Introduction to public financial management

Last updated November 20265 sectionsabout 11 min read

Public financial management is how a state raises revenue, decides what to spend it on, spends it, borrows what it cannot raise, and accounts publicly for all of it. In Kenya that whole cycle runs through a single constitutional chapter and a single Act built to implement it, applied identically, with only the names of the institutions changed, to both the national government and the forty-seven county governments the 2010 Constitution created. This chapter sets out the framework the rest of the paper's public-finance chapters, and much of the taxation half too, keep returning to.

Scope of public finance

Public finance is the study, and the practice, of how government raises money (taxation, borrowing, fees, grants), how it decides what to spend that money on (the budget process), how it actually disburses and accounts for spending, and how it manages the debt that results when spending exceeds revenue.

In Kenya its scope runs across two levels of government simultaneously, since devolution under the 2010 Constitution gives forty-seven county governments their own revenue-raising powers, their own budgets, and their own share of revenue raised nationally, all governed by the same constitutional principles and the same Act as the national government, rather than by a separate parallel framework.

Article 201 of the Constitution states the principles every part of this paper's public-finance chapters ultimately traces back to:

• Openness and accountability, including public participation in financial matters.
• The equitable sharing of the burden of taxation and the benefits of public spending.
• Prudent and responsible use of public money.
• Clear fiscal reporting.

Section 3 of the Public Finance Management Act, 2012 restates these as the Act's own object, so that a candidate can cite either the constitutional article or the statutory section for the same underlying idea.

Sources of public finance

Objectives of the PFM Act

Section 3 of the Public Finance Management Act, 2012 states its object as ensuring that public finances are managed at both the national and county levels of government in accordance with the principles set out in the Constitution, and, in particular, to ensure prudent and responsible use of public finances, and the management of the finances of the two levels of government on a sustainable basis and in the public interest.

Financial regulations made under the Act give this object practical, day-to-day effect: prescribing the forms budgets and financial statements take, the timelines for each stage of the budget cycle, procurement and asset-management procedures, and the specific reporting formats accounting officers must follow, so that both levels of government, and every entity within them, apply consistent, comparable financial management practice.

• Ensure prudent and responsible use of public resources at both levels of government
• Promote transparency, accountability and public participation in public financial matters, giving effect to Article 201
• Provide a coherent, coordinated framework for national and county budgeting, revenue raising and reporting
• Ensure that public debt and borrowing are managed sustainably (section 15's fiscal responsibility principles, and the chapter on public debt)
• Provide for the accountability of public officers who manage public finances, including sanctions for a breach of financial discipline

The budget process

The annual cycle in sequence

The cycle runs in this order:

1. The Budget Review and Outlook Paper (section 26), reviewing the just-ended financial year's actual performance against what was planned, is due to Cabinet by 30 September, early in the new financial year.
2. The Budget Policy Statement (section 25), setting the fiscal ceiling and sector priorities for the year ahead, and, at county level, the County Fiscal Strategy Paper, follows, due to Parliament (or the county assembly) by 15 February.
3. Sector working groups and entities then prepare detailed estimates within the ceilings set.
4. Parliament (or the county assembly) debates, may amend within the limits the Constitution allows, and approves the estimates through an Appropriation Act (or the county equivalent) before the financial year begins on 1 July.

The National and County Treasuries

The National Treasury manages and controls national public finance: it coordinates macroeconomic and fiscal policy, prepares the Budget Policy Statement and the national budget estimates, administers the Consolidated Fund and the other national funds (see the next chapter), monitors national government entities' compliance with the Act, and, through the Public Debt Management Office it houses, manages national public debt (see the chapter on public debt).

A County Treasury performs the equivalent role within its own county: preparing the County Fiscal Strategy Paper and the county budget estimates, administering the County Revenue Fund and any County Emergency Fund, and overseeing the county's own entities' compliance with the Act and with financial regulations. Both Treasuries are accountable, ultimately, for prudent management and control of public finance within their own sphere, and the Act deliberately mirrors their responsibilities so that a national-level rule (a fund, a reporting deadline, a fiscal responsibility principle) generally has a direct county-level counterpart.