Part A: The framework and the cycle
Introduction to public finance management in Kenya
Key takeaways
- Public finance covers how government raises revenue, allocates and spends it, and manages debt and public assets, to deliver public services, keep the economy stable and promote equitable development.
- Article 201 of the Constitution sets the 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.
- The PFM Act, 2012 gives effect to Chapter Twelve for both levels of government, and its fiscal responsibility principles (fiscal discipline, prudent debt management, predictability, transparency, equitable sharing of revenue) apply across the whole of public finance management.
- The Act is also a policy tool: it is the mechanism through which priorities set in the strategic and budget processes become funded, prioritised programmes.
- Implementation is held back by limited capacity in some entities (especially smaller counties), a weak compliance culture, national-county coordination problems and resource constraints.
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 scope and objectives of public finance
Public finance covers how government raises revenue, allocates and spends it, and manages debt and public assets, aimed at delivering public services, maintaining macroeconomic stability, and promoting equitable development, the umbrella this whole paper, and much of this diploma, sits under.
Principles of public financial management
The same fiscal responsibility principles introduced in Budgeting, Revenue and Cash Management, where they appear as the principles of a sound budget, apply across the whole of public finance management, not only the budget process narrowly:
- Fiscal discipline
- Prudent debt management
- Predictability
- Transparency
- Equitable sharing of revenue
Why the PFM Act matters
The PFM Act, 2012 gives legal effect to the constitutional public finance principles, providing the detailed rules this diploma's budgeting, accounting and audit papers all implement in their own respective areas.
The PFM Act as a policy tool
Beyond its procedural rules, the PFM Act is also the practical mechanism through which government policy priorities (set through the strategic and budget processes) actually become funded, prioritised programmes, connecting the political philosophy and policy content of this diploma's first module to its financial implementation.
Challenges affecting implementation of the PFM Act
- Limited capacity in some entities, especially smaller county governments
- Weak compliance culture and enforcement in some institutions
- Coordination challenges between national and county levels of government
- Resource constraints limiting the systems and staff needed for full compliance
Exam tip
The principles of public financial management above recur across this whole diploma, whenever you are unsure why a specific PFM Act rule exists, connect it back to one of these principles, the exam frequently rewards showing that connection explicitly.
Self-check
(a) State the scope of public finance. (3 marks)
(b) Explain why the PFM Act is described as a tool for implementing public policy, not only a set of procedural rules. (3 marks)
(c) State two challenges affecting implementation of the PFM Act. (2 marks)
(d) State the constitutional article establishing the principles of public finance. (1 mark)
Show worked answer
(a) How government raises revenue, allocates and spends it, and manages debt and public assets, aimed at delivering public services, maintaining macroeconomic stability, and promoting equitable development (3 marks).
(b) The PFM Act's budget and financial management processes are the practical mechanism through which government policy priorities actually become funded, prioritised programmes, without the Act's rules governing how resources are allocated, policy priorities would remain aspirational statements rather than funded action (3 marks).
(c) Any two of: limited capacity in some entities, especially smaller county governments; weak compliance culture and enforcement in some institutions; coordination challenges between national and county levels; resource constraints limiting the systems and staff needed for full compliance (2 marks).
(d) Article 201 (1 mark).