The problem with the supplementary budget

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This article first appeared in my weekly column with the Business Daily on February 22, 2016

Earlier this month the government drafted a supplementary budget that indicated changes in budget allocations. The general direction of the change was in cutting expenditure significantly. Development expenditure will be cut by over KES 70 billion, recurrent expenditure by KES 23 billion, local borrowing by KES 53.2 billion and tax revenue by almost KES 47 billion. If you look at the structure of the supplementary budget there is one obvious and glaring problem. It is development expenditure that has been most aggressively reduced; by over three times the cut to recurrent expenditure. Treasury’s argument is that as of December 2015 ministries had not spent KES 139.2 billion earmarked for development projects, therefore the cut is justified.

Treasury principal secretary Kamau Thugge. PHOTO | FILE

(source: http://www.businessdailyafrica.com/image/view/-/3059718/medRes/1245956/-/maxw/600/-/iflpelz/-/THUGGE.jpg)

There are two core concerns: firstly with regards to government financing, it is the development docket of expenditure that can be most effectively leveraged to bolster economic growth and, of course, development. Therefore, cutting development expenditure so aggressively means that many potentially economically productive and pro-development projects that had been planned will not be financed. Government is essentially mutilating the ability of its financing to reap development dividends. If government is trying to signal that it is trying to go down the path of austerity, then the strategy is misinformed. What type of austerity so obviously favours recurrent expenditure which finances hefty salaries, benefits, foreign tips at the cost of development financing? What type of austerity is this? One assumes that austerity financing structures look at the items least needed and cuts those first. In such aggressive cutting of development spending is government stating that such financing is not necessary? The prudence of such a move is questionable as it will likely have a negative knock on effect on economic growth because the bulk of the budget will now be financing the recurrent docket which even government admits is non-productive.

Secondly, the fact that KES 139.2 billion of development financing has not been absorbed signals the presence of a serious problem. The response should not be to cut financing but to address the issue. Treasury itself acknowledges the fact that development funds have been left idle reflects an absorption issue and that ministries etc. have not been able to spend as much as anticipated.

I have long stated that Kenya has an absorptive capacity issue because year after year the story is the same; development funds are not used. Although Treasury asserts that mechanisms have been put in place to improve the absorption level; more detail is required here. The core questions Treasury should be asking are: why aren’t development funds being absorbed? What of those factors are due to weaknesses within government and the bureaucracy of releasing funds for example? What factors are due to issues at Ministry or County level? Even my limited experience with county governments has made clear glaring weaknesses with regards to absorptive capacity. Firstly, planning capacity at county level is weak and perhaps this is a reflection of the fact that county governments are still in their infancy, appropriate human capital has not been identified and organisational structures and processes are not robust. But the lack of planning capacity means that either counties cannot effectively identify their needs, or if they can, are unable to develop coherent, pragmatic plans to address development issues. What do counties need to do to identify their development gaps, what technical skillsets are required to address those gaps, and how will those skills sets be identified and utilised so that development goals are realised?

absorptive-capacity.gif w=500

(source: https://technopreneurship.files.wordpress.com/2007/04/absorptive-capacity.gif)

The bottom line is that the government cannot respond to poor absorptive capacity by slashing development budgets. Instead, government should create a unit to investigate this issue by going to Ministries, Departments and even County governments to identify bottlenecks and from there create a strategy to improve absorptive capacity.

Anzetse Were is a development economist; anzetsew@gmail.com                                  

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