1. Fiscal Sustainability
By Director PBO-Kenya
Phyllis Makau

2. Fiscal sustainability: Introduction
Fiscal sustainability, is the ability of a government to sustain its current spending, tax and other policies in a sustainable manner ensuring there is no unsustainable accumulation of public debt and service delivery is not affected.
Many countries realizing the need to maintain fiscal sustainability have defined it by law
In other countries the emergence of trading and economic blocks have also required countries to pursue prudence in public finance hence have set fiscal rules to ensure fiscal sustainability

3. Fiscal sustainability: The case of Kenya
Historical perspective:- Kenya emerged from Independence with a strong economy. In the sixties and seventies budgets were about accounting for the use of resources and basically the problem was how to spend but not how to prioritize.
Due to several issue the country ran into systemic , persistent deviations from desirable fiscal policies : Deficit, debt and public arrears.
Why?.
–Myopia/Short-sightedness/Electoral Cycle
–Time-inconsistency/Moral hazard

4. How to measure Fiscal Sustainability
Sustainable revenue collection: enhanced predictability
Containing the overall Expenditure levels:- Often as a ratio to GDP a lower level of spending gives room to private sector operations
Composition of spending: large recurrent expenditure often means more future spending sometimes reaching to entitlements. Lower capital spending means lack of creation of new assets thus no future income
Debt repayments (principal +interest): debt is a first charge on resources more payments leaves no room for other spending
Use of Fiscal rules to aim at achieving fiscal sustainability

5. Use of Fiscal Rules to achieve fiscal sustainability
Revenue Target:- Sets ceilings in law on how much can be raised as this helps to ensure the size of government is contained
Determine the use of windfall revenues
In Kenya under the PFM act the revenues target was set at 21 to 22 percent of GDP but there is no indication of what happens when more revenue are collected Note under EAC this effort is set at 25% .

6. Use of Fiscal Rules to achieve fiscal sustainability
Set limitations on Expenditures:-
Overall expenditure limit as a ratio to GDP/revenue/nominal or real growth
Composition of expenditure limits e.g. Wage bill, Capital spending, transfers etc
Binding ceilings in the medium term

7. Use of Fiscal Rules to achieve fiscal sustainability
Set Debt Rules:
Set explicit limit on the stock of public debt: Ceiling of gross public debt of 50 percent GDP in net present value terms ( eac)
Set the Deficit:-Fiscal deficit (including grants) ceiling of 3 percent of GDP (EAC)

8. How PBO-Kenya Measures Fiscal Sustainability The Use of Budget Outturn
Revenue Target
Category Of Revenues
Seasonality over last three Years
Current Year
Projection By Authorities
PBO Projection
Ordinary Revenue
90% or Target
Half Year Performance
XXXX
YYYY
Appropriations in Aid
60% of Target
Grants from external Partners
50% Target

9. Trends in the deficit on a commitment basis
Financial Years
2011/12
2012/13
2013/14
2014/15
2015/16
2016/17
2017/18
2018/19
2019/20
2020/21
2021/22
BPS 2014
Balance(Commitment basis excl grants)
-6.2%
-7.4%
-10.8%
-7.9%
-7.2%
-6.6%
Balance(Cash basis incl grants)
-5.5%
-6.8%
-8.9%
-6.3%
-5.4%
-4.9%
BPS 2015
-5.8%
-6.5%
-8.8%
-8.2%
-4.8%
-5.3%
-5.9%
-8.0%
-4.0%
BPS 2016
-9.3%
-9.2%
-7.7%
-8.6%
-4.1%
BPS 2017
-8.3%
-7.0%
-5.7%
-8.4%
-7.5%
-6.9%
-6.4%
-5.0%
BPS 2018
-3.8%
-3.4%
-9.1%
-6.0%
-4.3%
-3.3%
-3.0%

10. Budget Outturn 2015/16 2016/17 2017/18 2018/19 2019/20 Ksh Billions
Percentage of GDP
Total Revenue
1,264.8
19.6%
19.5%
o/w Ordinary Revenue
1,184.2
18.3%
18.2%
Expenditure
1,693.1
26.2%
25.3%
25.1%
25.0%
23.9%
Recurrent
1,008.8
15.6%
14.7%
13.9%
13.0%
12.1%
Development
428.0
6.6%
7.0%
7.9%
7.6%
County Allocation
229.3
4.0%
4.1%
4.2%
4.3%
Deficit (excl grants)
(502.1)
-6.6%
-5.8%
-5.6%
-5.5%
-4.4%
Grants
28.1
0.5%
0.4%
Deficit (incl grants)
(474.0)
-6.1%
-5.4%
-5.2%
-5.1%
-4.0%
Financing
470.5
6.1%
5.4%
5.2%
5.1%
Foreign Financing
216.4
2.4%
2.2%
2.7%
3.5%
3.3%
Domestic Financing
254.1
3.7%
3.1%
2.5%
1.8%
0.7%

11. 3) Effectiveness of development budget framework: does the development budget framework meet the national development needs in a cost effective and coherent manner?
2017/18
2018/19
2019/20
2020/21
Nominal
Percentage of GDP
National Government
1,660,073.00
1,676,655.00
1,829,370.00
2,005,628.00
19.18
17.12
16.48
15.89
Recurrent
1,077,211.00
1,022,949.00
1,127,521.00
1,226,699.00
12.45
10.45
10.16
9.72
Development
582,862.00
653,706.00
701,849.00
78,929.00
6.73
6.68
6.32
6.17
Judiciary *
18,051.00
17,768.00
20,073.60
17,571.15
0.21
0.18
0.14
13,922.00
13,719.00
15,974.60
16,571.15
0.16
0.13
4,129.00
4,049.00
4,099.00
1,000.00
0.05
0.04
0.01
Parliament *
37,166.00
42,548.00
43,907.00
47,160.00
0.43
0.40
0.37
34,016.00
39,348.00
41,107.00
44,510.00
0.39
0.35
3,150.00
3,200.00
2,800.00
2,650.00
0.03
0.02
CFS
726,857.00
962,562.00
885,012.00
976,482.00
8.40
9.83
7.97
7.74
Interest Payment
305,061.00
399,981.00
424,457.00
449,927.00
3.52
4.09
3.82
3.56
Debt Redemptions
344,335.00
470,635.00
351,112.00
395,677.00
3.98
4.81
3.16
3.14
Pension
71,895.00
86,251.00
104,489.00
126,490.00
0.83
0.88
0.94
1.00
Others
5,566.00
5,695.00
4,954.00
4,388.00
0.06
County Allocation ***
331,681.00
374,627.00
372,164.00
381,909.00
3.83
3.35
3.03
Overall Budget
2,773,828.00
3,074,160.00
3,150,526.60
3,428,750.15
32.05
31.40
28.38
27.17
GDP
8,654,618.00
9,790,760.00
11,100,784.00
12,620,781.00
100.00

12. Trend of Kenya’s Debt Stock 2010/11 to 2020/21

13. Key issues
To assess the fiscal sustainability of the budget framework we use the following tools
The PBOM:- The performance of key Variables and government spending including composition of the expenditures
The Revenue Model: Revenue targets and performance
The Budget outturn.
Debt sustainability Assessment: Shared tool from the National Treasury: Challenges exist.

14. Conclusion
According to PBO-Kenya “A budget Deficit is like a sin you can hide it but it will be born. Every shilling that is borrowed must be paid some day. Hence the importance of measuring and evaluating public spending, revenue/resource projection so as to understand the impact of current government outlays on future generation and the economy at Large.