Unrealistic budget estimates will always lead to cash flow hitches
What you need to know:
We spend a disproportionate share of revenues on debt service and on wages.
Is it not outrageous that we spend close to 38 per cent of Kenya Revenue Authority’s collections on repaying loans?
Last week, National Treasury Cabinet Secretary Henry Rotich threw in another scary number in his budget reading.
He revealed that the civil servants pension has grown to a level where it now gobbles up Sh89 billion yearly.
I’ve been writing and commenting on budget speeches for over 20 years and always wonder just how very little has changed.
It all starts by the minister setting unrealistic and over-optimistic GDP targets that lead him to setting unrealistic revenue collection targets — unrealistic budget deficit and domestic borrowing targets — and, finally, unrealistic revenue collection targets to the Kenya Revenue Authority.
DEVIATIONS
Since all assumptions and projections are based on unrealistic numbers, the government will face serious cash-flow problems throughout the financial year.
Frequent recurrence of large unbudgeted expenditures, persistent existence of pending bills and huge disparities between what has been approved by Parliament and actual Exchequer releases combine to produce a dysfunctional budget management regime characterised by just too many supplementary budgets.
During the budget speech in June, newspapers will splash and report about how so many billions have been allocated to which government department and project. We don’t track supplementary budgets to see the reallocations made during the financial year. Yet, I cannot remember a financial year that ended without major reallocations to the budget.
There was a time when supplementary budgets — or mini budgets — would not only happen so infrequently but contain minor reallocations. Today, deviations between the original budget and the final out-turn can be massive.
When they go to the rooftops to announce how they have allocated billions to this or that project, it doesn’t necessarily mean the allocations will turn into actual disbursements made promptly and within the financials year. The truth is, the National Treasury still has powers to make reallocations within the financial year and return to Parliament for retrospective approval for them through supplementary budgets.
OPAQUE
I’m not suggesting that changes and variations introduced in the middle of the financial year are all the time without justification. Indeed, part of it has to do with poor budgeting, the consequence of unrealistic resource and expenditure estimates. When contingencies arise, deviations from the original budgetary provisions are unavoidable.
What I’ve never cracked in all the years, however, is the link between supplementary budgets and allocations to security departments — the Ministry of Interior, the Department of Defence and the National Intelligence Service. I’ve seen cases where, even though the primary justification for a supplementary budget was a food crisis, it later turned out that most of the major reallocations ended up being used to channel more money to security departments.
It’s a matter that raises questions about the transparency of the budget, especially since budgets for security departments, particularly Defence and NIS, are opaque, making them candidates for hiding slush funds. When you scrutinise their budgets, you only see large lump sum allocations without a breakdown and details on the votes of where the money will be spent.
These are symptoms of dysfunctional public expenditure policies. We spend a disproportionate share of revenues on debt service and on wages. Is it not outrageous that we spend close to 38 per cent of Kenya Revenue Authority’s collections on repaying loans?
Last week, National Treasury Cabinet Secretary Henry Rotich threw in another scary number in his budget reading. He revealed that the civil servants pension has grown to a level where it now gobbles up Sh89 billion yearly.
LOW-PRIORITY
Yet another sign of the dysfunctional public expenditure regime practised by the government is the extremely poor absorption rate of the development budget. For example, a review of Exchequer releases by the Controller of Budget by March this year — just three months before the end of the financial year — showed that only 54 per cent of the national government’s development budget had been released.
It’s one thing to say that we have allocated so many billions to development and another to complete the projects by spending the money within the financial year. The link between policy-making and budgetary allocations remain tenuous.
With revenue collection on a decline, a burgeoning wage bill and high debt service costs — and without a comprehensive public service retrenchment programme and a plan for pruning low-priority projects — the assumption by Mr Henry Rotich that the budget deficit will drop to five per cent of GDP is misplaced.
This economy is likely to remain a low-growth, low-private investment one marked by weak corporate spending on new investments. However, the enduring lesson we’ve learnt in recent years is that high government spending on infrastructure cannot compensate for an underperforming private sector.
