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Wednesday, June 28, 2017

What does the constitution say about public finances and are we implementing it?

THE AUGUST HOUSE: Parliament in session. 'Parliament's record has been mixed. The National Assembly has played an important role in defending the budgets of key oversight institutions, including the Auditor-General and the Controller of Budget. However, while Parliament is entrusted with oversight of the overall budget, it has focused its attention mainly on its own budget and the budget for CDF and related funds, all of which are now of dubious constitutionality.'
THE AUGUST HOUSE: Parliament in session. 'Parliament's record has been mixed. The National Assembly has played an important role in defending the budgets of key oversight institutions, including the Auditor-General and the Controller of Budget. However, while Parliament is entrusted with oversight of the overall budget, it has focused its attention mainly on its own budget and the budget for CDF and related funds, all of which are now of dubious constitutionality.'

This article looks at Chapter 12 of the constitution with a focus on national institutions and the national budget. A second article will look at public finance issues related to counties and devolution.

Constitutional provisions

There are two remarkable aspects of Chapter 12 that stand out to the casual reader. First, the chapter creates numerous bodies and assigns to these and to other already existing bodies (for example, Parliament) extensive powers. The powers of the National Treasury are less obvious from the constitution. The Treasury (or Ministry of Finance) is the only ministry specifically mentioned in the constitution, but it is required to have a separate legal framework (what is now the Public Finance Management Act). Second, the chapter provides what some might consider excruciating detail about certain aspects of the public finance system, such as the form and content of national and county budget proposals (for example, budgets “shall contain…estimates…differentiating between recurrent and development expenditure”).

We can conclude from these two features that a deeper purpose of this chapter was to limit the authority and discretion of the executive and distribute power over public money to a broader set of actors. Beyond Parliament, and the Treasury, these include the Controller of Budget (COB), the Commission on Revenue Allocation (CRA), the Salaries and Remuneration Commission (SRC), the Office of the Auditor General (OAG), and the Central Bank of Kenya. Of these, only the Auditor and the Bank are not new, though the post-2010 AG reports directly to Parliament unlike under the previous constitution. The other actors are creations of the constitution and have been given specific roles: COB (hived off from the old Auditor) is to ensure money is not released from public funds unless authorised by law; CRA is to ensure principles of equity and transparency guide revenue sharing across the two levels of government; SRC is to ensure wages of state officers are equitable and financially sustainable. The Central Bank is to formulate monetary policy and promote price stability as well as issuing currency.

The Cabinet Secretary for Finance (head of the Treasury) is mentioned seven times in the chapter in connection with the following specific responsibilities: authorisation of use of the Contingencies (emergency) Fund for unforeseen needs, reporting to Parliament on debt, presenting the budget to Parliament annually, stopping funds to agencies or counties if they have breached the law, and nominating members to the Salaries and Remuneration Commission (Finance also sits on the CRA). He or she must be consulted every five years on the revenue sharing formula as well.

Above all of the other institutions mentioned in Chapter 12, it is Parliament that is at the centre of the new public financial management system envisioned by the constitution. The phrase “Act of Parliament” appears 22 times in the chapter. No money may be withdrawn from the Consolidated Fund without parliamentary action (mainly through the annual Appropriation Act, which enacts the government budget). No national taxes may be imposed without a supporting law passed by Parliament.

These are all well-established practices, but now Parliament may also pass laws imposing conditions for government borrowing (which it has done in the Public Finance Management Act). Parliament also has the final say if the Cabinet Secretary wishes to stop transfer of funds to agencies and counties for breaches of the law (Article 225(3)). And Parliament has more power to change the budget than under the old constitution (or than in most other countries).

Perhaps the main area where the constitution does not give Parliament a leading role in public finance management is in the development of a supplementary budget. It is still possible, after the annual budget has been approved, for the executive to spend outside this budget and receive support from Parliament only after the fact. The constitution does ensure this power is limited in size to 10 per cent of the total budget unless Parliament authorises a higher figure (“in special circumstances”) – Article 223(5)).

The last thing worth highlighting here are some of the key principles that must guide public finance, laid out in Articles 201 and 203 particularly. Among the most crucial are equity (among regions, groups and individuals, as well as between generations), transparency, public participation, prudence and accountability. In sharing between the two levels of government, principles of efficiency and encouraging optimal revenue collection are also mentioned.

Implementing financial provisions

How has the post-2010 public finance system evolved? It is clear that the last five years have brought greater scrutiny of public finances, with more public debate about the national budget and the distribution of resources. The COB has emerged as a strong voice raising issues of prudence and regularly reporting on and raising questions about government spending. The CRA has tangled with the National Treasury and has promoted a substantial redistribution of funds across the country. The Auditor has raised serious concerns about financial management at national level that have received more sustained coverage by the media than in the past. The range of new and enhanced institutions created by the constitution are functioning and dispersing power over public money.

Parliament’s record has been mixed. The National Assembly has played an important role in defending the budgets of key oversight institutions, including the Auditor and the Controller of Budget. However, while Parliament is entrusted with oversight of the overall budget, it has focused its attention mainly on its own budget and the budget for CDF and related funds, all of which are now of dubious constitutionality. Parliament has also done little to control Treasury’s appetite for borrowing, allowing a massive increase in the proposed deficit for the financial year 2015-16 with no explanation. While Parliament has noted its concerns about revenue and the debt, it has done very little to control them. Parliament’s engagement with the public has also been erratic. While budget hearings were held in 2014 in a number of counties, this was reduced to a few hearings in Nairobi in 2015, and parliamentary reports do not make clear, as they did previously, which inputs from the public were actually taken on board.

The Treasury continues to exercise a fair amount of control over the budget process. While there have been some attempts to increase transparency, there have also been a number of regressions. As I write this, there are no quarterly budget implementation reports from Treasury on its website from 2014-15. Nor is the 2015 debt management paper available there. Both the Controller and the Auditor General have raised serious questions about the management of the Eurobond, indicating a lack of transparency and probity on the part of National Treasury. The principle of public participation has also not been observed. While Treasury continues to hold a series of “sector hearings” around the budget each year, the degree to which the public can engage with these is extremely limited due to lack of information, lack of time, and lack of clear decisions into which input can be given. To be sure, the public itself is also generally more inclined to complain after the fact than to engage early in the budget process.

Parliament and the National Treasury are playing a more balanced role in the process of budget-making than before, but have fallen short in providing convincing public justifications for the decisions they take during the budget process. This lack of justification means there is also scanty debate about equity within the national budget (this has gotten more attention in the debate over county funding). While core functions, such as education and infrastructure, remain in the national budget, budget debates do not feature substantial discussion of the distribution of these funds across the country.

The author is Country Manager of the International Budget Partnership Kenya office


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