Budget Guide 2013

Budget Highlights 2013/2014 1

INSI

DE

By Institute of Economic Affairs

1. Introduction 22. Fiscal Policy 43. Sector Budget Analysis 10

4. Taxation Proposal 175. Conclusion 19

GUIDE

Budget 2013/14: The Onset of the Devolved Government and the Hurdles Ahead

June 2013

• TheoveralltotalexpenditureKshs1,640.9billion• Totaldevelopmentexpenditureof27.3%ofthetotalbudget• Kshs16.1billionallocationtoJudiciary• Kshs19billionallocationtoParliamentaryServiceCommission• Kshs380.3billionallocationtoconsolidatedservices• TotalallocationtothecountygovernmentKshs210billion - Kshs190billionequitableshare - Kshs20billionconditionalgrant• FoodSecurity

- Kshs2billionsetasideforAgri-BusinessFund- Kshs3.6billionforimplementationofthefirstphaseofthe1

millionacreirrigationandfoodsecurityprojectinGalana• YouthandWomen

- Kshs6billionsetasideforyouthtoengageinincomegeneratingprogrammes

- Taxrebatestotax–compliantbusinessesandNGOswhohireinexperiencedyouthgraduatingfromeducationalinstitution.

• Education- Kshs10.3billiontowardfreeprimaryeducation- Kshs2.6billionforschoolfeedingprogramme- Kshs20.9billionforfreedaysecondaryeducation- Kshs1.19billionforsecondaryschoolbursary- Inthemediumterm,allocatedKshs53.2billionfordeployment

of1.35millionlaptopstoclassonepupils,developmentofdigitalcontent,buildingcapacityandrollingoutcomputerlaboratory.

• Health- Kshs3.8allocatedforfreematernalhealth- Kshs700millionforfreeaccesstoallhealthcentresand

dispensaries- Kshs3.1billionfor30communitynursesperconstituency- Kshs522millionfor10communityhealthworkersperconstituency

Taxproposals• IntroducerailwaydevelopmentLevyof1.5%onallimportedgoods.• Re-introductionofCapitalGainsTax

HigHligHTSoFBudgET2013/14inTroducTionPicking up from the previous budget, Budget 2013/14 will play a big role in laying a firm foundation to usher in the devolved system of government. The environment for budget formulation and prudent financial management at the national and county government level is now set, given the passing of requisite legislation, including the Public Finance Management Act, 2012 and the launch of the second strategy for Public Finance Management Reforms in early 2013. Given this state of play one can interrogate the budget process using the PFM, Act 2012 as a benchmark. The three arms of government managed to submit their expenditure estimates to the National Assembly by 30th April. Equally commendable is the fact that for the very first time, the National Government adopted Programme based budgeting (PBB) to present its expenditure estimates in line with PFM reforms. However, one would expect to see more details in the national government expenditure estimates. As for the estimates presented by the Parliamentary Service Commission (PSC) and the Judiciary, their budgets were presented in line item format with the Judiciary providing a summary annexed with the presentation in PBB format. Perhaps the delay in publishing of regulations to guide in the implementation of the PFM law may have led to this confusion.

Participation in the budget process, as required by the constitution and PFM law, took place through public hearings during the formulation and legislation stages. Despite delays in constituting the Budget Committee at the National Assembly, the committee managed to hold public hearings in 10 centers across the country on 30th May. It is important to note that the number of counties visited was however fewer than during Budget 2012/13 public

2 Budget Highlights 2013/2014

hearings. The National Treasury should also ensure that the budget estimates are available and accessible to the public for effective participation during these public hearings. One major challenge has been the unavailability of other supporting budget documents such as Statistical Annexes to the Budget and the Financial Statement, making it difficult to conduct budget analysis.

That notwithstanding, we believe that the Budget 2013/14 took cognizance of the contextual environment to ensure improved public service delivery, hence the key message of this Budget “Transformation for shared Prosperity”. To this effect the Cabinet Secretary outlined several priority areas for Budget 2013/14 to spur inclusive growth and move the country to higher levels of prosperity. These areas include:

i. Accelerating growth by improving productivity and competitiveness, and opening up the economy to investment and trade opportunities to boost exports;

ii. Support for small and medium enterprises through targeted financial support, skills development, and access to market through a revamped public procurement system so as to expand business and to reduce joblessness among the young people;

iii. Continuing with public and private investment programmes that have the highest impact to growth, covering roads, railways, pipelines, ports and energy;

iv. Creating a business climate that encourages innovation, investment and growth;

v. Improving the quality of education and training through leveraging on ICT, starting with the primary school level;

vi. Modernizing the police force to effectively and efficiently respond to crime;

vii. Boosting food security by investing in agriculture and opening up at least 1 million acres of new land through irrigation in order to end food insecurity;

viii. Maintaining macroeconomic stability by keeping inflation low, and striving for a stable and competitive exchange rate, while enhancing the country’s capacity to respond to external shocks;

ix. Sealing leakages in the revenue collection system and extending the tax base while ensuring efficiency in public expenditure;

x. Supporting devolution through capacity building to effectively deliver public services and ensuring county governments receive adequate resources to fund their functions;

xi. Investing in Kenyas greatest capital resource – 1 Republic of Kenya (RoK) Kenya Bureau of Statistics Economic Survey 2013

the people and provision of progressive social protection for every Kenyan as demanded by the Constitution of Kenya.

1.2 Economic PerformanceA more stable economy in 2012 led to modest improvement in economic conditions and activity, resulting to real GDP growth rate1 of 4.6% up from 4.4% in 2011. However, this is still below the projected growth target of 5.2% as per the Budget Policy Statement 2012. Overall, the economy was stable, buoyed by increased domestic demand and modest growth in credit. As a result of this favourable environment, the economy was supported by the positive growth recorded by all the key sectors including agriculture, wholesale and retail, transport and communication, manufacturing, construction and financial intermediation. Despite all the sectors recording positive growth rates, it is important to note that only the agricultural and the construction sectors posted increased growth rates from the previous year, 3.8% in 2012 from 1.5% 2011 and 4.8% from 4.3% respectively. The Economic Survey 2013 indicates that economic performance in 2012 faced a number of challenges, including a turbulent global economy, delayed long rains and a weakened shilling at the beginning of the year. The economy’s resilience in 2013/14 will therefore be determined by how the government navigates this wave of challenges to meet the 2013 projected growth rate of 5.8%.

Table 1 overleaf captures indicators of economic performance and the macroeconomic environment for Kenya for the period 2008-2012.

1.2.1MacroeconomicFrameworkInflation: The average annual rate of inflation decreased from 14% in 2011 to 9.4% in 2012 with core inflation (excludes food and oil prices) declining from 11.6% to 5% over the same period. The decline in inflation was largely attributed to better food supply resulting from favourable weather conditions. Further prudent macro-economic policies pursued by the government, ensured stability of the shilling against other major currencies. According to Central Bank inflation outlook, the inflationary pressures are expected to ease in the coming months on account of the stable exchange rate and the positive impact on food supply from the rainfall expected in various parts of the country particularly the food basket regions.

Budget Highlights 2013/20143

Interest rate: The Central Bank of Kenya (CBK) in pursuit of their mandate of maintaining price stability in the economy used its various instruments including the Central Bank Rate (CBR) to signal direction of interest rates. CBR was reduced from a high of 18%

16.5%, and by November 2012 it had been lowered to 11%. To this effect the average 91-day Treasury Bills rate declined from 18.3% in December 2011 to 10.09% in June 2012 before settling at 8.25% in December 2012.

Exchange rate: The shilling exchange rate stabilized against major currencies in 2012. The shilling traded at Ksh 85.99 against the US dollar compared to Ksh 86.7 in December 2011. The action of CBK to tighten

pressures and the fact that the year also experienced

the shilling.

Employment: Total employment outside small scale agriculture and pastoralist activities improved from 12.1 million in 2011 to 12.7 million in 2012. The economy generated 659.4 thousand new jobs in the period under review, with 591.4 thousand jobs being created in the informal sector relative to only 64.9 thousand jobs created in the formal sector (See graph 1). Given that the bulk of the new jobs have in recent years been generated in the informal sector, a number of challenges have emerged with regard to the sustainability and quality of the jobs created. This may also explain the narrow tax base and the low income levels.

