Budget Guide 2013

Budget Highlights 2013/2014 1
INSIDE
By Institute of Economic Affairs
1. Introduction 2
2. Fiscal Policy 4
3. Sector Budget Analysis 10
4. Taxation Proposal 17
5. Conclusion 19
GUIDE
Budget 2013/14:The Onset of the Devolved
Government and the Hurdles Ahead
June 2013
• The overall total expenditure Kshs 1,640.9 billion
• Total development expenditure of 27.3% of the total budget
• Kshs 16.1 billion allocation to Judiciary
• Kshs 19billion allocation to Parliamentary Service Commission
• Kshs 380.3 billion allocation to consolidated services
• Total allocation to the county government Kshs 210 billion
- Kshs 190 billion equitable share
- Kshs 20 billion conditional grant
• Food Security
- Kshs 2 billion set aside for Agri-Business Fund
- Kshs 3.6 billion for implementation of the first phase of the 1
million acre irrigation and food security project in Galana
• Youth andWomen
- Kshs 6 billion set aside for youth to engage in income generating
programmes
- Tax rebates to tax –compliant businesses and NGOs who hire
inexperienced youth graduating from educational institution.
• Education
- Kshs 10.3 billion toward free primary education
- Kshs 2.6 billion for school feeding programme
- Kshs 20.9 billion for free day secondary education
- Kshs 1.19 billion for secondary school bursary
- In the medium term, allocated Kshs 53.2 billion for deployment
of 1.35 million laptops to class one pupils, development of digital
content, building capacity and rolling out computer laboratory.
• Health
- Kshs 3.8 allocated for free maternal health
- Kshs 700 million for free access to all health centres and
dispensaries
- Kshs 3.1 billion for 30 community nurses per constituency
- Kshs 522 million for 10 community health workers per constituency
Tax proposals
• Introduce railway development Levy of 1.5% on all imported goods.
• Re-introduction of Capital GainsTax
Highlights of Budget 2013/14
Introduction
Picking up from the previous budget, Budget 2013/14 will
play a big role in laying a firm foundation to usher in the
devolved system of government. The environment for
budget formulation and prudent financial management at
the national and county government level is now set, given
the passing of requisite legislation, including the Public
Finance Management Act, 2012 and the launch of the
second strategy for Public Finance Management Reforms in
early 2013. Given this state of play one can interrogate the
budget process using the PFM, Act 2012 as a benchmark.
The three arms of government managed to submit their
expenditure estimates to the National Assembly by 30th
April. Equally commendable is the fact that for the very first
time, the National Government adopted Programme based
budgeting (PBB) to present its expenditure estimates in line
with PFM reforms. However, one would expect to see more
details in the national government expenditure estimates.
As for the estimates presented by the Parliamentary Service
Commission (PSC) and the Judiciary, their budgets were
presented in line item format with the Judiciary providing
a summary annexed with the presentation in PBB format.
Perhaps the delay in publishing of regulations to guide in
the implementation of the PFM law may have led to this
confusion.
Participation in the budget process, as required by the
constitution and PFM law, took place through public
hearings during the formulation and legislation stages.
Despite delays in constituting the Budget Committee at the
National Assembly, the committee managed to hold public
hearings in 10 centers across the country on 30th May. It
is important to note that the number of counties visited
was however fewer than during Budget 2012/13 public

