PARLIAMENTARY SERVICE COMMISSION. Parliamentary Budget Office. Overall Analysis of the 2013/14 Budget

Transcription

1 PARLIAMENTARY SERVICE COMMISSION Parliamentary Budget Office Overall Analysis of the 2013/14 Budget

2 Disclaimer The Parliamentary Budget Office (PBO) is a non-partisan professional office of the Parliament of the Republic of Kenya whose primary function is to provide professional advice and objective analysis in respect of the budget, finance and the economy. Parliamentary Budget Office, 2013 For more information, contact: The Director, Parliamentary Budget Office Parliament of the Republic of Kenya Protection House, 10 th Floor P.O. Box GPO NAIROBI, KENYA Tel: Fax: pbo@parliament.go.ke. 2

3 The Key Message 1. In terms of documentation that are supposed to be submitted in line the Public Finance management Act, the compliance rate was 53 percent, implying that most of the documentation required for effective scrutiny of the budget estimates has not been submitted. 2. The failure by the Government to publish the PFM Act regulations is causing confusion, for instance, the format of the estimates by the three arms of government varied. Parliament and Judiciary submitted their budget based on line item framework while the executive submitted it s budged based on programmes. 3. Development expenditure threshold of 30 percent as provided for in Section 15 (2) of the PFM Act has not been met. The current allocation stands on average at percent implying that some vote have very low allocation for capital spending. 4. The absence of the figures for 2012/13 budget makes it difficult to make comparison in areas where there are increases/ decreases, especially the extent to which some functions have been devolved. To this end, it seems the Treasury is not sure of the projected performance of revenues as well as expenditure outlay for 2012/ The 2013/14 budget is not fully funded; there is a financing gap of Kshs billion percent of total recurrent expenditure goes towards compensation to employees, implying that fewer resources are ploughed back for investment purposes. 7. Addressing the issue of wage bill which consumes a high percentage of recurrent expenditure needs a holistic approach. Indeed, out of the Kshs.225 billion allocated to state corporations in the 2012/13 budget, 60 percent or Kshs.135 billion was spent on compensating employees 8. The National Government has allocated money to some functions which are constitutionally devolved. 9. The programme budget as presented in its current format seems to be a conversion of the various departments in the Ministries into programmes. Thus, in many instances the outputs are not clear neither are they measurable. 10. National entities are required to prepare and submit their estimates to parent line ministries which should be considered alongside other budget documents. An annex is expected to be published and added to the budget, this is lacking. 11. There is no sufficient disclosure with regard to money being collected and used at source (Appropriations in Aid (AIA)). 12. The development expenditure as presented does not provide details of the source of donor financing in terms of grants or loans. 3

4 1. Introduction i. Preamble 1. The budget for the three arms namely, National Executive (herein referred to as National Government), Parliament, and Judiciary were submitted to the National Assembly on 30 th April 2013, in line with the Constitution. The Judiciary and Parliament submitted itemized budget while the National Government submitted program based budget under one volume covering both development and recurrent expenditure. This brief looks at the extent with which the submitted budget conforms to the Constitutional provisions as well as the Public Finance Management Act, 2012.Therein; the brief also provides analysis of the overall budget for the fiscal year 2013/14 with regards to issues of fiscal sustainability and affordability. ii. Legal Basis for Submission of the estimates of Revenue and Expenditure 2. Good practice requires the legislature to be given ample time, especially at ex ante stage. More specifically, the legislature should be provided with an opportunity to review the budget proposal of the Government and any other policy proposals in the medium term, especially the next year s annual budget strategy and main aggregates. In line with this practice, the Constitution and the Public Finance Management (PFM) law has altered the public finance management architecture in Kenya. Indeed, it has transformed the Kenyan parliament from a budget approving parliament to a budget making Parliament. The following section highlights the budget process. i. According to the PFM Law, the budget process starts in the month of August with the national treasury issuing budget guidelines to all national government entities by 30 th August of each year. This will closely be followed by strategic planning and expenditure reviews by the line ministries, this step has a timeline of September of every Financial Year. 4

