PUBLIC BUDGETING

WEEK 8
5 FEBRUARY 2025 - VW
 LESSON OBJECTIVES
• By the end of the lesson the learner should be able to:
• Define Public Budget
• Describe its coverage
• Differentiate Public and Private
• Explain the stages of Public Budget Preparation
• Discuss the Medium Term Expenditure Framework – Expenditure
management tool
• Discuss the Objective of Public Participation in Public Budget
Preparation
• Discuss the challenges of public budgeting
 PUBLIC BUDGET – INTRODUCTION - 1
• Public Budget also referred to as National Budget: is a financial plan that estimates the
monetary expenditures and revenues of a state/government for a future financial year usually one
year period that goes through approval by parliament and the executive (and public participation in
some countries) prior to its implementation for purposes of meeting underlying government economic,
social and political development objectives . Each year governments prepare and publish annual
budgets.
• The state/government covers the public sector which include all entities that are controlled, owned
and managed by the governments: the general government (both Central and Sub National Levels of
Government ie counties, federals., state-owned enterprises and Ministries, Departments, Agencies –
(MDAs).
• The Budget is a comprehensive budget covering all revenues and expenditures of the government.
• The public budgeting process is the main mechanism by which much of the money spent by
governments gets distributed to government mininstries and agencies that then spend funds in order
to achieve their goals.
• Budgets reflect the priorities for government programs which keep changing with time. The more the
allocation the higher the priority.
• Public Budget include: Recurrent budgets cover the recurring annual costs And Capital budgets
 PUBLIC BUDGET - COVERAGE

• The public sector includes the general government and all entities that it
controls (e.g., state-owned enterprises and Ministries, Departments and
Agencies (MDAs).
• General Government is both Central and Sub National Levels (County) of
Government
• Each level of government and public sector entity should have its own
budget
• For accountability and Financial Control Reports are consolidated for the
General Government
• The Budget should be comprehensive to covering all revenues and
expenditure of the government
 PUBLIC BUDGET – SOURCES OF REVENUE
There are different sources of revenues:
• Services fees and charges (e.g. court charges, traffic charges, Levies, toll
charges, stamp duty, Land Rent and Rates, Parking Fees ).
• Taxes: Property tax Corporate and Individual (PAYE) income tax, VAT
(Consumption Tax) , Excise Duty, Custom Duty. Income Tax is the highest
sources in Kenya.
• Public debt: government borrows money from investors by issuing bonds so
that government will obligate to pay the money back with interests to the
investors.
• External loans (e.g. country borrowing from other countries).
• Proceeds from country’s properties and assets (KICC, Kenya Airport Authority,
ADC Farms).
• Grants- Money given without requirement to repay or have no interest
 PUBLIC BUDGET – EXPENDITURE
• Different examples of expenditures:
• Spending on continuous services and programs offered by
governmental organizations. (e.g. education, defense, and health)
• Spending on public personnel salaries and wages.
• Spending on Training and Travel of government personnel
• Spending on public capital projects and investments – Roads, Water
Supply.
• Spending on office needs or demands for normal office operations
• Spending on unusual crisis, such as natural disasters like the COVID 19,
Drought, Internally Displaced People; Fires
• Spending on Important day celebrations
• Spending on Elections
 OBJECTIVES OF GOVERNMENT BUDGET - MACRO
ECONOMIC AND SOCIAL ISSUES
• Allocate the scarce resources of government.
• Stabilizing the economy: promote or decrease spending
• Improve the efficiency of the economy using the least inputs to obtain maximum gains
• Improve equity across groups in society and across generations
• Control Spending ie conform to legislative intent and legal restrictions was the money
spend they way it should have been spent in line with the elected representatives and
the chief executive
• Coordinating the actions of many government officials.
• Spending on social programs – reducing poverty, improving illiteracy,
• Management Tool: improve management of state agencies
• Planning: Objectives, how best to achieve the objectives given alternative options
budgets are prospective and future focused which requires planning
 OBJECTIVES OF GOVERNMENT BUDGET –
POLITICAL
• National Assembly: Make appropriate allocations of the country’s
resources to government versus the private sector
• Timing of spending and the benefits that will be provided to different
groups in the society
 PUBLIC BUDGET DEVELOPENG AND
IMPLEMENTATION - STAGES
1- Preparation Stage.
2- Approval Stage.
3- Implementation Stage - Executive Stage –.
4- Monitoring and Evaluation - Oversight Stage
5- Auditing _ Final Account or Statement.
 PUBLIC BUDGET DEVELOPMENT -
PREPARATION I
• The budget preparation process should aim at:
(i) ensuring that the budget fits macroeconomic policies and resource
constraints;
(ii) allocating resources in conformity with government policies; and
(iii)providing conditions for good operational management.
• Hard choices and trade offs must be made explicitly when formulating
the budget. Postponing such decisions until budget execution prevents a
smooth implementation of priority programs, and disrupts program
management.
• The budget is the financial mirror of government policies. Therefore,
mechanisms for formulating sound policies and ensuring the policy-
budget link are essential.
 PUBLIC BUDGET – REGULATIONS AND LAWS
• There are several laws that stipulate what should be done before, during
and after budget making in Kenya these include :
• The Constitution 2012 Article 221
• Public Finance Management (PFM) Act 2012 _Sections 25, 37 and 38 of
the,
• Public Finance Management Act Regulations Sections 6, 27(4),32 and 59
of, 2015
• National Assembly Standing Order 235.

