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CIFA Intermediate LevelPublic Finance and Taxation for Investment Analysts
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Chapter 1

Part A: Public finance

Introduction to public financial management

Last updated November 20265 sectionsabout 6 min read

Key takeaways

  • Public finance is how a government raises, allocates and accounts for the resources it uses to deliver public services, answering to a constitutional and democratic duty to the public rather than to shareholders.
  • Government draws on four sources: tax revenue (the largest and most sustainable), non-tax revenue, grants and public debt.
  • The PFM Act, 2012 gives practical effect to the Constitution on public finance, aiming at transparent, accountable and prudent management of public resources, effective financial control at both levels of government, and fiscal responsibility.
  • The budget process runs in four stages: development plan preparation, Treasury circulars, cash flow projections, then budget estimates and revenue raising measures.
  • The National Treasury prepares the national budget, manages national public debt and issues the circulars and regulations that guide both levels; each County Treasury does the equivalent for its county.

Public finance is how a government raises, allocates and accounts for the resources it uses to deliver public services, subject to a different set of pressures than corporate finance (see Corporate Finance): no market discipline of shareholders demanding a return, but a constitutional and democratic duty to the public instead.

Authority for this chapter

Chapter Twelve of the Constitution of Kenya, 2010: Article 201 (principles of public finance: openness and accountability with public participation, equitable sharing of the burden and benefits, prudent and responsible use, and clear fiscal reporting), Articles 206 to 208 (the Consolidated, County Revenue and Contingencies Funds) and Articles 220 to 223 (budgets and appropriation); section 3 (object) and section 15 (fiscal responsibility principles) of the Public Finance Management Act, 2012, the Act that gives Chapter Twelve effect for both levels of government.

Nature and scope of public finance

Public finance covers government revenue raising (taxation and borrowing, in later chapters), public expenditure and budgeting, and the institutional oversight that holds government accountable for both, spanning national government and, in Kenya's devolved system, 47 county governments (see the chapter on national and county government finances).

Sources of public finance

  • Tax revenue: income tax, VAT, customs and excise duties (all covered in Part B), the largest and most sustainable source
  • Non-tax revenue: fees, licences, fines, and dividends or surpluses from state-owned enterprises
  • Grants: donor and development partner funding, often earmarked for specific programmes
  • Public debt: domestic and external borrowing (see the chapter on public debt management), used to bridge the gap between revenue and expenditure needs

The Public Financial Management Act

Kenya's Public Financial Management Act, 2012 (PFM Act) and its regulations give practical effect to Chapter Twelve of the Constitution of Kenya, 2010 on public finance, aiming to ensure transparent, accountable and prudent management of public resources, effective financial control at both national and county level, and fiscal responsibility (living within sustainable revenue and borrowing limits) across the whole public sector.

The budget process

Development plan preparation
Medium-term plans and sector strategies set the policy priorities the budget is subsequently built around.
Treasury circulars
Guidance issued by the National Treasury (see The National and County Treasuries, below) to national and county entities setting the budget calendar, format and specific requirements for a given budget cycle.
Cash flow projections
Forecasts of expected revenue and expenditure timing through the year, needed for orderly cash and debt management (see the chapter on public debt management), not merely the annual budget total.
Budget estimates and revenue raising measures
The detailed expenditure estimates by vote and programme, paired with the specific revenue measures (tax proposals, borrowing plans) needed to finance them, together forming the budget submitted for legislative approval (see the chapter on oversight).

The National and County Treasuries

National Treasury
Formulates national fiscal policy in coordination with the Central Bank, which conducts monetary policy, prepares the national budget, manages national public debt (see the chapter on public debt management), and issues the Treasury circulars and regulations that guide financial management across national and county government.
County Treasuries
Perform the equivalent function at county level: preparing the county budget, managing county public funds (see the chapter on national and county government finances), and ensuring county compliance with national PFM regulations and standards.

Exam tip

This chapter's PFM Act objectives reappear as the standard against which the oversight bodies of the next chapter but one (Auditor-General, Controller of Budget) are later tested, transparency, accountability, prudence, fiscal responsibility, keep these four in memory as the paper's recurring evaluative yardstick.

Self-check

(a) State the four sources of public finance. (4 marks)

(b) State the four objectives the PFM Act, 2012 and its regulations aim to achieve. (4 marks)

(c) State the four stages of the budget process, in order. (4 marks)

(d) Distinguish the role of the National Treasury from that of a County Treasury. (3 marks)

Show worked answer

(a) Tax revenue; non-tax revenue (fees, licences, fines, dividends from state-owned enterprises); grants; public debt.

(b) Transparent, accountable and prudent management of public resources; effective financial control at national and county level; fiscal responsibility (living within sustainable revenue and borrowing limits); giving practical effect to Chapter Twelve of the Constitution.

(c) Development plan preparation; Treasury circulars; cash flow projections; budget estimates and revenue-raising measures.

(d) The National Treasury formulates national fiscal policy, prepares the national budget, manages national public debt and issues the circulars and regulations guiding both levels of government. A County Treasury performs the equivalent function at county level, preparing the county budget, managing county public funds and ensuring county compliance with national PFM regulations.

Test Your Knowledge

3 questions on this chapter
Question 1 of 3Which source of public finance does the chapter describe as the largest and most sustainable?
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Question 2 of 3The National Treasury sends national and county entities guidance setting the budget calendar, the format and the specific requirements for the coming budget cycle. Which stage of the budget process is this?
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Question 3 of 3A county's budget has to be prepared and its public funds managed in line with national PFM regulations and standards. Which body does the chapter give this job?
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