5 ii. Next, the macro-fiscal framework is formulated by mid-october through the collaborative effort of the National Treasury, CRA, Macro-Working Group, Budget and Economic Council (BEC), among others. The key output being the Budget Review Outlook Paper (BROP). Concurrently, the development of budget proposals by line ministries and sector working groups start in mid-august and concluded in mid-december. This step will involve public participation in the sector hearings and preparation of sector reports. iii. The next important step is the development and approval of the Budget Policy Statement (BPS) and the Division of Revenue Bill, which commences in January. The BPS must be submitted to Parliament by 15 th February of every year and its approval within 14 days after submission. BPS is submitted to Parliament alongside the Division of Revenue and County Allocation of Revenue Bill, as legislative proposals and which must be considered by Parliament within 30 days after introduction in the House but not later than 30 th April. iv. After submission and approval of the BPS, the next vital step is the preparation and approval of budget estimates. This step starts in mid-february through the issuance of guidelines for budget preparation by the National Treasury. In line with the Constitution requirement that the estimates of revenue and expenditure for all the arms of government be tabled in the House two months before the end of the financial year (Article 221), it is envisaged tha t the said estimates for the national government, the judiciary and the parliament will be submitted on or before 30 th April every year. v. The estimates are committed to the Budget and Appropriations Committee for review and make recommendations to the National Assembly. Views of the National Treasury on the budgets submitted by Judiciary and Parliament are considered together with those of the general public. Indeed, the Constitution requires that B&AC takes into consideration the views of the public on the budget estimates 5

6 before making its recommendations to Parliament. In this regard, public hearings are expected to be conducted in the month of May. vi. The review and recommendations by the relevant Committee envisaged in Articles 221(4) should be completed by end of May. Subsequently, Parliament will discuss the report of the committee on the estimates through the Committee of Supply. This process, including the passing of both the Appropriations Bill and the Finance Bill, or alternatively the Vote-on-Account (Article 222), is expected to be finalized by end of June every financial year. 3. The 2013/14 budget is being scrutinized under very unique circumstances. Given that the month of February and March was the electioneering period, some of the key executive and legislative processes concerning the budget were delayed. The following are the key steps that were delayed or interfered with: i. The circular detailing the merger of ministries and the appointment of Cabinet Secretaries came out in April, thus, the 2013/14 budget did not have the political buy in at an early stage of the budget process. ii. The public hearing by the Executive was undertaken before the elections and therefore the sectoral reports which are a guide to the budget did not take cognizant of the new development. More specifically, the sectoral reports will not add much value to the process since the reports were done prior to the new government structure. iii. The period coincided with the timelines of passing two crucial bills, namely the Annual Division of Revenue Bill and the County Allocation of Revenue Bill. With the delay in passing these bills, Parliament has limited time to process the budget to full completion before the end the financial year as required by law. 4. One key observation is that the budget as submitted by the National Government does not fully conform to the constitution as well as the PFM Law. More specifically, Article 221 of the Constitution requires the estimates to be submitted together with the allocation for the Equalization Fund. Further, the Constitution spells out that the Estimates must be in the form and according to the procedure, prescribed by an Act of Parliament. 6

7 5. Section 37(2) of the Public Finance Management Act spells out that the Cabinet Sectary shall submit the budget estimates with documents supporting those estimates. Section 38 (1) details the key documents that should accompany the budget estimates. This include the following: a. A summary of budget policies on revenue, expenditure, debt and deficit financing. b. An explanation on how the budget relates to fiscal responsibility principles and the financial objectives. c. Memorandum by the cabinet secretary on how the resolutions adopted by the National Assembly on the BPS under section 25(7) have been taken into account. 6. With regards to the format of the Budget, the budget estimates should include: a. A list of all entities that receive funds appropriated from the budget of national government, b. Estimates of revenue allocated to the Equalization Fund, with an explanation on how this conforms to the underpinning policy on marginalized areas as determined by the Commission on Revenue Allocation (CRA), c. All revenue allocations to County Governments from the National government, which shall include conditional and unconditional grants, d. All estimated revenue by broad economic category, e. All estimated expenditure by vote and by programme, identifying both recurrent and development expenditure, f. Loans committed by the National Government including an estimate of principal, interest, and other charges to be received by the national government in the financial year in respect to this loans, g. Information regarding guaranteed loans, h. Information regarding payments to be made by the Government that does not require national legislation authority, and 7