1.3 Revenue Performance

200.44 billion in 2012/2013, the total revenue collected for the period July 2012-March 2013 was Kshs 737.63 billion against a target of Kshs 900.34 billion, which represents a performance rate of 81.9% revenue

Table 1: Macroeconomic indicators

Indicators 2008 2009 2010 2011 2012

Real GDP growth rate (%) 1.5 2.7 5.8 4.4 4.6

Agriculture growth rate (%) -4.3 -2.5 6.3 1.5 3.8

Income per capita (Kshs) 57,350 62,743 66,376 77,098 84,624

Population growth rate (%) 3 2.9 3.1 2.6 3.0

Annual Average rate (%) 16.27 9.24 3.96 14.02 9.4

91 days Treasury Bill rates (nominal) % 8.5 6.82 2.3 17.9 8.3

Exchange rate (Kshs/USD) 69.2 77.35 79.23 88.81 84.5

Public Debt as % of GDP 48.5 48.1 44.5 48.5 45.2

Public external debt as % of GDP 24.7 21.5 20.6 26.48 21.7*

Public domestic debt as % of GDP 20.6 23.5 22.2 27.78 26.0*Source: Economic Survey 2013, CBK Monthly Economic Reviews* Figures are for period July 2012 up to end of March 2013

Source: Economic Survey 2013

graph 1


shortfall of Ksh 21.3 billion2. The category that had the best performance rate against the targeted revenue collection for the period July 2012 to March 2013 was revenue raised from external grants, 89.4% followed closely by total domestic borrowing and repayment, 89.2% and total tax income a distant third, 83.3%. The lowest performing categories were revenues raised from external loan and total non tax income. Revenue shortfall was mainly attributed to3 depressed business activity observed during the election period, decline in oil volumes affecting petroleum taxes, subdued growth in trade taxes and shift in consumption patterns for beer and cigarettes which affected domestic excise duty. Given the revenue shortfall there are chances that implementation of the budget may be slowed down, and if the government opts for domestic borrowing to plug in the deficit, then this may result to high interest rates.

1.4 Review of Budget 2012/13Reports indicated that budget implementation remains a major challenge4. For the period July 2012 to March 2013, the Office of the Controller of Budget released Ksh 738.2b for both recurrent and development expenditure, representing 58.9% of the targeted revised budget for that period. Budget implementation rate for this period was lower than in the same period in the previous year by 7.5%, with this slow-down in disbursement attributed to shortfall in revenue collection5. Sectoral analysis shows that in the same period, the education sector at 72.5% had absorption rate, and in contrast, Energy, Infrastructure and ICT had the lowest at 51.8%. Equally an analysis by the World Bank, based on the National Treasury data indicated that by December 2012 that National Security sector had 100% utilization rate followed by the education sector at 93% whereas the Energy, Infrastructure and ICT and the Environment Protection, Water and Housing had the lowest utilization rate of 45% and 39% respectively. To address this issue and given underperforming revenue, the government rationalized expenditure by cutting recurrent spending and allowed development spending to increase. It is important to note that the overall rate of absorption has remained the same at 72%6, with recurrent expenditure absorption

capacity standing at 90.2% (higher than 84% as at the end of June 2012) and the development expenditure at 45.8% (compared to 55% at the end of June 2012)7.

This implies that under spending may affect timely implementation of planned projects as per the budget (especially capital ones) and hence poor public service delivery. How the government addresses the recurrent challenges including procurement planning and some spending entities, that lead to poor budget implementation, and hinder meeting donor conditionalities will determine the extent of achievement for Budget 2013/14.

2.0FiScalPolicYThe 2012 medium term fiscal framework according to the Budget Policy Statement 2012, aimed at continuing to support growth and employment despite the economic challenges. To achieve this, the government set out to narrow the gap between spending and revenue but focus investment in infrastructure and implementation of the constitution with measures to ensure debt sustainability in the medium and long term. As mentioned by the Cabinet Secretary for National Treasury, the targeted revenue is predicated on the projected economic growth, the on-going reforms in tax and customs administration and new tax measures and therefore how to ensure that economic growth is sustained is imperative. Indeed the following section interrogates this further and indicates financing sources both local and external, as well as the overall fiscal implications.

2.1 Revenue analysisThe Cabinet Secretary for the National Treasury targets to collect total revenue of Kshs 1027.2 billion in 2013/14, representing a nominal increase of 7.5% over the budget estimates for 2012/13. Total revenue projected for 2013/14 accounts for 24.7% of GDP. This comprises Kshs 870.5 billion of Ordinary Revenue and Kshs 79.3 billion of Appropriation-in-Aid. Table 2 overleaf gives a summary of overall Budget Estimates 2013/14 relative to estimates of Budget 2012/13.

2 RoK (April 2013) Third Quarter 2012/2013 Budget Implementation Review Report, Office of the Controller of Budget.3 Ibid4 Ibid and World Bank (June 2013) Kenya Economic Update: Time to Shift Gears –Accelerating Growth and Poverty Reduction in the New Kenya, Edition No. 85 Ibid6 World Bank (June 2013)7 World Bank (June 2013)

Budget Highlights 2013/20145

Table 2: overall Budget Estimates2013/14 (Ksh Billion)**

Forecast 2012/13

Forecast 2013/14

% Change

r evenue

Total Revenues 954.7 1027.2 7.6

Ordinary Revenue 870.5 961.3 9.4

Total Receipts (incl. of grants & loans) 1180.1 1,284 8.1

Expenditure

Total Discretionary expenditure

National Government **** 1010.5

Parliamentary Service Commission 16.9 19 12.4

Judiciary 15.4 16.1 4.5

Counties’ transfer *** 210

Contingency Fund 5 5 0.0

Non Discretionary expenditure

Consolidated Fund Service 346 380.3 9.9

Total overall expenditure 1459.9 1640.9 12.4

Financing:

Overall before grants and loans -505.2 -614 21.5

Total external grants 56.2 67.4 19.9

Total external loans 169.3 187.6 10.8

-279.7 -356.9* 27.6

d

Net domestic borrowing 106.7 106.7 0

Domestic roll over 170.5 126.1 -26.0

Sovereign bond 123.9

Debt swap 0.5

Cash adjustment (LATF) 2

Total 279.68 356.7* 27.5Source: Budget Statement 2013

• Domestic resources: The main source of government resources is tax revenue which includes income tax and tax on goods and services, comprising 58.6% of estimated Budget 2013/14 a drop from 66.2% in 2012/13. The other sources of domestic resources including money obtained from user fees charged for government offered services including court fees, licenses, passport application fees and other user charges comprise 4.3% of Budget 2013/14, whereas funds estimated

through Treasury Bills/Bonds comprise 6.5%

down from 7.3% in 2012/13, denoting low uptake of government securities. Given the decline in government revenue, Budget 2013/14 is anticipated

81.1%, a slight reduction from 84.5% in the previous

• Composition of ordinary revenue: For the last 5 years (2008/09-2012/13) the primary sources of revenue have remained static, income tax averages about 35%, as the largest source of ordinary revenue, followed by VAT at an average of 25%, excise duty 13%, import duty at about 11% and non-tax revenue (Appropriation-in-Aid) at about 7%. For the period 2013/14, the picture is no different but its important to note that of the 2% total ordinary revenue expected to come from investment income, there was a drop in projections for VAT and an increase for income tax projection. Reports show that government revenue as a share of GDP has declined in the recent past and this is attributed to weaker VAT due to delays by Parliament to approve the new VAT Bill, on which targets were based and low excise duty collection as aforementioned. (see pie chart)

• External resources: In the budget, external funding is usually channeled via the development budget. Donor assistance comes in the form of grants and loans disbursed either as revenue or Appropriation-in-Aid. Of the total Kshs 255 billion (15.5% of Budget 2013/14) expected from both bilateral and multilateral donor countries in 2013/14, external loans will account for 73.6% and external grants 26.4%. In comparison to 2012/13, there was a decline in external loans as a share of the total budget from 11.6% to 11.4% and for external grants as share of the budget from 4.5% to 4.1% in the same period.

