget 2021 as a baseline for future economic and fiscal reform

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Treasury Secretary Ukur Yatani holds up the briefcase containing the Budget for the 2021/22 financial year outside the National Treasury on June 11, 2021. PHOTO | SILA KIPLAGAT | NMG

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Summary

  • Our stuttering BBI experiment might have better focused on aligning and strengthening our public finance framework with the constitution, than seeking to amend it.
  • This was not in the Budget Statement, but a couple of BAC observations are worthy of reflection.

We continue from last week. Parliament makes the budget, Treasury simply reads it. Having received the budget estimates from Treasury on April 29, Parliament’s Budget and Appropriations Committee (BAC) left it till June 8 to table its report before the whole House for approval.

So we have a situation where Treasury just read a budget yet to be approved by Parliament. Where am I going with this?

Constitutional implementation might be a place to start. While the human rights, devolution and independent institutions (fourth arm of government) chapters innovatively centerpiece our 2010 constitution, public finance was the sphere in which true reform was commanded and demanded.

Put differently, our stuttering BBI experiment might have better focused on aligning and strengthening our public finance framework with the constitution, than seeking to amend it.

This was not in the Budget Statement, but a couple of BAC observations are worthy of reflection. We have a serious pending Bills problem split into two parts: the lack of cash (probably legitimate) and the lack of budget (likely illegal). The incredulous proposal from BAC is to create a special pending Bills fund.

We have an even more worrying stalled projects challenge. We suffer the duplication of functions across ministries, departments and agencies (MDAs). We still cannot think and act for the medium-term; our Medium-Term Expenditure Framework (MTEF) does not work.

There is concern that the National Treasury will become an implementing agency for mega-projects.

The budget numbers only provide light relief for our active media and chattering classes. The revenue proposals have been roundly dismissed as over-ambitious and unrealistic at a macro-level, and overly intrusive (like nuisance taxes on bread) at the micro-level.

Our debt treadmill strategy emphasizes domestic borrowing to save our foreign exchange; forgetting the idea that this is commercial borrowing.

The spending envelope reflects a reluctance to use the constitution to slim down national government.

Ten years in, we are still unable to starve the national government beast to feed our county baby. Further, the economic ideation underpinning our fiscus seems tentative and unimaginative.

There was a moment when the Executive had some interesting ideas to reform public finances. A US-style Office of Management and Budget to separate planning and resourcing from Treasury’s spending and financing obligations.

Transparency orders on public spending and procurement. Basically, a sensible way to attack the public spending problem that is Kenya’s fiscal elephant in the room. Built around a theory of government that aligned with the constitution’s commands. Nothing happened.

Instead, we have a budget framework in which debt service will consume more than half of revenues. Or put differently, our revenue cannot pay for day-to-day national government, excluding debt and counties.

Or, that debt service now exceeds development spending. Or that priority spending on the Big 4 and Covid-19 recovery accounts for less than 10 percent of our total spending picture.

Differently, that spending on Big 4, Covid recovery and debt service leaves just enough for the wage bill, before operations and maintenance.

The wider question, raised last week, is how nine years of mega-investment has grown our economic capacity beyond physical, rather than human, capital growth.

A step backward offers a summary view of the 2021/22 budget. In its analysis for the BAC, the Parliamentary Budget Office tested for four things. Budget credibility and comprehensiveness. Adherence to medium-term priorities.

Quality of our capital budgeting (projects) framework. The realism of forecasts. Their general finding is one of a mechanistic “going through the motions” budget process.

What then, do we learn from a Sh3.6 trillion spending budget financed by Sh2 trillion in revenues; including Sh1.8 trillion in taxes with Sh1.1 trillion in debt service and a primary budget deficit of around a trillion?

First, we have missed the chance to use the constitution (legislative role number one) to get the budget working (legislative role number two). That was the real BBI moment,

Within this idea are three further conclusions. One, an easy priority for Kenya’s next political administration is public finance and budget reform.

That is the expenditure side. Above this, that next administration’s equally simple priority will be economic reform, especially at the micro-level. That’s the revenue side.

Between all of this, address the deficit problem to fix the debt challenge. Remember, debt reduction isn’t simply about budget balancing, but budget surplus. That the big picture.

If anything, Budget 2021 offers a useful “worst-case” baseline to guide future reform improvements.