8 i. Statement of the national treasury specifying the measures taken by the national government to implement recommendations made by the National Assembly with respect to the budget for previous year or years. 7. The table 1 below provides compliance check to the extent the submitted estimates meet the requirement of the Constitution as well as the PFM Act. Table 1: Key requirements of the PFM Act and the Constitution Key requirement Compliance Required Rating Overall Rating 1. Submission of the estimates at least two months Submitted within the before the end the financial year timeline 2. Submission of Estimates of expenditure Estimates of expenditure submitted 3. Submission of Estimates of revenue The estimates of revenue were not submitted 4. Allocation for the equalization fund This has been included the estimates of expenditure 5. Submission by Parliamentary Service Commission Estimates of expenditure submitted 6. Submission by Judicial Service Commission Estimates of expenditure Explanation on how the budget relates to fiscal responsibility principles and the financial objectives. 8. A list of all entities that receive funds appropriated from the budget of national government. 9. Estimates of revenue allocated to the equalization fund, with an explanation on how this conforms to the underpinning policy on marginalized areas as determined by the Commission on Revenue Allocation (CRA), 10. Allocations to county governments from the national government, which shall include conditional and unconditional grants 11. All estimated revenue estimated by broad economic category submitted Not complied Not complied Allocation for equalization fund indicated but the explanation on how this conforms to recommendation by CRA is lacking Not complied Not complied Information regarding guaranteed loans Not complied Loans commited by the national government including an estimate of principal, interest, etc Complied 14. Information regarding payments to be made by the Government that do not require national legislation authority. Complied Statement of the national treasury specifying the measures taken by the national government to implement recommendations made by the National Assembly with respect to the budget for previous year or years. Not complied Submission of the Medium Term Debt Not complied Management Strategy Grand Total

9 Key requirement Compliance Required Rating Overall compliance Rate 53% Overall Rating Issues of concern: 1. A compliance rate of 53 percent implies most of the documentation required for effective scrutiny of the budget estimates has not been submitted. This makes it very difficult for the Budget and Appropriations Committee as well as other Committees of Parliament to perform any meaningful scrutiny of the 2013/14 budget. 2. The manner in which the documents trickled down to the National Assembly is also an issue. Indeed, some the budget documents were submitted after a follow up by the National Assembly. 3. The failure for the Government to publish the regulations to the PFM Act is causing confusion, for instance, the format of submission of by three arms varied. Parliament and Judiciary submitted their budget based line item framework while the executive submitted its budged based on programme based budgeting. 1. A look at the Overall Budget for 2013/14 i. Overall expenditure 8. The total general budget for 2013/14 stands at Kshs trillion. Of which Kshs trillion will go towards total discretionary expenditure, while Kshs billion will fund mandatory expenditure such as payment of interest, pension, and salary and allowances for constitutional offices, among others. 9. On the other hand, Parliament and Judiciary tabled the budget amounting to Kshs.24.5 billion and Kshs billion, respectively. This translates to 2.31 percent and 2.2 percent of the total allocation for discretionary expenditure. The details are shown in table 2. 9

10 Table 2: Overall Budget Estimates for 2013/14 Budget Estimates (2013/14) Total Revenues 986, (a) Total Discretionary Expenditure 1,062, PSC 24, Judiciary 23, Other 1,014, (b)transfer to Counties 198, (c) Consolidated Fund Services 380, Interest Payments 121, Pension 38, Miscellaneous Services Guaranteed Debt 1, Salary and Allowances 3, Other 0.50 External Debt Redemption 88, Internal Debt Redemption 127, Total Overall Expenditure 1,640, Total Financing 490, o/w Grants 67, o/w Financed Externally 189, o/w Domestic Borrowing 233, Financing Gap (163,439.51) 10. Section 15 (2) of the PFM Act requires that over the medium term, a minimum of thirty percent of the National and County governments budget shall be allocated to development expenditure. This requirement however can be a moving target given that the three year requirement under MTEF could be easily manipulated such that the outer years are forecasted to attain the target but readjusted as a new outer year is set. Its important to note that the definition of medium term as provided in the PFM law implies that at any given year, there is no guarantee of meeting the 30 percent threshold of the share of resources going to development expenditure, since this is a three year rolling framework. Indeed, policy makers can continuously shift the medium term achievement of the target into the outer years infinitely. For 2013/14, the allocation for development expenditure stands at Kshs billion or percent of total expenditure outlays, which includes Consolidated Fund Services (CFS) (Annex 1 provides the details). Issue of concern: The National Government needs to adhere to the expenditure threshold in the 2013/14 as opposed to the current envisaged allocation of percent. 11. The overall budget does not have the indicative performance of the 2012/13 budget. 10