Total Projected Revenue 2013/14

Import Duty 10%

Excise Duty 12%

Value Added Tax 22%Income Tax

45%

Other Tax 3%

A-in-A 6%Investment Income 2%


Sector budget analysis show the bulk of Budget 2013/14 is proposed to go to the Education Sector, 27%, followed by the Energy, Infrastructure and ICT (22%) and Public Administration and International Relations at 12% comes third. Over a third (35%) of Budget 2013/14 is proposed to be channeled to the three social sectors, namely: the Education, Health and Social Protection, Culture and Recreation sectors. This shows largely that budgetary allocation is in line with sector priorities as outlined in the Budget Policy Statement 2013. Although budgetary allocation does not necessarily translate to spending it is correct to conclude that with the exception of the ARD that budget allocation is consistent to priority areas as outlined in the Vision 2030 and the MTP 2008-2012.

It is commendable to note that estimates of recurrent and development expenditure of the National Government has adopted the long overdue programme-based budgeting, but the other two arms of government, the Judiciary and Parliamentary Service Commission estimates of expenditure were presented in line item budgeting format. Table 3 captures a summary of recurrent and development expenditure by votes for 2013/14. Despite the lack of information for indicative performance of Budget 2012/13 in the current estimates of expenditure for the three arms of government - making it difficult to make comparisons - we nevertheless made an attempt to compare, using previous estimates (2012/13) and re-organized and matched the current collapsed ministries with the former list of ministries.

• Budget deficit: From table 1, overall budget deficit increased from Kshs 505.2 billion in 2012/13 to Kshs 614 billion whereas after deducting loans and grants the deficit reduces further to Kshs 279.8 billion and Kshs 356.9 billion respectively. The deficit financing options for 2013/14 as mentioned by the Cabinet Secretary include net domestic borrowing of Kshs 106.7 billion, domestic debt rollover of Kshs 126.1 billion and through issuance of a sovereign bond of Kshs 123.8 billion. It seems these proposals are in line with government policy to shift from short term debt to long term concessionary loans and also safeguard the domestic market from unstable interest rates.

2.2 Expenditure analysisThe total estimated overall expenditure for 2013/14 is Kshs 1,640.9 billion, representing a nominal increase of 12.4% from the previous year’s budget. The estimated budget for 2013/14 relative to the size of the economy (GDP) is approximately 47.7%.8 The budget has been expansionary over the last five years and the 2013/14 is no different. In fact, it is significantly above the figure provided for by the Budget Policy Statement 2013 expenditure forecasts. Despite expenditure pressure to cater for transition to county governments, salary demand from health, education and police personnel, security interventions among other issues, the question of how to contain expenditure from spiraling and its attendant effects budget deficit and public debt sustainability is paramount. The pie chart below shows an illustration of how the budget, Kshs 1,640.9 billion will be split among the three arms of government, transfers to the counties and the portions for Consolidated Fund Services, the Equalization Fund and the Contingency Fund.

8 Using KNBS GDP for 2012 (GDP for 2012/13

HowistheKsh1,640.9BnSplit?


Table3:SummaryofEstimates2012/2013(KshsMillion)

Vote DetailsofVote

Recurrent Development Total

%changeofTotalExpend.from12/13to

13/14

%shareofTotalBudget

2013/14GrossExpend.2012/2013

GrossEstimates2013/2014

GrossExpend.2012/2013


GrossExpend.2012/2013


101 ThePresidency 2,603.4 3,094.4 1,979.6 990.3 4,583.0 4,084.7 (10.87) 0.2

102

Min.ofInteriorandCoordinationofNationalgovernment 88,576.5 98,603.8 12,221.7 10,343.6 100,798.2 108,947.4 8.08 6.6

103*Min.ofDevolutionandPlanning 36,535.8 16,512.8 44,456.6 68,349.8 80,992.4 84,862.6 4.78 5.2

104 Min.ofDefense 70,040.4 60,444.7 - - 70,040.4 60,444.7 (13.70) 3.7

105 Min.ofForeignAffairs 9,860.6 9,924.5 727.0 293.9 10,587.6 10,218.4 (3.49) 0.6

106 Min.ofEducation 86,994.8 97,101.8 25,530.1 33,457.3 112,524.9 130,559.1 16.03 8.0

107 TheNationalTreasury 21,147.3 25,967.2 39,821.7 43,053.3 60,969.0 69,020.5 13.21 4.2

108 Min.ofHealth 53,527.4 19,811.2 31,501.5 14,936.5 85,028.9 34,747.7 (59.13) 2.1

109Min.ofTransportandInfrastructure 32,314.5 22,798.8 110,108.8 102,924.3 142,423.3 125,723.1 (11.73) 7.7

110Min.ofEnvironment,WaterandNaturalResources 16,890.4 12,443.7 50,469.8 36,111.7 67,360.2 48,555.4 (27.92) 3.0

111Min.ofLand,HousingandUrbanDevelopment 7,189.1 4,179.8 13,700.0 11,662.5 20,889.1 15,842.3 (24.16) 1.0

112Min.ofInformationandCommunication 2,503.5 2,226.5 4,792.1 7,346.1 7,295.6 9,572.6 31.21 0.6

113**Min.ofSports,CultureandArts 8,374.9 2,710.8 5,324.2 681.1 13,699.1 3,391.9 (75.24) 0.2

114***Min.ofLabour,SocialSecurityandServices 1,870.0 1,594.3 546.0 674.4 2,416.0 2,268.7 (6.10) 0.1

115 Min.ofEnergy 2,773.4 2,413.2 77,174.2 76,089.0 79,947.6 78,502.2 (1.81) 4.8

116Min.ofAgriculture,LivestockandFisheries 15,241.1 9,839.8 19,502.5 29,057.8 34,743.6 38,897.6 11.96 2.4

117Min.ofIndustrializationandEnterprise 3,573.0 2,830.3 3,844.2 3,035.2 7,417.2 5,865.5 (20.92) 0.4

118Min.ofEastAfricanAffairs,CommerceandTourism 5,351.2 4,698.7 1,922.9 1,308.9 7,274.1 6,007.6 (17.41) 0.4

119 Min.ofMining - 190.1 - 384.9 - 575.0 #DIV/0! 0.0

120OfficeoftheAttorneyGeneralandDeptofJustice 3,815.2 2,458.6 1,129.0 651.7 4,944.2 3,110.3 (37.09) 0.2

121EthicandAnti-CorruptionCommission 1,657.0 1,294.2 222.0 60.0 1,879.0 1,354.2 (27.93) 0.1

122NationalSecurityIntelligenceService 13,414.0 13,980.0 - 13,414.0 13,980.0 4.22 0.9

123DirectorateofPublicProsecutions 1,007.8 1,111.8 80.0 148.0 1,087.8 1,259.8 15.81 0.1

124

CommissionfortheImplementationoftheConstitution 531.5 399.4 - 531.5 399.4 (24.85) 0.0

125 RegistrarofPoliticalParties 430.0 344.7 - 430.0 344.7 (19.84) 0.0

126 WitnessProtectionAgency 235.0 196.8 - 235.0 196.8 (16.26) 0.0


201

KenyaNationalHumanRightsandEqualityCommission 263.6 253.2 - 263.6 253.2 (3.95) 0.0

203IndependentElectoralandBoundariesCommission 17,579.5 3,312.7 482.5 17,579.5 3,795.2 (78.41) 0.2

206TheCommissiononRevenueAllocation 485.0 321.4 - 485.0 321.4 (33.73) 0.0

207 PublicServiceCommission 658.8 570.6 80.0 200.0 738.8 770.6 4.30 0.0

208SalariesandRemunerationCommission 510.0 375.4 - 510.0 375.4 (26.39) 0.0

209TheTeachersServiceCommission 119,837.0 143,104.3 - 119,837.0 143,104.3 19.42 8.7

210TheNationalPoliceServiceCommission 300.0 244.8 - 300.0 244.8 (18.40) 0.0

211 AuditorGeneral 1,672.0 1,892.0 500.0 1,672.0 2,392.0 43.06 0.1

212 ControllerofBudget 681.0 422.8 - 681.0 422.8 (37.91) 0.0

213ThecommissiononAdministrativeofJustice 350.0 298.5 - 350.0 298.5 (14.71) 0.0

214NationalGenderanEqualityCommission 239.5 210.6 - 239.5 210.6 (12.07) 0.0

215IndependentPoliceOversightAuthority - 153.9 - - - 153.9 #DIV/0! 0.0

xx OfficeofPrimeMinister 1,746.4 739.0 2,485.4 - (100.00) 0.0

- - - 0.0

OTHERARMSOFGOVT 0.0

TheJudiciary 12,500.0 16,100.0 2,860.0 15,360.0 16,100.0 1.0

NationalAssembly - 0.0

ParliamentaryServiceCommission 13,904.6 19,000.0 2,950.0 16,854.6 19,000.0 1.2

0.0

0.0

TotalDiscretionaryExpenditure 657,185.2 603,432.0 451,682.9 442,742.8 1,108,868.1 1,046,174.8 (5.65) 63.7

