Introduction to public sector budgeting

Last updated November 20264 sectionsabout 5 min read

Key takeaways

The Public Finance Management Act, 2012 is Kenya's principal law on how public money is planned for, raised, spent and accounted for at national and county level, giving effect to the Constitution's public finance provisions.
A sound budget keeps spending within sustainable revenue and borrowing limits, manages debt prudently, keeps fiscal policy predictable, and is transparent, accountable and equitably shared between national and county governments.
A recurrent budget covers day-to-day operating costs such as salaries, supplies and maintenance; a development budget covers capital spending such as infrastructure and other long-term investment.
A programme-based budget organises spending by programme and expected outcome rather than only by line item, and a supplementary budget adjusts an approved budget mid-year.
The budget cycle runs preparation, approval, execution, monitoring and reporting, then evaluation and audit, whose findings feed the next year's preparation.

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.

The PFM Act's budget provisions

The Public Finance Management (PFM) Act, 2012 is Kenya's principal law governing how public money is planned for, raised, spent and accounted for at both national and county level, giving effect to the Constitution of Kenya 2010's public finance provisions (see the chapter on the legal and institutional framework). It sets out the budget process, the roles of the National Treasury, Parliament and accounting officers, and the fiscal responsibility principles every national budget must comply with.

Principles of soundness of the budget

Fiscal discipline: spending kept within sustainable revenue and borrowing limits
Prudent debt management, keeping public debt at sustainable levels
A reasonable degree of predictability in fiscal policy, so budgets are not subject to sudden, disruptive change
Transparency and accountability in the management of public funds
Equitable sharing of revenue between national and county governments, and across counties

Types of budgets and rationale for their application

Recurrent budget

Covers day-to-day operating costs, salaries, supplies, maintenance.

Development budget

Covers capital expenditure, infrastructure and other long-term investment.

Programme-based budget

Organises spending by programme and expected outcome, rather than only by line item, the format Kenya's national and county budgets now use.

Supplementary budget

Adjusts an already-approved budget mid-year where circumstances require it, as the chapter on the budget process explains.

The public sector budget cycle and stages

Budget preparation, guided by the Budget Policy Statement and the Medium Term Expenditure Framework
Budget approval by the relevant legislature (National Assembly or County Assembly)
Budget execution, spending in line with the approved allocations
Budget monitoring and reporting during the financial year
Budget evaluation and audit after the year closes (Public Sector Audit and Assurance)

The public sector budget cycle

The five stages of the budget cycle run in this order every financial year, and evaluation and audit after the year closes is not the end of the story: what it finds feeds directly into the next cycle's preparation, the dashed line closing the loop, which is exactly the recall the practice question above tests.

Exam tip

The fiscal responsibility principles above are the standard the whole rest of this paper's budget process exists to enforce, when a later chapter's procedure seems overly cautious or bureaucratic, it is usually there specifically to uphold one of these principles.

Self-check

(a) List the five stages of the public sector budget cycle in order. (5 marks)

(b) Distinguish a recurrent budget from a development budget, with one example of each. (4 marks)

Show worked answer

(a) Budget preparation; budget approval; budget execution; budget monitoring and reporting; budget evaluation and audit (5 marks).

(b) A recurrent budget covers day-to-day operating costs, for example salaries; a development budget covers capital expenditure, for example a new hospital building (4 marks).

(c) Any two of: fiscal discipline; prudent debt management; predictability in fiscal policy; transparency and accountability; equitable revenue sharing between national and county governments (2 marks).