11 Issue of concern: The absence of the figures for 2012/13 budget envisaged expenditure to June 2013 makes it difficult to make comparisons in areas where there are increases/ decreases. ii. Financing the 2013/14 budget 12. It is envisaged that the 2013/14 budget will be financed by tax revenue, non tax revenue and Appropriations in Aid, respectively amounting to Kshs billion, Kshs billion and Kshs billion respectively. Thus total revenue will amount to Kshs billion. On the other hand, total grants and loans will amount to Kshs billion and Kshs billion, respectively. With the aforementioned resource outlay, the budget for 2013/14 has a financing gap of Kshs.163.4billion. Issues of concern: The 2013/14 budget is not fully funded; there is a financing gap of Kshs billion. Although this may be raised through tax measures, the current tax structure is unlikely to support the huge gap. Indeed, available data indicates that the Government can only net in a maximum of Kshs.50 billion through tax measures, implying that there is need for further expenditure cuts via expenditure rationalization or additional borrowing. The treasury did not give an explanation to the aforementioned financing gap. This implies lack of commitment in the quality and form of information supplied to parliament because there should have been a memorandum that accompanied the budget explaining how the budget is to be financed. Ideally, one of the documents that need to have accompanied the budget was a financial statement (budget outturn). A quick comparison between the revenue performance for 2012/13 show that revenue collection is likely to fall short by about Kshs.115 billion to stand at Kshs billion. The shortfall was occasioned by many factors among them, unrealistic target setting, not passing the VAT bill and laxity with regards to revenue administrative measures. Thus, even if the revenue forecast for 2013/14 has been anchored on the growth of nominal GDP, key legislative and revenue administrative measures remain unresolved. With these factors in mind, the revenue target for 2013/14 remains unrealistic. Thus the envisaged expenditure level of Kshs trillion is not sustainable unless the Government resorts to borrowing, which may eventually be disastrous in terms of macroeconomic stability. To this end, the Government may be required to: (i) finding savings through reduced spending on non-core functions and activities; (ii) rationalize public entities and agencies to save 11

12 money and improve accountability;(iii) review public spending to weed out poorly performing programmes, low-priority activities and ineffective policies; (iv) reform procurement systemss to reduce corruption and obtain better value for money; (v) change the culture of the public service to reduce waste and to prevent extravagant spending, shoddy work and corruption; and leverage IT in most of the processes which will reduce administrative costs substantially and also reducee the leakages in resource mobilization and use. 2. Where is the money going? 13. The pie chart below shows where the bulk of the resources are allocated for both recurrent and development expenditure (economic classification). From figure 1, percent, percent, and percent of the total recurrent expenditure, respectively is envisaged to go towards compensation to employees, current transfers to other levels of government, and use of goods and services. Other recurrent expenditure will take a paltry 6.52 percent. Figure 1: Recurrent Expenditure Based on Economic Classification 6.52% 39.04% 42.91% 11.53% Compensation to Employees Use of Goods and Services Current Transfers to Govt Agencies Other Recurrent Issue of concern: There is need to critically look at the overall allocation of percent that goes to compensation to employees. Key issues of productivity as well as value for money needs to looked into. In Kenya, the key contributing factor to the higher growth has been consumption while investment has contributed dismally to total GDP. Over the period , the contribution capital and labor stood at 2.64% and 0.46% respectively, while total factor productivity averaged 0.41%. Addressing the issue of wage bill which consumes a high percentage of recurrent expenditure needs a holistic approach. Indeed, out of the Kshs.225 billion allocated to state corporations in the 2012/13 budget, 60 percent or Kshs.135 billion was spend on compensating employees. 12

