Topic 2: Public Finance

1. Meaning

Public finance deals with how the government raises revenue, spends it, and manages the national budget and public debt.

2. Sources of Government Revenue

a) Tax Revenue

Direct and indirect taxes (PAYE, VAT, excise, customs duty, corporation tax).

b) Non-Tax Revenue

• Licence and permit fees
• Fines and penalties
• Fees for services (e.g. passports)
• Dividends from state corporations
• Rent and sale of government assets

c) Borrowing

• Internal: Treasury bills and bonds sold locally.
• External: loans from other countries and institutions (e.g. World Bank, IMF).

d) Grants and Aid

Gifts or donor support from foreign governments and organisations.

3. Public Expenditure

Reasons for Increased Public Expenditure

• Growing population and demand for services
• Inflation
• Defence and security
• Debt servicing
• Provision of infrastructure

4. The National Budget

A budget is a government plan of expected revenue and planned expenditure for a financial year.

Types

• Balanced budget: revenue = expenditure.
• Surplus budget: revenue > expenditure.
• Deficit budget: expenditure > revenue (financed by borrowing).

Budget Process (Simplified)

1. Planning and preparation by the National Treasury.
2. Presentation to Parliament by the Cabinet Secretary for the National Treasury.
3. Debate and approval by Parliament.
4. Implementation by ministries and counties.
5. Monitoring and audit (Auditor-General, Controller of Budget).

Objectives of the Budget

• Allocate resources efficiently
• Stabilise prices and promote growth
• Reduce unemployment
• Redistribute income
• Ensure accountability

5. Public Debt

• Public debt is the total money owed by the government.
• Causes: budget deficits, development projects, emergencies.
• Problems: debt servicing burden, reduced spending on services, loss of economic independence.
• Management: prudent borrowing, debt restructuring, raising local revenue, economic growth.

6. National and County Governments

Kenya has two levels of government. The national government shares revenue with county governments through an equitable share to fund devolved functions, and counties may also raise revenue locally (rates, fees and licences).