COUNTYGOVERNMENT 0.0

Transfertocounties 210,000 210,000.0 12.8

Contingency 5,000 5,000 5,000 5,000.0 0.3

AddConsolidatedFundServices(CFS) 345,987.8 380,300 345,987.8 380,300.0 23.2

0.0

TOTALEXPENDITUREOUTLAY 1,008,173 1,198,732 451,682.9 442,742.8 1,459,855.9 1,641,474.8 100.0

Developmentvoteforasashareoftotalexpenditureoutlays2013/2014(%)

Source: Printed Estimates of Expenditure 2012/13 and 2013/14 and own calculations

noTE

103TheMin.ofdevolution&planninghassomeresponsibilitiesthatwerepreviouslyingenderandyouthministries.However,onlytheMin.ofGenderwasincludedinthesummation.Itmaynotgiveagoodcomparisonduetothis

113TheMin.OfSports,cultureisamergingofpreviouslyyouthandsportstogetherwithNationalHeritageandCulture.It’showeverimportanttonotethatsomepreviousallocationsandfunctionshavebeentransferredtoMin.ofdevolution

114TheMin.ofLabour,SocialSecurityandServiceshasthesomeresponsibilitiesthatwerepreviouslyinMin.Ofgender.Howeverforthepurposesofthisexercise,theallocationindicatedcoversonlywhatwasinlabourtoavoiddoublecountingas2013/14genderbudgetwasfactoredinthe103vote


From table 3, the estimated recurrent expenditure is Kshs 1,193 billion inclusive of Consolidated Funds Services (CFS) of Kshs 380.3 billion whereas development expenditure stands at Kshs 447.9 billion. Unlike in 2012/13, the development expenditure as a share of estimated Budget 2013/14 declined to 27.3% from 31.3%. The Public Finance Management Act, 2012 stipulates that the National Treasury shall manage the national government public finances in accordance with the principles of responsibility. Section 15 (2) (a) of this Act requires that the national and county governments allocate a minimum of 30% of their budgets over the medium to development expenditure. As much as the law requires that these two levels of government meet this 30% threshold over the medium term, reversing on this in 2013/14 after meeting it in last three prior years is of concern.

2.3 Consolidated Fund ServicesThe Consolidated Fund is established by article 206 (1) of the Constitution of Kenya 2010 with a main purpose to hold “all money raised or received by the National Government”, with limited exceptions. The centrality of the Consolidated Fund is further emphasized by the article 207 (4) that specifically requires the approval of the Controller of Budget for withdrawals to issue from the Consolidated Fund. Thus the Consolidated Fund stands as the primary payment account for the purposes of budget policy in Kenya. A number of payments that are clearly specified are known as the Consolidated Fund Services (CFS) owing to the fact that they represent the “first charge” on all public money held in the consolidated fund. The implication is that there is both a statutory and constitutional requirement to ensure that these payments are prioritized in national expenditure.

Specifically, the items that have first claim on public resources in Kenya are; the remuneration for constitutional office holders, the national debt, pensions of retired public servants and subscriptions to international organizations. Given the priority that must be accorded to these payments, they represent non-discretionary expenditure and thereby not subject to direct policy challenge. For that same reason, the growth and overall quantum of the Consolidated Fund Services (CFS) have enormous implication for fiscal space available for government spending.

Table4:TrendsinnominalchangesintheconsolidatedFundServices

2010/11 2011/12 2012/13 2013/14

PublicDebt 157.2 175.4 303.6 337.3

Pensions 26.7 29.3 37.8 38.2

Salaries&Allowances 2.1 3.4 3.2 3.4

SubscriptionstoInternationalOrgs 0.05 0.05 0.05 0

GuaranteedDebt 1.4 1.5 1.3 1.4

Total 187.5 209.5 346 380.3 Source: Estimate of Recurrent and Development Expenditure 2013/14

The composition of the CFS shows that redemption of public debt and pensions together comprise the bulk of the total expenditure. In the four-year period displayed in table 4 above, the Public Debt and pensions have constituted between 95-98% of the CFS. Essentially therefore, in the medium-term the CFS payments are disproportionately affected by any changes in these variables. Changes in CFS expenditure have been growing over the last five years, with the portion dedicated to the public debt showing the largest nominal increases too. These major liabilities in the CFS are sources of expenditure risks because they constituted a large portion of non-discretionary expenditure while also being signals to future flexibility in spending.

Debt as an Economic Policy Imperative Taking together the issue of the large redemption and the domestic debt rollover of Kshs. 126 Billion shows that debt is a permanent fixture in CFS and will continue to adversely affect flexibility in spending. On the other hand, the allocation to pensions has constituted 9-10% of the CFS and is expected to grow because of the expectation that a substantial number of public sector employees will be in retirement in the coming decade. Management of the debt through regular payments and ensuring competitive interest rates is now essential. Long-term growth is required because the CFS has continued to command 23% of total expenditure for a long time.

The structure of the CFS is also pertinent for overall budget policy because of the current discussion on public sector wage policy. A rational and fair wage policy in the public sector is also important at this point because of the observed effects on flexibility in spending and the overall weight of debt and pensions in spending decisions. The affordability of the wages negotiated with all public sector professionals is not only a constitutional requirement but also necessary


because the wages are in turn directly related to the pensions that will be paid upon retirement. At the same time, a consistently large deficit is a pointer to more debt that will exert more claims on future spending through obligations in the form of debt redemption.

In addition to managing waste and cleaning up procurement, the Institute of Economic Affairs (IEA-Kenya) considers that flexibility in budget must also be assured through upfront management of the debt and pensions liabilities.

2.4 Fiscal Implications (Revenue and expenditure issues)This section raises issues that the IEA-Kenya has noted with regard to broad revenue mobilisation measures and in the use and management of expenditure as far of Budget 2013/14 is concerned.

• Observing fiscal responsibility principles: The government’s fiscal objective is to contain non-priority and non-productive recurrent expenditure with the principal aim of managing the budget deficit and exercising prudent borrowing to ensure debt sustainability. In order to meet these objectives, the national government should ensure that its observes the fiscal responsibility principles with regard to meeting the 30% threshold for development expenditure even as much as the PFM Act, 2012 says that this should be met over the medium term. In addition, the National Treasury should publish the necessary regulations that will define the thresholds for public officers’ wages as a percentage of national revenue, public debt borrowing and reasonable tax rates.

• Realistic revenue targets: The projected revenue is predicated on the projected economic growth of 5.8% in 2013, scaled up on-going reforms in tax policy and administrative measures. Besides the Cabinet Secretary plans to seal tax collection loopholes in order to ensure sustainability in domestic resource mobilization. It is clear that KRA has experienced challenges in realizing the revenue targets over the last five years and without clear measures to resolve legislative challenges such as delay in passing of VAT Bill, expanding the tax base and improving tax compliance, hence the government is likely to continue to experience budget shortfall in 2013/14.

• The Cabinet Secretary mentioned that expenditure will be rationalized and focused on priority areas as well as continue with austerity measures, yet the total budgeted expenditure 2013/14 as a share of GDP

is about 47%. Implementation of this huge budget may pose some challenges as outlined below:

(i) In order to create fiscal space and save money, members of parliament should be keen to ensure across the board reductions in expenditure such as purchase of vehicles unless really necessary, deferment of trainings, reduction on purchase of furniture, stationery, computers and foreign travels among other items.

(ii) IEA-Kenya notes that one of the ways of reducing the total cost of government is to reduce transfers to state agencies by reforming the law on creation of state agencies as well as abolishing those that are not efficient and also weaning commercial viable entities from transfers.

