The Budget Process and Public Debt
Public Finance
The Budget Process and Public Debt
Syllabus tag: KASNEB CPA | Intermediate Level | CA26 Public Finance and Taxation | Topic 10 The Budget Process and Public Debt
Lesson objectives
By the end of this topic, you will be able to:
- Set out the stages of the national budget cycle and their statutory dates
- Identify the documents produced at each stage
- Distinguish the Division of Revenue Act from the Appropriation Act
- Classify public debt and explain how it is authorised
- Discuss the arguments for and against public borrowing
Why this matters
The PFM Act fixes a date for every stage of the budget. Those dates are examinable, and missing one has consequences — as recent standoffs over the Division of Revenue Bill have shown, counties cannot be paid until the legislation passes.
The budget calendar
Kenya's financial year runs 1 July to 30 June. The PFM Act sets deadlines counting backwards from it.
| By | Stage | Document |
|---|---|---|
| 30 August | Treasury issues the circular starting the process | Budget Circular |
| 30 September | Broad strategic priorities set | Budget Review and Outlook Paper (BROP) |
| 15 February | Fiscal framework and ceilings approved | Budget Policy Statement (BPS) |
| 30 April | Estimates tabled in Parliament | Budget Estimates |
| 30 June | Parliament approves spending | Appropriation Act |
| Before the estimates | Revenue split agreed | Division of Revenue Act |
The two Acts are not the same thing, and candidates confuse them.
- The Division of Revenue Act splits shareable revenue between the national and county levels of government
- The County Allocation of Revenue Act then splits the county share among the 47 counties
- The Appropriation Act authorises the national government to spend what it has been allocated, vote by vote
Without an Appropriation Act, no money may lawfully leave the Consolidated Fund. Where it is delayed, a Vote on Account allows limited interim spending.
Public participation
Article 201 requires public participation, and the PFM Act gives it effect: the BPS, the estimates and county budgets must all be published and comment invited. A budget adopted without demonstrable participation is open to legal challenge, and Kenyan courts have set budgets aside on that ground.
Types of budget
| Type | Description |
|---|---|
| Line-item | Spending listed by input. Easy to control, says nothing about results |
| Programme-based | Grouped by objective and output. Kenya's current approach |
| Zero-based | Every activity justified from nil each cycle |
| Activity-based | Built from planned activity volumes |
Kenya uses programme-based budgeting, which reports what each vote is intended to achieve rather than merely what it will buy.
Classifying public debt
| Basis | Categories |
|---|---|
| Source | Domestic — Treasury bills and bonds; External — multilateral, bilateral, commercial |
| Term | Short (under a year), medium, long |
| Security | Secured or unsecured |
| Guarantee | Direct government debt, or guaranteed debt of a state corporation |
Domestic borrowing avoids exchange rate risk but competes with the private sector for the same pool of savings, pushing up interest rates — the effect known as crowding out.
External borrowing brings in foreign currency and is often concessional, but repayment is in a currency the government does not control. A depreciation of the shilling increases the debt in local terms without a single further shilling being borrowed.
Authority and limits
All borrowing requires the authority of Parliament, and the PFM Act sets a ceiling on total public debt. The Cabinet Secretary reports on the debt position, and the Auditor-General examines it.
The Medium Term Debt Strategy, published annually, sets out the intended mix of domestic and external borrowing over the medium term.
Is borrowing bad?
The examinable answer is not a simple yes or no.
The case for borrowing. Infrastructure lasts for decades, so charging its whole cost to today's taxpayers while future generations enjoy the benefit is itself inequitable. Borrowing can also smooth spending through a downturn rather than forcing cuts when the economy is already weak.
The case against. Debt service competes directly with health, education and every other service — and unlike them, it cannot be deferred. High debt narrows the room to respond to the next shock, and external debt carries exchange rate risk that no domestic policy can remove.
The distinction that matters is what the borrowing funded. Debt that built a port or a power station creates the capacity to service itself. Debt that funded recurrent spending has no such prospect, and simply moves today's consumption onto tomorrow's taxpayers.
:::checkpoint A government borrows externally at a concessional rate to fund civil service salaries. Using the Article 201 principle of equity between generations, explain why this is more troubling than borrowing the same amount to build a railway. :::
Fiscal responsibility
The PFM Act sets fiscal responsibility principles: a minimum share of spending on development, a ceiling on the wage bill, borrowing only for development where possible, and public debt maintained at a sustainable level.
These are statutory rather than merely aspirational, though enforcement is weaker than the drafting suggests.
:::checkpoint Parliament fails to pass the Appropriation Act before 30 June. Explain what mechanism allows government to continue operating, and why it is a poor substitute for the Act itself. :::