New order in sound financial management

  • Share

By Musau Nelson

Kenya promulgated a new constitution in August 2010 as a template of fresh start where the public advocated for a dispensation espousing dramatically new values and set of principles. One of the fundamental changes was in the area of public finance which regrettably received little or no attention prior to the referendum. Truth be told, myriads of Kenyans passed the constitution in utter ignorance of the contents of its Chapter 12 and without rudimentary inkling of this transformative chapter.

Chapter 12 marks a new dawn in the administration of public finances which has evolved over time. Erstwhile, the allocation and mobilization of resources was controlled by the executive with the parliamentarians having little or no say.  Article 48 of the old constitution allocated the role of introducing bills on money or alteration of taxes and national debt to the executive with the parliamentarians left to rubber stamp the executive’s recommendations. Arguably, the parliament has been endorsing budgetary proposals religiously until recently when some changes like the enactment of the Fiscal Management Act (2009) and the establishment of the Parliamentary Budget Office brought some sanity and decency into the system. The above system left the Kenyan public financial management in a precarious position and in dire need of resuscitation to life.

The old passed away and behold the new came in 2010 under Chapter 12 of the new dispensation. The constitution spells out numerous changes in the management of public finances, setting out the general principles that apply to all public money. The office of the Controller and Auditor General has been split into two offices with their roles clearly defined. Revenue allocation is under a commission with a set formula to be revised every five years. Imposition of taxes is at two levels; the national government is authorized to impose income tax, value-added tax, custom duties and excise tax while the county may impose property and entertainment taxes.

An equalization fund, amongst other funds, will be set aside annually to provide basic services to marginalized communities.  Of great interest, is the fact there are no tax exemptions for public office holders and that imposition, exemption, variation of tax has to be legislated. National borrowing and public debt are no longer a prerogative of the executive. In a nutshell, Chapter 12 epitomizes the principles of accountability, transparency, fairness and equity.

As the implementation progresses, Kenya has to deal with issues which are yet to receive enough attention, find solutions to any problems arising and confront emerging challenges. It’s the high time Kenyans appreciated that expenditure has to be matched with revenue which is generated through tax or debt.

Focus should be directed towards utilization of finances generated through imposition of taxes or borrowing, as the choice of taxes to be imposed and the allocation of the mobilized resources are of great significance to the status of any economy’s health. The provisions of the new constitution have to be scrutinized to ensure that they are sound enough to guarantee economic growth and safeguard public interests.

Laws to institute appropriate policy framework and to establish institutions should be legislated without compromising the letter and the spirit of the new constitution. Article 114 authorizes the National Assembly to introduce, amend and alter bills on money and also move motions that have fiscal implications. This might be calamitous if the challenges in the current parliament are not curbed. Fragmentation of the political system, limited technical knowledge, vested interests amongst others characterizes the current system. Voters have to rise to the occasion and veto any detrimental leadership. The current Bill on leadership and integrity sets the ball rolling.

The public have a chance to participate in the budgetary process. This is a laudable move which can be improved by extending citizen’s participation to cover expenditure as well. This calls for policies on the criteria to be used in vetting citizen’s proposals on budget and expenditure to avoid cases of formalities.

With the county governments set to replace the existing local authorities, capacity building and establishment of institutions at the county level will be crucial to ensure sound financial management is observed at all levels. Lessons should be drawn from the current administration of local authorities which is synonymous to unprofessionalism. Proper leadership and integrity should be replicated at the various levels of government without exception if significant milestones are to be achieved collectively.

Expenditure has to be tailored to the available resources to avoid any fiscal imbalances. The National Assembly has a role to play under Article 211. Careless, costly and unsustainable borrowing should not be tolerated.  Increase in expenditure, introduction and increase in taxes should be justified. Economists advocate for changes in expenditure as long as they are within the pre-agreed limits. This should be the guiding principle as policies of unfunded expenditure obligations are put in place.

Kenya cannot lose the opportunity provided by the new constitution to bid goodbye to the abuse of tax incentives derived from waiver of taxes. A tax waiver will be granted within the provisions of the law with details of the tax waiver and exemptions recorded, reasons for the waiver explained and a report availed to the Auditor General. Provisions in subsidiary legislations ought to resonate with the constitution to ensure that such benefits do not remain a preserve of a few who are politically correct or connected.

Apparently, the economy will only enjoy the fruits of Chapter 12 if proper policy framework is developed and institutional and administrative structures are built to guide the implementation. Lessons from economies operating a similar system like Indonesia will come in handy. It will not be easy. But now that Kenya made the bed in 2010, it should be ready to grab the opportunity and lie on it.

The writer is a tax consultant with EY. Email: nelson.musau@ke.ey.com. Views expressed are not necessarily those of EY.