(iii) Despite the improved priority given to the infrastructural investment, execution rate for development expenditure remains a challenge and is likely to affect service delivery. The Cabinet Secretary should have reported on what measures have been put in place to address associated procurement process as one of the causes of low execution as well as the impact of other initiatives such as the Electronic Projects Monitoring System (e-Pro MIS) initiated in 2010/11 to address low budget implementation.

3.0SEcTorBudgETanalYSiS3.1 Promotion of Private Sector Growth and Employment CreationThe Cabinet Secretary in his budget speech outlined three main economic challenges that the country faces:1. Elevating the economy to a higher and sustainable

growth path;2. Creating decent jobs;3. Significantly reducing poverty while preserving

macroeconomic stability.

He stated that these challenges would be addressed by pursuing the following budgetary goals:

Proposal 1: Accelerate growth through improving productivity and competitiveness and opening up the economy to investment and trade opportunities to boost exports.

While enhancing productivity and competitiveness is an important step in ensuring that the economy grows, there are no specific


proposals/regulations that will result in this. Unfortunately, productivity-enhancing proposals are only concentrated in the agricultural sector and even then, they do not target higher labour productivity for the labour-intense sector.

Proposal 2: Support for small and medium enterprises through targeted financial support, skills development, and access to market through a revamped procurement system.

This proposal responds very well to the needs of SMEs. However, when considering the Procurement quota it is important to reflect on the challenges faced by the previous incentive of 10% so that lessons maybe incorporated in the design of the new incentive scheme. Market access is also very crucial to the growth and development of SMEs. It’s therefore important to consider issues of standardization and quality of output especially for an export-led Market access strategy.

Proposal 3: Infrastructure investment programmes for roads, railways, pipelines, ports and energy, specifically, • 97.9 Billion for road expansion, upgrading and

rehabilitation. • 22 Billion for construction of two-track railway line

from Mombasa to Kisumu, thereby reducing freight costs by 79%

• 78.5 Billion for scaling up energy investments in reliable and affordable energy.- 12.5 Billion for geothermal development - 23.8 Billion is for enhancing power transmission- 3.7 Billion for construction of the first three

berths and associated infrastructure of the LAPSET project.

The focus on infrastructure is very vital to the growth of national as well as regional businesses. However the choice of funding the railway system through an import levy should be reconsidered, because it will result in an immediate impact on prices of imported goods, thereby worsening the upward pressure on prices already experienced in the country. IEA-Kenya suggests the government explores issuing sovereign bonds especially for major infrastructural projects such as building a railway.

Proposal 4: Creating a business climate that encourages innovation, investment, and growth, specifically:-• Business registration reforms: making it faster and

easier to register a business• Obtaining construction and business permits

to be made easier in coordination with county governments

• Reforming the tax system enhance compliance• Biashara Kenya Bill: one-stop-shop to SMEs

covering entire business chain

Financial Sector Reforms: The Cabinet Secretary for the National Treasury proposed far reaching changes in the financial sector. Under the proposed changes, the Insurance Act and the Retirement Benefits Act will be overhauled and separate legislations enacted. There will be one Act of Parliament which will oversee the entire insurance industry and the other will drive regulations of the retirement benefits industry. This will help to strengthen the regulatory framework and ensure a stable and growing financial sector and align the sector to the best international practices and the Constitution. The changes being effected in the financial sector are steps towards establishing a single authority to manage the sector as is done in advanced countries.

The Insurance Act requires that not less than one third of the paid up capital of Insurance companies to be owned by Kenyans and in case of the brokerage firms, at least 60% of the paid up capital be owned up by Kenyans. The amendment of the insurance bill will see the ownership of insurance and brokerage firms across the East African Region and this is the spirit of the implementation of the East Africa Community Common Market protocol. Equally, in the spirit of deepening the penetration of the insurance market in the region, the Insurance Bill will seek to remove restriction on foreign ownership and registration of agents with a view of encouraging multinational banks and businesses across the East African Region.

3.2 Deepening Regional Integration

As a member of the East African Community (EAC) Kenya will yield a much greater benefit not only to its populace, but for the entire EAC region if it enhances regional integration through interdependence approach and by pooling of resources. This is the message that the Cabinet Secretary passed in his Budget Statement 2013/14. One of the mandates of the Ministry of East African Affairs, Commerce and Tourism9 is to facilitate, coordinate, oversee, monitor and evaluate the implementation of EAC policies, projects and programmes for effective integration.

Trends in allocation to the former ministries of East African Community and Ministry of Trade, 2011/12 – 2013/14, now converted into Programmes, namely: Co-ordination of EAC Affairs in Kenya and Trade Development and Investment (TD&I) respectively, is captured in the table 5 overleaf.

9 The Ministry is a merger of the former ministries of East African Af-fairs and Regional Cooperation, Trade, and Tourism into one ministry.


Table5:Trendallocation

2010/11 2011/12 2012/13 2013/14

MinistryofEastAfricanCommunity 1,028.4 1,329.9 1,330.1 1,374.7

MinistryofTrade 2,411.8 2,475.2 3,162.7 2,717.8Source:VariousIssuesofEstimateofRecurrentExpenditure

Overall, there is a nominal increase of allocations over the period 2010/11 to 2013/14 for the former Ministry of East African Community, denoting the commitment given to this Programme unlike in the TD&I Programme whose allocation is expected to reduce considerably between 2012/13 and 2013/14. This scenario has implications to both the country and the region. In addition, it should be noted that one of the successes that can be realized as a result of integration is growth of trade volumes either within the EAC or with other trading blocks and thus these Programmes must complement each other.

Table6:ProgrammesandallocationswithintheMinistryforFY2013/14

Ministry of East African Affairs, Commerce and Tourism

Programmes grossExpenditurePercentageofMinistryBudget

TradeDevelopment&Investment 2,717,815,657 45.2%

Co-ordinationofEastAfricanCommunityAffairsinKenya 1,374,688,934 22.9%

TourismDevelopment&Marketing 1,915,028,310 31.9%

TotalMinistryBudget 6,007,532,901 100%Source:EstimateofRecurrentandDevelopmentExpenditure2013/14

The estimated budget for the Ministry is Kshs 6 Billion. Of this, TD&I get Kshs 2.7 Billion while Coordination of East African Affairs in Kenya gets Kshs 1.374 Billion which translates to 45.2% and 22.9% of the dockets total allocation respectively. According to the General Economic, Commercial and Labour Affairs (GECLA) Sector report 2012 (under which this ministry falls), one of the strategic goals is to fast track regional integration within the EAC, Common Market of East and Southern Africa (COMESA) and Southern Africa Development Community (SADC) regions, with one of its strategic objectives being to co-ordinate regional integration in the EAC, COMESA and the larger EAC-COMESA-SADC Tripartite Free Trade Area (FTA)

Areas to Spur Regional Integration and TradeThe Cabinet Secretary proposed allocation of Kshs 1.37 Billion for regional integration, expected to finance

programmes including creation of an enabling business and investment environment, tourism development, setting up of the one-stop border post in designated locations, and enhancing programmes that will lead to scrapping of the Non-Tariff Barriers that have been a huge hinderance to trade within the region. This is a welcome move that will not only boost trade and foreign exchange to member states, but also give rise to better living standards. It is important to note that the East African Legislative Assembly (EALA) passed ‘The One-Stop-Border-Posts Bill, 2012’ in April 2013. The bill makes it mandatory for member states of the East African Community to construct special one-stop border posts (OSBPs) in a bid to improve trade flow within the region.

The amendment proposed by the minister in the Capital markets Act to provide for the issuance of regional fixed income securities is expected to go a long way to encourage cross listing of companies in the region and to spur investment in different markets and sectors by different people, thereby leading to a growth in regional integration initiatives.

The Cabinet Secretary stated that the so-called “Uganda list” has been reduced from 138 to 49. This is envisaged to aid manufacturers who will be at an advantage position and enable a favorable competitive environment.

Infrastructure for Regional Development In terms of infrastructure development for regional expansion and promotion of trade, there are initiatives including expansion of the road networks linking the countries in the EAC so as to create opportunities for business expansion of trade and trade opportunities across the region. To realize this, there are a number of development partners who have undertaken to finance projects in infrastructure with regional dimensions, and energy, specifically to tap power from Ethiopia and Democratic Republic of Congo. The costs associated with this are estimated to be Ksh. 289 Million for TD & I for recurrent expenditure and Ksh. 39.7 Million for development expenditure.

