Development expenditure

Kenya’s Development Expenditure Problem

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This article first appeared in my weekly column with the Business Daily on July 8, 2018

The budget for FY 2018/19 revealed the divide in expenditure as follows: recurrent expenditure will amount to KES 1.55 trillion, development expenditure is projected at KES 625 billion, and transfers to County Governments will amount to KES 376.4 billion. Development expenditure will only be 24 percent of total expenditure (below the 30 percent threshold), recurrent about 60 percent and transfers to county 15 percent. 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.

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(source: https://www.vskills.in/certification/blog/meaning-of-government-budget-and-its-objectives/)

That said, 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 in September 2017 in which development expenditure was reduced by KES 30.6 billion. As the Parliamentary Budget office points out, this reduction translates to 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.

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.

Image result for Kenya budget

(source: https://www.capitalfm.co.ke/business/2013/11/cabinet-approves-sh116bn-supplementary-budget/)

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 USD 2.1bn 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. Thus, 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.

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

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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?

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(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