• Kenya’s Public Finance Management Act 2012 requires that all

government entities submit a plan to facilitate resource allocation
 PUBLIC BUDGET - PREPARATION
1. preparation of a macroeconomic framework: should be the starting point of budget
preparation. The macroeconomic framework should be based on realistic assumptions,
without overestimating revenues or underestimating compulsory expenditures
2. preparation of a budget circular, which gives guidelines for the preparation of sector
budgets and expenditure ceilings by sector; Budget Circular is a written instruction
issued by Ministry of Budget and Economic Planning providing broad guidelines
on the budget process of the State Government.
3. preparation of the line ministries’ budget and MDAs on the basis of these
guidelines;
4. budgetary negotiation between the line ministries and the Ministry of Finance;
5. finalization of the draft budget; and
6. submission to the legislature – Parliament or National Assembly.
An appropriate medium-term perspective multi-year expenditure programming approach
has been is the common approach used in public budgeting
 PUBLIC BUDGET PROCESS – BUDGET
FRAMEWORKS
• Medium-Term Fiscal Framework (MTFF) provides a statement of
national fiscal policy objectives and medium-term macroeconomic and
fiscal targets and projections.
• MTFF’s form the basis for projecting government revenues and devising
an overall budget ceiling for the Medium-Term Expenditure
Frameworks (MTEF)
• The MTEF together with the annual Budget Framework Paper provides the
basis for annual budget planning.
 PUBLIC BUDGET – EXPENDITURE MANAGEMENT TOOL
MEDIUM TERM EXPENDITURE FRAMEWORK _ (MTEF)
DEFINITION
• Medium-Term Expenditure Framework (MTEF) – as the name suggests is an
Expenditure Management tool used by governments resources and expenses. It is
the
• (MTEF) is a national annual, rolling three year-expenditure plan. – It sets out three-
year spending plans of the national and provincial governments. The MTEF is a
three -year rolling budget in the sense that the first year's estimates become the
basis for the subsequent year's budget, once changes in economic conditions and
policies are taken into account.
• It sets out the medium-term expenditure priorities and budget ceilings for each
sector along with financing needs and borrowing plans.
• It aims to ensure that budgets reflect Government's social and economic priorities
and give substance to Government's reconstruction and development
commitments.
 PUBLIC BUDGET – MANAGEMENT TOOL
MEDIUM TERM EXPENDITURE FRAMEWORK
• "The MTEF consists of a top-down resource envelope, a bottom-up estimation of the
current and medium-term costs of existing policy and, ultimately, the matching of these
costs with available resources." World Bank

• The "top-down resource envelope" is fundamentally a macroeconomic model that

indicates fiscal targets and estimates revenues and expenditures,

• Resource envelope is the determination of total resources available in a stable macro

economic environment – Domestic – Revenue and borrowings, Foreign: Grants and Loans

• MDAs engage in "bottom-up" reviews that begin by scrutinizing sector policies and
activities (similar to the zero-based budgeting approach), with an eye toward optimizing
intra-sectoral allocations. MDAs must prepare strategic plans.

• Bottom up requirements from the MDAs include – Wages and Salaries, Office Equipment;
Capital Requirements