Also, there are plans to construct a railway line to transport goods from the port of Mombasa to Kisumu. This is anticipated to reduce the cost of doing business, especially in the delivery of both raw materials to industry as well as finished products to consumers, both at manufacturing and consumer levels. The trickle down effects will be felt on the member countries populace at large.


3.3 Investment in National SecurityNational defense and the use of the national defense services is a function of the national government as provided for in the Fourth Schedule of the Constitution of Kenya 2010. Similarly, the Constitution notes that police services including the setting of standards of recruitment, training of police, criminal law and correctional services as the other key function assigned to the national government.

Provision of safety, law and order is a constitutional requirement necessary for national development and prosperity of the country as one of the priorities under Governance, Justice, Law and Order Sector identified in the BPS 2013. Its importance as a pillar for economic growth and one that contributes to the improvement of quality of life for Kenya, and perhaps the reason why the Cabinet Secretary for the National Treasury reiterated the need to invest in provision of this service. With regard to crime, the Economic Survey 2013 shows that the number of crimes reported to the Police increased by 2.8% from 75, 733 in 2011 to 77,852 in 2012. The report notes that overall, the number of offenders went up from 82,052 in 2011 to 83,853 in 2012 with male, 83% accounting for the majority of the offenders. One of the reform agendas in GJLOS was the establishment of the National Police Service Commission as provided for in the constitution whose budgetary allocation reduced from Ksh 300 million in 2012/13 to Ksh 244.8 million in 2013/14, a nominal reduction by 18.4%.

Police services is one of the primary Programmes under the Ministry of Interior and Co-ordination of National Government whose objectives is to provide protection to both life and property, security reforms, detection and prevention of crime and community policing. The Cabinet Secretary proposed to allocate Ksh 67 billion for the National Police Services which is supposed to cater for a number of issues towards meeting the objective of this Programme, namely: • Kshs 4 billion for purchase of security equipment

• Kshs 4.5 billion for enhanced security operations throughout the country

• Kshs 1.5 billion for enhanced crime research and investigation

• Kshs 3 billion for leasing 1,200 motor vehicles annually to improve police response to reported crime

• Kshs 1.2 billion for a rapid development of 2,000 housing units through the National Housing Corporation.

It is important to note that the estimates of Recurrent and Development Expenditure show that the total estimated allocation to Police is different from what the Cabinet Secretary read during his budget statement. The amount is Ksh 63.9 billion, accounting for 58.6% of the Ministry’s total budget and hence the largest programme in the Ministry. Since 2010/11, allocation to the Ministry increased from Kshs 52.2 billion to the estimated allocation of Ksh 108.95% to the current reconstituted Ministry. Further analysis of the Ministry’s proposed budget shows that out of the total recurrent expenditure for Police Services, 65.4% is committed to compensation of employees’, majority of whom are police officers.

The Police Department had a total workforce of 42,586 officers in 2012 which was an increase of 7.2% from the number recorded in 2011. The table below shows the trend of police and correctional services officers for the period 2010-2012. Interestingly the proportion of female police officers as a percentage of total police force on average 10% is quite low and as such, perhaps there is need to recruit more female police officers.

While majority of spending in police service recurrent expenditure is on personnel emoluments, 65.4% there is still a shortage of police officers as the ratio of police10 to population of 1:550 by 2009 was short of the UN recommended ratio of 1:450 and despite improvements, we are still short of the target. Besides there is need to invest more in the recruitment of

10 Including Administration Police and total population is 40.7 million according to Economic Survey 2013 http://www.standardmedia.co.ke/?articleID=1144016735&story_title=Police-reforms-pointless-when-population-is-not-reformed-

Table7:numberofPoliceofficers,PrisonandProbationofficersbySex2010-2012

officers

2010 2011 2012

Total %Male %Female Total %Male %Female Total %Male %Female

PoliceOfficers 40,708 90% 10% 39,717 91% 9% 42,586 89% 11%

PrisonOfficers 19,993 85% 15% 19,737 85% 15% 19,878 84% 16%

ProbationOfficers 624 63% 38% 863 57% 43% 624 56% 44%Source: Economic Survey 2013


female police officers as a way of advancing gender equality but also to have engendered community policing post and functional gender desks. Further, it is expected that the specific allocations to purchase security equipment, lease vehicles and enhanced crime research and investigation will go a long way to enhance police mobility in combating crime and improve crime investigation. However to ensure sustainability in achieving these expected results and in the medium to long term secure living and working environment and reduce cost of doing business, there is need for further reallocation of the Police Service budget to improve it from the estimated 23% for use of goods and services.

3.4 Promoting Food Security and Rural DevelopmentAccording to the Economic Survey 2013, agriculture and fisheries continue to be the major contributor to the Kenyan economy, accounting for 26.4% of the Growth Domestic Product (GDP) and providing 18% and 60% of the formal and total employment respectively. Agriculture-led growth has a critical role with regard to poverty reduction and job creation as it has been shown to be twice as effective at lifting people out of poverty as industry-led growth. The sector grew by 3.8% in 2012 against 1.5% in 2011, which is encouraging and confirms its return on a higher growth path (Economic Survey 2013). However it remains far below the growth rate of 2010 that peaked at 6.8%. These enhanced performances result from high rainfall in some regions yielding to a significant increase in total output production of both agricultural products and livestock and from an average increase of output prices by 12.2%.

In the 2013/2014 Budget, the government emphasized its commitment to improve food security by modernizing and by investing in the agricultural sector. From this perspective, it sets up a large programme aiming at enhancing productivity in order to transform Kenyan agriculture into a market-oriented economy. In this respect, Kshs 8 billion is proposed to be allocated to implement the on-going irrigation projects and Kshs 3.6 billion will be granted to the Phase 1 of the 1 million acres irrigation project in Galana, which is anticipated to lead to the creation of 3 million jobs. In addition, Ksh 2 billion is planned to be set-aside for the Agri-Business Fund in order to improve farmer’s access to credit thus supporting private investment in the agricultural sector. According to the Cabinet Secretary, there are plans to scale this Fund to Ksh 20 billion by the fourth year for wider access by interested farmers. A further Kshs 0.3 billion will be allocated to

machine and equipment purchase and Ksh 1.5 billion will be used to repair roads destroyed by rainfall in rural areas.

For the period 2013/2014 the Agricultural and Rural Development (ARD) sector will be provided with Kshs 38.897 billion at the national level accounting for 2.3% of the total national budget. 75% of the budget will be directed towards capital expenditure, mainly through the Irrigation and Drainage Development Programme. However, it should be noted that some functions previously under the responsibility of the national government now have been devolved to the counties, explaining the significant reduction of the share of the total national budget allocated to the ARD sector (2.3% in 2013/2014 against 4.8% in 2012/2013). Indeed, the extension service programme, which accounted for about 66% of the total recurrent expenditure of the Ministry of Agriculture, is now a function and responsibility of the county governments. Following the ARD sector Medium Term Expenditure Framework (MTEF) 2013/14-2015/16, the total ARD sector should be provided with Kshs 54.410 billion for the period 2013/2014, which would imply counties participating to the amount of Ksh 15.51312 billion. While the current expenditure in the ARD sector greatly remains below the Maputo Declaration benchmark of 10% of the total national budget, Parliament and the civil society have to ensure that counties fill their commitment regarding agricultural spending to achieve vision 2030 objectives.

Irrigation has a critical role in farmers’ living condition improvement process, especially because it allows the latter not to rely heavily on rain-fed agriculture, which can be unreliable due to its unpredictability. In 2012, an additional 771 hectares of land was placed under irrigation raising the total number of farmers operating on irrigated lands by 36% to attain 21, 464 individuals. The total output of paddies using irrigation schemes increased by 4% between 2011 and 2012 to achieve 83, 572 tonnes. The extension service programme must be pursued and improved by increasing the number of farmers reached by the program and by ensuring that the transition to a higher participation of the private sector in the provision of services is not to the detriment of the most vulnerable households. The macroeconomic policy must keep aiming at limiting inflation of food products since food expenditure accounts for 70% of the budget of poor households. Moreover, a new institutional and legal framework

12 54.41 – 38.897 = 15.513


must be implemented, especially to improve access to market and property rights in order to enable farmers escape from subsistence farming.