13 14. On the development expenditure front, percent, percent, and percent of the total proposed development expenditure, respectively is expected to go to acquisition of non financial assets, capital grants to government agencies and other levels of government and other development related expenditure. Figure 1: Development Expenditure Based on Economic Classification 13.04% 38.58% 48.38% Acquisition of Non Financial Assets Other Development Capital Grants to Govt Agencies 3. To what extent have the functions been devolved? 15. In this section, we take a case study of the Ministry of Health and Ministry of Agriculture, Livestock and Fisheries (The details are shown in Annex 2). The Ministry plans to implement two main programmes: curative health programme and preventive and promotive health care services. These programmes do not reflect the Constitutional expectation of this Ministry as regards its mandate. The Ministry s programme should reflect clearly how it will handle the two main functions namely: Health Policy and Management of National Referral Hospitals. Indeed, the two programmes that the national government has proposed to undertake in the health sector are supposed to be handled by the County Governments as provided for in the Constitution of Kenya. 16. With regards to Ministry of Agriculture, Livestock and Fisheries, the Administrative Support Services programme has been allocated Kshs.166 million for the year 2013/2014. The same programme has been budgeted for under the Ministry of Industrialization and Enterprise Development at an estimate of Kshs million. On the other hand, the outputs indicated such as community storage facilities, water pans construction, and construction of Agriculture Training Centres (ATC) reflects functions which have so far been devolved to the County Governments and should not be allocated any money at the national level. Other programmes that seem to devolved but have allocations at the National level include Fisheries Development as well as Livestock Resource Management and Development. 13

14 4. Other General issues with Regard to the 2013/14 Budget 17. It is indeed laudable since the budget for National Government is presented at programme level. However, the budget as presented has the following specific drawbacks: i. The programme based budgeting should indicate the details of the programme especially details on the total cost of the projects/ programmes, the expected completion time and the status of the programme. Issue of concern: The programme budget as presented in its current format seems to be a conversion of the various departments in the Ministries into programmes. Thus, in many instances the outputs are not clear neither are they measurable. ii. Parliament in its scrutiny of the budget estimates has often than not proposed austerity measures aimed at reducing expenditures in non priority spending items such as hospitality supplies and services, printing and advertising, foreign travel and office supplies and services. Thus, besides submission of the budget on programme basis, there is need for further details on the itemized budget. Issue of concern: With the economic classification only as the basis of allocation of resources it becomes increasingly difficult to target such items. It is extremely an uphill task to ascertain what the spending items are being used. In addition, there is need to provide the details on the name and amount of all resources going to semiautonomous government agencies. iii. National entities are required to prepare and submit their estimates to parent line ministries which should be considered alongside other budget documents. Issue of concern: In absence of this it becomes tantamount to blanket approval of the SAGAS estimates unanimously. Indeed, the information provided should necessitate analysis on how much of the total has allocated in form of transfers. iv. The development expenditure as presented does not provide details of the source of financing. Issue of concern: It is difficult to express whether the funding is fully funded by the GoK or has foreign financing component. In addition, there need to provide more information on the geographical distribution of this projects. In fact, the lack of provision of information is against the tenants of the Constitution. Article 201 of the constitution requires 14

15 public finance matters to be conducted in an open and accountable manner. Moreover, article 201(e) contemplates that the burdens and benefits of the use of resources and public borrowing shall be shared equitably between present and future generations. 15