• The MTEF approach brings in the value of integrating the top-down resource envelope
with the bottom-up sector programs. The integration of the top-down envelope with
bottom-up sector programs occurs by means of a formal decision making process.
 PUBLIC BUDGET – MANAGEMENT TOOL
MEDIUM TERM EXPENDITURE FRAMEWORK – OBJECTIVES _
The MTEF is intended to facilitate a number of important outcomes:
• Fiscal Discipline: the MTEF requires a consistent macroeconomic framework that is stable to operate on
• Linking annual programs and budget medium plan
• Strategic Allocation of Resources: Allocation of resources is aligned to strategic plans of each MDAs
• improved inter- and intra-sectoral resource allocation; by effectively prioritizing all expenditures (on the basis of the
government's socio-economic program) and dedicating resources only to the most important ones. Resource allocation is
hereby made more consultative
• greater macroeconomic balance; including fiscal discipline, is attained through good estimates of the available resource
envelope, which are then used to make budgets that fit squarely within the envelope.
• greater budgetary predictability of flow of resources to line ministries; which is expected as a result of commitment
to more credible sectoral budget ceilings.
• decision Making: budgetary decision making is made more legitimate, devolved to line managers, consultative on
resource allocation hence enhance greater political accountability for expenditure outcomes and brings about political
restraint.
• more efficient and effective use of public monies: essentially by allowing line ministries greater flexibility in managing
their budgets in the context of hard budget constraints and agreed upon policies and programs. Sectors have autonomy to
manage by making decisions that maximize technical outcomes like efficiency and effectiveness.
• Promotes transparency and accountability
• Focus on Performance, outputs and outcomes: MTEF contains outcome criteria for the purpose of performance
monitoring
PUBLIC BUDGET – EXPENDITURE MANAGEMENT TOOL
MEDIUM TERM EXPENDITURE FRAMEWORK _ (MTEF) –
• MTEF is a tool that is used in
• "Key to increasing predictability and strengthening the links
between policy, planning, and budgeting is an effective forum
at the center of government and associated institutional
mechanisms that facilitate the making and enforcement of
strategic resource allocation decisions."
 PUBLIC BUDGET – MANAGEMENT TOOL
MEDIUM TERM EXPENDITURE FRAMEWORK – STAGES IN BUDGET DEVELOPMENT
STAGE WHAT IS INVOLVED

I. Development of Macroeconomic/Fiscal Macroeconomic model that projects revenues and

Framework expenditure in the medium term (multi-year ie 3 years ).
Once the strategic expenditure framework is developed,
the government defines the sectoral resource
allocations, which are then used by the sectors to
finalize their programs and budgets.
II. Development of Sectoral Programs •Agreement on sector objectives, outputs, and activities
•Review and development of programs and sub-
programs
•Program cost estimation
III. Development of Sectoral Expenditure •Analysis of inter- and intra-sectoral trade-offs
Frameworks •Consensus-building on strategic resource allocation (It
is at this stage that the policy making, planning, and
budgeting processes are combined)

IV. Definition of Sector Resource Allocations Setting medium term sector budget ceilings (cabinet
approval)
V. Preparation of Sectoral Budgets Medium term sectoral programs based on budget
ceilings
 PUBLIC BUDGET DEVELOPMENT PHASE –
PROCESS
• Ministries, State Departments and Agencies (MDAs) are required to submit
a projection of their budgets to the National Treasury detailing projects or
sub-programmes they intend to implement.
• Each level of government and public sector entity develop own budgets.
• For accountability and Financial Control Reports from all arms of
government are consolidated into General Government
• The national budget is generally developed through a process of
negotiation between line ministries and the central government.
• The Ministry of Finance is the central government entity in charge of
Public Budget and Public Expenditure.
• The national legislative body _Parliament_ National Assembly- provides
final approval.
 PUBLIC BUDGET - APPROVAL
1. The Cabinet and Parliament scrutinize the budget submitted can make
changes ie increasing or reducing, enhance what is provided and total
eliminate any budget item as well as question the activities in the budget
or ask for clarification
2. Parliament or National Assembly approves the budget if satisfied
3. The budget is then sent back to Ministry of Finance for onward submission
to the President for final approval and signature
 PUBLIC BUDGET -
IMPLEMENTATION/EXECUTIVE STAGE
1. Finance ministry will send the final public budget to each ministry or
governmental agency attached with some instructions. Thus, each agency
will start implementing its budget’s items as determined before
 PUBLIC BUDGET - MONITORING AND
EVALUATION _OVERSIGHT
• Basically, the legislative authority would make sure if the executive
agencies would perform its budget as determined.
• The finance department monitors any deviations in spending or any
violations.
• Oversights are internal and external
– Internal oversight: done by the same administrative agency.
• – External oversight: done by representatives of finance ministry.
• Oversights are done regularly and submission of reports on quarterly basis
 PUBLIC BUDGET – AUDITING: FINAL ACCOUNT AND
STATEMENT

• Each agency or ministry must make the final statement. The MDAs will
make and collect the required data about its results through the previous
year and send to the Finance Ministry.
• This is very important to show the real revenues and expenditures from the
previous year.
• The Final Account and Statement will be used for Auditing
DIFFERENCE BETWEEN PUBLIC AND PRIVATE
BUDGET
Public PRIVATE
Focus on National agenda service delivery, Focus on the Company Financials to
social welfare, General population needs make profit and beating competition
provide public goods, infrastructure and
policy and regulations making – not profit
motive Individual/Group of Individuals owned,
managed and controlled companies
Include Government owned, managed and
controlled institutions
Economic and Social Effects Cover the Entire Smaller Impact and Effect depending on
Country business operationals areas
More Control by regulatory Agencies and Internal and limited to few stakeholders
entire public and Partners and fewer regulations
More Complex Budget Preparation Process Less Complex – Involving departments
involve MDAs and functions