3.5 Social SectorsThe social pillar of the Vision 2030 identifies the need to promote access and equity in the availability of essential health and education services. It is therefore imperative to have at a critical analysis of how the government allocated funds to the social in the financial year 2013/2014.

3.5.1EducationThe expansion of education opportunities has been a longstanding objective of the Government of Kenya since independence in 1963. From the year 2003, allocations to the education sector have averaged 18% of the total government budget. This spending has consistently been guided by the government objectives of meeting the Millennium Development Goals and the obligation of education for all Kenyans.

During this financial year, the proposed allocation to the Education sector is Kshs 273.3 billion which includes the allocation to the Teacher Service Commission (TSC). As a share of the total budget, the Ministry of Education allocation was 8% while that for TSC was 8.7%. These allocations are consistent with the guidance of the Secretary of education of improving quality and transforming the educational system for knowledge based economy. Of this total, the Cabinet Secretary allocated Kshs 10.3 billion towards Free Primary Education, School Feeding Programme of Ksh 20.6 billion, Free Day Secondary Education of Kshs 20.9 billion as well as secondary school bursary of Ksh 1.17 billion which captures some of the promises the Jubilee Coalition made. Other additional issues highlighted under the education sector in the budget include the following;• Transforming the education system to e-teaching

and e-leaning approaches by giving out 1.35 million laptops to class one pupils in the medium term.

• The sector will have a guided approach to the planning, management and coordination of scientific and technological activities in line with the government priority polices with financing of Kshs 887 million.

• The TSC budget has been increased to Ksh143 billion from the 2012/2013 budget of Kshs137 billion with the additional Kshs 6 billion expected to be partly used in honor of the 1997 salary agreement.

• In the current allocations, basic education will receive Ksh32 billion, secondary education Kshs 23.2 billion, and tertiary education Kshs 62.4 billion.

Part of the Ksh 32 billion for basic education will go to fund new programmes such as provision of free milk and expansion of existing school feeding programmes as well existing plans like free primary education

• Kshs 4.5 billion allocated to quality assurance and standards in the public education sector that has witnessed rapid enrolment rates in the past decade.

• Another Kshs 4.9 billion will be injected into the Higher Education Loans Board and Kshs 1.17 billion goes to Secondary Schools bursary. Up to 6,500 of students in public technical institutions will also receive bursaries from the government. The primary question that arises from this allocation is why the HELB needs further infusion of money while it is designed as a scheme that allows collections to fund new applicants.

3.5.2HealthThe budget allocation for the fiscal year 2013/2014 was Kshs 34.7 billion compared to Ksh 55.1 billion in the last financial year 2012/2013. This difference is explained by the devolution of health services and sharing of management of facilities between the national and County Governments. In the absence of full details on the costing conducted by the Treasury, it is not possible to tell whether the figures represent any material changes.

The Cabinet Secretary in his Budget Statement 2013/14 made the following proposal:• Kshs 3.8 billion for free access to maternal health• Kshs700 million for free access to all health centres

and dispensaries• Kshs 3.1 billion and Kshs 522 million for recruitment

of 30community nurses and 10 community health workers respectively per constituency

• Kshs 1.2 billion for provision of 1500 affordable housing units to healthcare workers

• Kshs 200 million for the construction of healthcare facilities in slum areas of Nairobi, Kisumu and Mombasa

The pertinent policy issue is whether the allocations for health workers and nurses at the constituency level takes account of the differences in population and coverage in constituencies. In addition, it is not clear whether this money is part of the allocation for counties or is provided as a conditional transfer by the national government to counties. This presents a management problem because there are no institutions at the county level that would be qualified to manage the transfers at the level below counties. Such a policy move shows that the health sector is being fragmented


unnecessarily with roles and transfers being made without consultation and agreement with counties.

The focus of the proposals made is largely based on preventive measures rather than curative; with the recruitment of community nurses and health workers at the lowest levels, 1 and 2 conforming to the objectives of vision 2030 of Kenya. However, small amount has been allocated for the whole 2013/2014 financial year to preventive and promotive health care services than to the curative health contradicting the vision’s goal of shifting from curative to preventive health. The budget proposals focus on the MDGs 4, 5 and 6, where matters of child mortality, improving maternal health and combating HIV/AIDS, Malaria and other diseases are addressed. Nevertheless, the shift of resources from Curative Health towards Preventive and Health is a positive development.

3.5.3allocationstowardsrealizingSocialEquity.A large proportion of Kenyans live below the poverty line and priority has been made to deepen the protection for the vulnerable, poor, elderly and persons with disabilities.

Gender allocationa) Kshs 30 million allocated towards the provision of

sanitary towels for girls from poor families in primary schools. It is a sensible policy but the absence of clear numbers of beneficiaries makes it difficult to judge whether this effort is adequate in comparison to the needs.

Allocation to marginalized Groupsa) Kshs 903 million has been allocated to the provision

of ARVs b) Kshs 200 million for the Slum upgrading programme c) Kshs 3.4 billion for Equalization fund to the counties d) Kshs 300 million allocated for provision of land for

resettling the Internally Displaced Persons.e) Kshs 7.5 billion has been allocated for doubling the

number of orphans and vulnerable children covered by cash transfers from 115,00 to 310,000.

f) Ksh 770 million allocated for doubling the coverage of those with extreme disability from 14,700 to 29,400.

g) Kshs 452 million allocated for doubling the number of other disabled persons under coverage of cash transfer.

h) Ksh 100 million for albinosi) Ksh 400 million for presidential secondary school

bursary scheme for orphans. Ksh 356 million allocated for urban food subsidy

j) Corroborative infrastructure investment in the region

through the expansion of road network linking the countries to create business opportunities as well as investing in several regional power generation and transmission projects.

Key issues and concerns with respect to the allocations are as follows;The performance of the previous disbursements and an assessment of the attainment of the goals of the cash transfers has not been made public. While the budget statement made reference to an allocation of Kshs. 100 and Kshs. 356 million to albinos and the urban food subsidy, the absence of details and numbers makes it difficult to comment on the adequacy of the programmes or the fitness for the defined problem.

3.6 Allocations to the Youth To achieve objectives of the Vision 2030, the government has to ensure that the abilities of youth, women and people with disabilities are harnessed. From this perspective, Ksh 6 billion in addition to SMEs and Agribusiness funds will be set aside to facilitate youth business creation. A clear and transparent auditing of such funding needs to be conducted in order to ensure the right and effective utilization of the provision. As some employers may be reluctant to employ youth because of lack of professional experience, a programme of subsidies will be implemented to reduce the fiscal burden on employer when hiring youth. In addition, the preference on reservation of procurement for youth, women and people with disabilities will increase from 10% to 30%, with the assumption that this will enable these categories to better participate in the national economy. It is doubtful that creation of employment by creating this policy distortion is justifiable. An efficient and fully transparent procurement system would be a better policy than introducing a distortion in policy which will merely transfer public funds to selected enterprises.

3.7 Devolution and Budget 2013-2014 The 2013/2014 budget is critical in laying a firm foundation for the devolved system of government in Kenya, The Cabinet Secretary allocated Kshs. 210 billion to County Governments of which Kshs. 190 Billion is unconditional and a further Kshs. 20 Billion is conditional. Reviewing the budget documents presented and placed in the public domain, it is unclear whether the assumptions used in costing the functions are realistic for each individual county. For that reason, it is not possible to state unequivocally whether these allocations are sufficient to fund functions assigned to the devolved units. What is concerning is that the cabinet secretary has already indicated that the


Transition Authority has already published gazette notices on the specific functions to be transferred to counties on 1st July 2013. The gazette notices has not been available for public scrutiny and it is doubtful that it would fulfill the constitutional requirements in schedule 4, part two of the Constitution of Kenya. Allocations made to Health and Agriculture suggest that the National government retains responsibility for these services.

4.0TaxaTionProPoSalSTable8:TaxationProposals

TaxationProposal intention/rationale comment

a.ValueaddedTaxation

Re-tabling theVAT bill which aims to simplify, modernize and reduce the cost of compliance and administration. The Treasury estimates that uponenactment, theKRAwould raiseanadditionalKshs10billion.Basedonpreliminary concerns, there isopposition toexpandingVAT to cover foodandessentialcommoditiesasproposedinthepreviousbill.

