national government

Systemic fiscal weaknesses need to be urgently addressed

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This article first appeared in my weekly column with the Business Daily on June 25, 2017

Last week the International Budget Partnership (IBP) presented information on what is driving fiscal performance at national and county level, with a focus on revenue inflows. This is a behemoth task in itself due to significant data gaps that impede comprehensive analysis. For example, gazettes released by the National Treasury tend to be incomplete and it is not clear when the disbursements actually happen. Additionally, figures frequently change (particularly revenue inflows) mid-year with no explanations and the same information can be presented in numerous formats making analysis on consistent data sets difficult.

That said, there is enough data from FY 2011/12 to 2016/17 to make some important observations. The first challenge that has emerged has to do with the sequencing of revenue inflows into National Treasury that affects county budget disbursements. National Treasury does not receive all of the revenue required to be dispensed over the fiscal year in equal tranches; that is 4 sets of 25 percent of revenue each quarter over the fiscal year.

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According to data over the time period analysed, in Q1 only about 20 (not 25) percent of total revenue in-flows have been received, this goes up to 47 percent by mid-year. What this means is that the bulk of financing for the fiscal year is received in the second half; as a result national government disbursement to counties follow a similar pattern where the bulk of county finances are sent in the later half of the year. This may explain complaints by governors that they do not get their disbursements on time and they blame Treasury for this.  But to be fair, National Treasury is not in full control of when revenue inflows come in. Nonetheless, since it is clear that this is a systemic issue that recurs, national government ought to start taking remedial action so that county governments are not affected by their revenue inflow constraints.

However, county governments are not innocent bystanders when it comes to fiscal weaknesses; counties almost consistently fail to approve their budgets on time and thus do not submit the attendant requisitions that lead to allocations. It seems that in most cases, county budgets have not been approved by the June 30 deadline; this leads to delays in disbursements. The factors behind these delays at county level are not clear but seem to be an amalgam of county capacity constraints as well as disagreements between County Executives and County Assemblies on what should feature in county budgets.Image result for fiscal policy

(source:https://www.proprofs.com/quiz-school/topic_images/p1aclsjbd41ijh1l7t1i071j3ckog3.jpg)

A third factor at play that is informing fiscal performance is to do with sources of revenue. We know that county governments are still very poor at generating their own revenue and thus are almost entirely reliant on national government allocations. This makes them less autonomous in controlling their fiscal performance. At national level, the issue is that government is being increasingly affected by delays in revenue inflows partly because taxes are making a decreasing share of national government revenue inflows. National government is becoming more reliant on other sources of revenue beyond taxes, which means more borrowing and government often does not control when those disbursements are received. So at both county and national level, government is not in full control of revenue inflows which leaves the country exposed to cash crunches on which quick remedial action cannot be taken.

It is important that national and county government develop revenue inflow strategies that mitigate current challenges so that expenditure and development plans can be more efficiently effected.

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