Constitutional and Legal Framework of PFM

Constitutional and Legal Framework of PFM

Syllabus tag: KASNEB CPA | Advanced Level | CA35S2 Advanced Public Financial Management

1. Constitutional provisions

The Constitution of Kenya 2010 establishes the foundational framework for public financial management. Key provisions:

Article 201 — Principles of public finance: openness and accountability; public finance to promote equitable society; expenditure to promote equitable development; burden of taxation must be shared fairly; financial management to be responsible and transparent.

Article 202 — Equitable sharing of national revenue: revenue raised nationally is shared equitably among national and county governments.

Article 206 — Consolidated Fund: all money raised or received by or on behalf of the national government must be paid into the Consolidated Fund. No money may be withdrawn from the Fund unless authorised by an Act of Parliament or the Constitution itself.

Article 207 — County Equitable Share Fund: each county is entitled to an equitable share of the national revenue — allocated by the Commission on Revenue Allocation (CRA) and approved by Parliament.

2. The Public Finance Management Act 2012

The PFM Act 2012 is the primary legislation governing public financial management in Kenya. It establishes:

• Responsibilities of accounting officers (Cabinet Secretaries, Chief Executive Officers) — personally accountable for the funds under their control
• Responsibilities of the National Treasury — regulate, manage, and oversee public finances
• Fiscal responsibility principles — including limits on expenditure, debt, and deficit as a share of GDP
• Budget timelines and processes — at both national and county levels

3. Fiscal responsibility principles

The PFM Act requires adherence to fiscal responsibility principles:

• National government expenditure shall not exceed 28% of GDP over the medium term
• The national government's fiscal deficit (including grants) shall not exceed 3% of GDP over the medium term
• Borrowing shall be used only for capital development, not recurrent expenditure
• Total public debt shall not exceed a reasonable level as a share of GDP (Parliament determines the ceiling)
• Contingent liabilities must be managed prudently

4. Key public finance institutions

National Treasury: overall responsibility for national PFM — budget preparation, public debt management, public investment management, oversight of state corporations.

Controller of Budget (CoB): independent constitutional office (Article 228) — oversees implementation of both national and county budgets; must approve withdrawals from the Consolidated Fund and County Revenue Fund.

Auditor General: independent constitutional office (Article 229) — audits and reports on accounts of all national and county government entities; reports laid before Parliament/County Assemblies.

Commission on Revenue Allocation (CRA): recommends the equitable share of national revenue for county governments and the criteria for allocating conditional grants.

Intergovernmental Budget and Economic Council (IBEC): forum for coordination between national and county governments on budget and economic matters.

5. Oversight bodies

Parliament (National Assembly and Senate) and County Assemblies exercise oversight through: budget approval; review of audit reports by the Public Accounts Committee (PAC) and Public Investments Committee (PIC); the County Public Accounts and Investments Committee.