B.incomeTax

Improve compounding framework for income tax ontaxoffences

Enhance the tax administration anddeepeningtaxreforms

Encouragetaxpayerstocomplywith incometaxAct.SortingtaxcasesoutcourtisencouragedbutattheriskthatexposeKRAofficialstobribery.

Impose awithholding tax onwinnings fromgamingandbetting.

Promote fairness and equity in the taxsystem.

Winners of gaming and betting to equallycontributetowardtheexchequer.

Amendment of the Income Tax Act to empower thecommissionerinprovingtaxevasionandcollectionoftax.

Enhance the tax administration anddeepeningtaxreforms

Empowering the commissioner to deter taxevasionandenhancetaxcompliance.

Reviewingcapitalgainstaxwithaviewtoformulatingmodalitiesforitseffectiveenforcement.

Promote fairness and equity in the taxsystem.

Targetingthewealthiermembersofthesocietytocontributetonationalagenda.

c.Exciseduties

RemissionofexercisedutyonKEGfrom100%to50%foraperiodof3years.

Generate and Increase Revenue collectiontotheexchequer.

Discourage the consumption of illicit anddangerousbrews

Reductionto50%ofexcisedutyonbeersmadefrommillet,sorghumandcassava.

Generate and Increase revenue collectiontotheexchequer.

Stimulate the agricultural activity in the regionwheretheseproductsaregrown.

d.importduty

Exemptimportdutyonitemsusedtofacilitaterailwayoperations.

Support the expansion and developmentoftherailwaynetworkintheregion.

Considerwhichspecificfirmstobenefit fromtaxincrease

Increaseimportdutyonweldingelectrodesfrom10%to25%.

Cushioning the local manufacturers fromimport.

Whycushionspecificindustriesfromcompetition.

Increase import duty on millstones and grindstonesfrom10%to25%.

Cushioning the local manufacturers fromthecheapimports

Whichindustrieswouldbenefitfromthis?

Increase import duty on plastic tubes for packing oftoothpaste,cosmeticsandsimilarproductsfrom10%to25%.

Cushioning the local manufacturers fromthecheapimports

Promotegrowthinlocalindustries

Promote employment and alleviatepoverty

Promotebeehivekeepingasaneconomicactivityinthecountry

E.customs

Introduce railway development Levy of 1.5% on allimportedgoods.

Raise funds for the construction of astandardgaugerailwaylinefromMombasatoKisumu

Itisnotagoodpolicydesign.Whyimportersarealwayssubsidized.

There is need for a clear focus that counties are the core service delivery units and hence all matters affecting services assigned to them should be allocated as such and in a manner consistent with the obligations of the Transition Authority in accordance with the transition to Devolved Government law.


Exempt duty on items used to facilitate railwayoperations.

Support the expansion and developmentoftherailwaynetworkintheregion.

Provide incentive to investors in the railwayindustry.

F.otherTaxationMeasures

Introduction of tax rebate to tax-compliant businessandNGOs.

Enhance access to jobs and training forqualifiedbutinexperiencedyouth

Toaddressthereluctanceofemployerstoemployinexperienced but qualified youth graduatingfromeducationalinstitutions

Exemptionofpremiumsfromemployersongrouplifeandgrouppersonalaccidentpolicycovers

Encourage more employers to coveremployeeongrouplifeandgrouppersonalaccidentpolicycovers

Extend a tax benefit to employees who havecover over the group life thus attracting moreemployees by taking off their medical cost andenablingthemtobemoreproductive.

Extension for 5 years, on persons with disability taxexemptionstatus.

Taxreliefforpersonswithdisability. whythe2yearsextension?

Alignment of tax exemption with the newconstitution particularly VAT, Excise and incometax.

EnsuringallKenyancontributeto revenuecollection.

Equity in tax collection and improved taxcollectionfromallKenyansandtoalignthemwiththenewconstitution.

Amendmenttothecustomslawtointroducecustomswarehouse rent on goods that remain at the port ofimportationformorethan21days.

Reducecongestionattheportandaddressthe importerspracticeof turning theportintoastoragearea.

Commendableintermsofensuringpromptdeals.Need to address operational efficiencies by KRAtoo.

CreationofasingletaxappealstribunalmergingVATtribunal, customs and excise tribunal and tax localcommittees

Enhanceddisputesolutionontaxcases. Mayimprovedisputeresolutionframework,instillprofessionalism, and fast track conclusion of taxcases.

Prescription of procedures and guidelines for theimplementation of excisable goods managementsystem2013.

Enhance the tax administration anddeepeningtaxreforms.

Mappingoutallrentalpropertyintheurbanareasandputtinginaplacearobustinstitutionalframeworkortaxation.

Increaseinrevenuecollection Samepromiseasyear2012

Amendment of the insurance Act to open up theownership of insurance companies and brokeragefirmstoothercitizensof theEastAfricanCommunity(EAC)

Strengthening financial system forsustainable development within the EastAfricaCommunity.

Implementation of the EAC common marketprotocol.

Overhaul of the Insurance Act to align it with bestinternationalpracticesandtheconstitution.

Strengthening financial institutions andensuring a stable and growing insurancesector

ComprehensivereviewoftheRetirementBenefitsActto align it with best international practices and theconstitution.

Strengthening financial system forsustainabledevelopment.

Providedetailsofthebillanddeclareprinciples

Amendment to the Kenya Deposits Insurance Act toensureadequateprotectiontodepositors

StrengtheningtheregulatoryframeworkoftheKenyadepositsinsurancecorporation

Protection of deposits and savings througha strong mandate and corporate governancedisclosure.

Amendment of the Capital Market Act to allow theissueofregionalfixedincomesecurities.

Raising funds from across the regionalcapitalmarkets.

RecognitionofpersonslicensedbytheotherEACcapitalmarketsregulators.

Amendment of the Banking Act to increase thepenalties to counter unethical or illegal businessactivities

Strengtheningthebankingsector To deter and reduce the number of institutionsviolatingofthebankingAct.


5.0concluSionSFor a successful implementation of Budget 2013 /14 and for future Budgets. The following are some points worth noting:

• For effective public participation in the budget process, there is need to ensure that at the very minimum, all the budget documents as required by the PFM, law, are published and publicized in a timely fashion.

• There is need for the National Government to lead the way in observing the provision of fiscal responsibility principles in Budget formulation with regard to 30% threshold for development expenditure, wages, public debt and reasonableness of tax rates in order to maintain fiscal discipline and macro stability.

• It is commendable that the National Government adopted programme-based budgeting; however there is need to consolidate past gains in ensuring that budget documents in their presentation are comprehensive in detail, for instance, more detail on economic classification, as well as detail on government of Kenya and donor component

of development expenditure should be reflected among other relevant information to make it easy to understand the numbers. Besides, the budget estimates did not have prior years’ (Budget 2012/13) information, making difficult the comparison of the two budget estimates. Revenue shortfalls have persisted amidst expenditure pressures thus a need to ensure that revenue targets are realistic and capture any emerging risks.

• Budget implementation especially for the development expenditure has been a recurring problem and there seems to be no significant traction in resolving the causes of low absorption rates.

• Flexibility in the budget must be assured through upfront management of the debt and pensions liabilities.

• It seems the estimates of the National Government recurrent and development expenditure contained allocation to some functions that are supposed to be under the jurisdiction of county government. For example, one of the indicators of the Livestock Resources Management and Development Programme is to construct abattoirs which are clearly a function for the counties.


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© 2013 Institute of Economic AffairsBudget Information ProgrammeACK Garden House, 1st Ngong AvenueP.O. Box 53989 - 00200Nairobi, Kenya.Tel: +254-20-2721262, +254-20-2717402Fax: +254-20-2716231Email: [email protected]: www.ieakenya.or.ke

Written by:Institute of Economic Affairs with contribution from MUHURI, HERAF & Chemi Chemi Ya Ukweli

Edited By:Otiato GuguyuOscar Ochieng’Audi C. Zilper

Board of Directors:Betty Maina Charles Onyango-ObboJohn Kashangaki Solomon MuturiAntony Mwithiga Atsango Chesoni

Design & Layout: Sunburst Communications Ltd.

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Budget Guide 2013

Economy & Finance

Transcript of Budget Guide 2013