Budget controversy exposes risks in allocation of public finances

The controversy over the Budget has once again highlighted the difficulties and risks the government is likely to face in implementing the public finance chapter of the new Constitution.

The biggest challenge is how to announce a Budget in accordance with the new law without providing money for county governments.

The new Constitution creates a consolidated fund that expressly leaves out county governments.

The other difficulty is that articles of devolved government are expressly suspended until after new elections.

Clearly, timelines for national and county governments will have to be synchronised for budget making to make sense.

Institutions for inter-government relations and coordination such as the Council for Fiscal and Economic Policy that are catered for in the new dispensation will also need to be in place.

Parliament, the Judiciary and county governments must prepare their separate budgets.

How do you make sure that these independent spending units adhere to the principle of fiscal discipline?

If county governments do not begin by operating with balanced budgets, they may get used to the notion they have to be bailed out by central government.

The government is yet to make up its mind whether it will implement the county administration through a big-bang or a gradual process where counties can only access funds depending on capacity  to formulate, implement and report on budgets.

Work is still pending on determining potential discrepancies between the functions which have been assigned to counties and assigned revenues.

This is an area which will require a great deal of analytical work because if revenues exceed assigned expenditures, it will be a total mess.

Several months ago, the Treasury created a team to craft the so-called fiscal decentralisation strategy.

A former Treasury mandarin, Dr Kamau Thugge, was recalled from Washington where he had been working with the International Monetary Fund to assist spearhead the process.

As it turned out, crafting a fiscal decentralisation strategy  has been complex and several deadlines have not been met.

The thinking right now is that the government will have to come up with  an “organic budget law” before the requirements of the new constitution can kick in seamlessly.

One of the difficulties has been how to generate firm numbers and statistics that can guide the transition to the new regime. 

How much will it  cost to put in place the institutions and infrastructure for the devolved government?

What will it cost to set up county assemblies, for instance? How much is to be spent on the expansion of Parliament, on setting up the Senate and on additional staff for Senate and Parliament?

And what criteria will be used to allocate funds to counties and determine the use of the new ‘equalisation fund — size, population, urbanisation or poverty levels. 

The issue of taxes that county governments can impose is another complex area. Under the new Constitution, counties can collect property and entertainment tax.

Several questions then arise. How much data do we have on the tax bases of all the 47 counties and the capacity of each to collect revenues?

Also under discussion is the place of existing devolved funds in the new dispensation. Currently, there are several such funds, the most popular being the Constituency Development Fund.

The new constitution stipulates that 15 per cent of revenues goes to counties. Are decentralised funds going to  be part of the 15 per cent and how can they be continued in a context where the constitution specifically provides a limit for what must go to the counties.