16 Summary of Expenditure by Vote and category for the Financial Year 2013/14 Ministries Gross Current Expenditure Gross Capital Expenditure Gross Total Expenditure 101 The Presidency 3, , Interior and Coordination of National Government 98, , , Ministry of Devolution and Planning 16, , , Defence 60, , Foreign Affairs 9, , Education, Science and Technology 97, , , The National Treasury 25, , , Health 19, , , Transport and Infrastructure 22, , , Environment, Water and Natural Resource 12, , , Land, Housing and Urban Development 4, , , Information, Communication and Technology (ICT) 2, , , Sports, Culture and the Arts 2, , Labour, Social Security and Services 1, , Energy and Petroleum 2, , , Agriculture, Livestock and Fisheries 9, , , Industrialization and Enterprise Development 2, , , East African Affairs, Commerce and Tourism 4, , , Mining Attorney General and Department of Justice 2, , Ethics & Anti-Corruption Commission 1, , National Inteligence Services 13, , Directorate of Public Prosecution 1, , Commission on the Implementation of the Constitution Registrar of Political Parties Witness Protection Agency Kenya National Human Rights Commission Independent Electoral and Boundaries Commission 3, , Commission on Revenue Allocation Public Service Commision Salaries and Remuneration Commission Teachers Service Commission 143, , National Police Service Commission Auditor General 1, , Controller of Budget Commission on Administrative Justice National Gender and Equality Commission Independent Police Oversight Commission National Land Commission Equalisation Fund - 3, , Parliamentary Service Commission 20, , , Judicial Service Commission 16, , , Total Discretionary Expenditure 605, , ,062, Add Consolidated Fund Services: (1) Public Debt 337, , (2) Pensions and Gratuities 38, , (3) Salaries, Allowances 3, , (4) Subscriptions to International Organizations (5) Miscellaneous Debts (Guaranteed Debt) 1, , TOTAL CONSOLIDATED FUND SERVICES 380, , County Governments Allocations 198, TOTAL EXPENDITURE OITLAYS 985, , ,640,

17 Annex 2: The Extent of Devolved Functions Ministry Programme Comments Health Curative Health This programme has been allocated Kshs billion representing 34 percent of its Services Programme expenditure resource requirement. This is significant drop compared to Kshs billion allocated to this programme in 2012/13. The functions in this programme are shareable between the national and county governments. However, a significant portion of the functions under this programme are under the county governments and therefore a significant portion of the expenditure estimates for this programme will be in the county government s budget. The ministry estimates to make a current transfers totalling Kshs billion and capital transfers totalling Kshs. 507 million to various SAGAs under this programme. The allocation of Ksh billion for other development activities should be transferred to County governments to develop health facilities at the counties. Preventive and This programme has been allocated Kshs billion representing 14 percent of its initial Promotive Health Care Services expenditure resource requirement. This is a significant deep compared to an allocation of Kshs billion in 2012/13. A significant number of functions in this programme fall under the jurisdiction of county governments in line with the constitution and therefore devolved resources are expected to fund this programme. The ministry estimates to make a current transfers totalling Kshs.1.97 billion and capital transfers totalling Ksh billion to various SAGAs under the Ministry. The allocation of Kshs billion for other development activities should be transferred to County governments to develop health facilities at the counties. Ministry Of Agriculture, Livestock and Fisheries Administrative Support Services This programme has been allocated Kshs.166 million for the year 2013/2014. The same programme has been budgeted for under the Ministry of Industrialization and Enterprise Development at an estimate of Kshs million. The programme outcome is improved governance and management of co-operative societies. The allocation to this programme should not be approved. Crops Development and Management The outputs of this programmes such as community storage facilities, water pans construction, and construction of Agriculture Training Centres (ATC) reflects functions which have so far been devolved to the County Governments. The programme has been allocated Kshs.12.2 billion in the year 2013/14 of which Kshs. 3.1 billion is current expenditure and Kshs.9.2 billion is for capital expenditure. A significant part of this allocation should be re-allocated to the county governments. Fisheries Development The fisheries functions except fisheries policy are county government functions. It is not clear why Kshs billion comprising of Kshs.1.16 billion current expenditure and 17

18 Ministry Programme Comments Kshs.2.69 billion for capital expenditure has been allocated under national government in 2013/14. This allocation should be transferred to the county governments. Livestock Resource Management and Development The livestock function including county abattoirs and livestock sales yard are county government function. The national government is mandated with veterinary policy. It is not clear why Kshs.5.01 billion comprising of Kshs.2.63 billion current expenditure and Kshs. 2.4 billion for capital expenditure has been allocated under national government in 2013/14. This allocation should be transferred to the county governments. 18