Public sector funding comes from taxes, duties, Private sector funding comes from owners or
bonds, and treasury bills. through loans, issuing shares, and
debentures.
Bureacratic Long decision making Process in
 PUBLIC BUDGET – EFFECTIVE BUDGET
PROCESS
• A paper from the Asian Development Bank examines the fundamental processes in budget
preparation. Effective public expenditure management involves consideration of:
(1) policies necessary to meet determined fiscal targets,
(2) spending limits and,
(3) a concern with cost-efficient operations.
• The process must begin with a macroeconomic framework, with realistic fiscal targets and
potential financial constraints included from the outset. This will enable suitable expenditure
targets to be identified. Furthermore, it permits continuous monitoring to ensure the budget
is formulated correctly and is being delivered effectively. Other conclusions are:
• It is essential the budget enables fiscal targets to be met cost effectively, with resources
allocated
• In countries with poor financial discipline, improving budget formulation can enhance
budget implementation. Better budget preparation will also advance appropriate resource
allocation and expenditure control
 PUBLIC BUDGET – IMPORTANT FACTORS _ I
• If budget allocation decisions are not taken early, demands for funds will continue up
to budget execution. Resources may not be allocated efficiently and programme
implementation is disrupted
• Specifying spending limits early helps sectors decide between programmes and plan
their programmes more effectively. Time is also allowed for negotiations between the
Finance Ministry and line agencies before final drafts of the budget are required
• The budget and public policies must be mutually reinforcing. Before finalizing policy
decisions it is important to assess
(1) impact on resources of a policy change,
(2) implications for meeting fiscal targets and,
(3) required budget adjustments
• Publishing economic forecasts and fiscal targets compels governments to meet
budget commitments.
 PUBLIC BUDGET – IMPORTANT FACTORS - II
• Departments responsible for planning different parts of the budget must coordinate their activities at
every stage of budget preparation. To further improve budget preparation, policy needs include:
• Deciding spending priorities early. Strict spending limits should be specified to help agencies plan
expenditure dependent on funds available to them, not on their demands.
• Considering all expenditure and revenue needs together, to prioritise demands. This should be done
transparently. Budget decisions made through political bargaining disregard efficient allocation of
resources and postpone difficult spending decisions.
• Expenditure projections, used within a macroeconomic framework help ensure (1) actual and proposed
aggregate spending, (2) policy objectives, and (3) fiscal targets, are compatible and sustainable.
• Using a medium-term perspective (three to five years) in budget preparation, to ensure fiscal targets are
suitable and sustainable. Build administrative and technical capacity to improve forecasting and enable
planning of longer-term investments.
• Budget formulation and operation must be subject to examination by elected representatives and civil
society to ensure political and societal needs are met appropriately. Participation in budget decisions is
distinguished from allowing lobbies excessive influence.
• Holding programme implementers and designers accountable for operating efficiently and adhering to
spending ceilings negotiated with the Finance Ministry.
 PUBLIC BUDGET – CHALLENGES - I
• Unrealistic Revenue Targets: In 2019/2020 target 1.88 Trillion but dropped to 1.64
Trillion Currently the same estimation is being used against budget estimate of Kshs 3.6
trillion
• Misalignment of resource allocation and objective: in 2020/2021 budget aims was
to prioritize on employment creation, youth empowerment, supporting manufacturing
activities, enhancing health coverage, improving food security and enhancing living
conditions through affordable housing. However, biggest budget allocation was in
Education to cater for operational costs of the Teachers Service Commission. The health
budget has not adequately addressed the challenges that threaten to hinder the
attainment of Universal Health coverage particularly with regard to human resources
inadequacies and poor health infrastructure; the manufacturing and food security are
among the least funded sections of the budget; and the allocation to key big four housing
projects has been significantly scaled down with programs such as construction of social
housing receiving no allocation for FY 2020/2021.
• Existence of Informal Rules – ie Ethnicity, Kinship groups are factors that have the
 PUBLIC BUDGET - CHALLENGES II

• Auditing : Kenya suffered absence of an Auditor General for some period of

time ca cause of audit delays that is a problem to date.
• Corruption: corruption is the misuse of public or private office for personal
gain. Corruption weakens fiscal discipline; distorts the allocation of resources;
harms operational efficiency and effectiveness; and, obviously, is antithetical
to due process. ne major route to improving Public Expenditure Management
(and, of course, improving the quality of governance as well) is to reduce the
opportunities for corruption in the process and punish corruption when it
occurs.
• Rejection of Budget by the public participation
• Lack of communication and education of citizens
• Insufficient funds for budget implementation