2 Budget Highlights 2013/2014
hearings. The National Treasury should also ensure
that the budget estimates are available and accessible
to the public for effective participation during these
public hearings. One major challenge has been the
unavailability of other supporting budget documents
such as Statistical Annexes to the Budget and the
Financial Statement, making it difficult to conduct
budget analysis.
That notwithstanding, we believe that the Budget
2013/14 took cognizance of the contextual
environment to ensure improved public service delivery,
hence the key message of this Budget “Transformation
for shared Prosperity”. To this effect the Cabinet Secretary
outlined several priority areas for Budget 2013/14 to
spur inclusive growth and move the country to higher
levels of prosperity. These areas include:
i. Accelerating growth by improving productivity
and competitiveness, and opening up the economy
to investment and trade opportunities to boost
exports;
ii. Support for small and medium enterprises through
targeted financial support, skills development,
and access to market through a revamped public
procurement system so as to expand business and
to reduce joblessness among the young people;
iii. Continuing with public and private investment
programmes that have the highest impact to
growth, covering roads, railways, pipelines, ports
and energy;
iv. Creating a business climate that encourages
innovation, investment and growth;
v. Improving the quality of education and training
through leveraging on ICT, starting with the
primary school level;
vi. Modernizing the police force to effectively and
efficiently respond to crime;
vii. Boosting food security by investing in agriculture
and opening up at least 1 million acres of new land
through irrigation in order to end food insecurity;
viii. Maintaining macroeconomic stability by keeping
inflation low, and striving for a stable and
competitive exchange rate, while enhancing the
country’s capacity to respond to external shocks;
ix. Sealing leakages in the revenue collection system
and extending the tax base while ensuring
efficiency in public expenditure;
x. Supporting devolution through capacity building
to effectively deliver public services and ensuring
county governments receive adequate resources to
fund their functions;
xi. Investing in Kenyas greatest capital resource – 1 Republic of Kenya (RoK) Kenya Bureau of Statistics Economic
Survey 2013
the people and provision of progressive social
protection for every Kenyan as demanded by the
Constitution of Kenya.
1.2 Economic Performance
A more stable economy in 2012 led to modest
improvement in economic conditions and activity,
resulting to real GDP growth rate1
of 4.6% up
from 4.4% in 2011. However, this is still below the
projected growth target of 5.2% as per the Budget
Policy Statement 2012. Overall, the economy was
stable, buoyed by increased domestic demand and
modest growth in credit. As a result of this favourable
environment, the economy was supported by the
positive growth recorded by all the key sectors
including agriculture, wholesale and retail, transport
and communication, manufacturing, construction
and financial intermediation. Despite all the sectors
recording positive growth rates, it is important to note
that only the agricultural and the construction sectors
posted increased growth rates from the previous year,
3.8% in 2012 from 1.5% 2011 and 4.8% from 4.3%
respectively. The Economic Survey 2013 indicates
that economic performance in 2012 faced a number
of challenges, including a turbulent global economy,
delayed long rains and a weakened shilling at the
beginning of the year. The economy’s resilience in
2013/14 will therefore be determined by how the
government navigates this wave of challenges to meet
the 2013 projected growth rate of 5.8%.
Table 1 overleaf captures indicators of economic
performance and the macroeconomic environment for
Kenya for the period 2008-2012.
1.2.1 Macroeconomic Framework
Inflation: The average annual rate of inflation
decreased from 14% in 2011 to 9.4% in 2012 with
core inflation (excludes food and oil prices) declining
from 11.6% to 5% over the same period. The decline
in inflation was largely attributed to better food
supply resulting from favourable weather conditions.
Further prudent macro-economic policies pursued
by the government, ensured stability of the shilling
against other major currencies. According to Central
Bank inflation outlook, the inflationary pressures are
expected to ease in the coming months on account of
the stable exchange rate and the positive impact on
food supply from the rainfall expected in various parts
of the country particularly the food basket regions.

Budget Highlights 2013/20143
Interest rate: The Central Bank of Kenya (CBK) in
pursuit of their mandate of maintaining price stability
in the economy used its various instruments including
the Central Bank Rate (CBR) to signal direction of
interest rates. CBR was reduced from a high of 18%
16.5%, and by November 2012 it had been lowered to
11%. To this effect the average 91-day Treasury Bills
rate declined from 18.3% in December 2011 to 10.09%
in June 2012 before settling at 8.25% in December
2012.
Exchange rate: The shilling exchange rate stabilized
against major currencies in 2012. The shilling traded
at Ksh 85.99 against the US dollar compared to Ksh
86.7 in December 2011. The action of CBK to tighten
pressures and the fact that the year also experienced
the shilling.
Employment: Total employment outside small
scale agriculture and pastoralist activities improved
from 12.1 million in 2011 to 12.7 million in 2012.
The economy generated 659.4 thousand new jobs in
the period under review, with 591.4 thousand jobs
being created in the informal sector relative to only
64.9 thousand jobs created in the formal sector (See
graph 1). Given that the bulk of the new jobs have in
recent years been generated in the informal sector, a
number of challenges have emerged with regard to the
sustainability and quality of the jobs created. This may
also explain the narrow tax base and the low income
levels.
1.3 Revenue Performance
200.44 billion in 2012/2013, the total revenue collected
for the period July 2012-March 2013 was Kshs 737.63
billion against a target of Kshs 900.34 billion, which
represents a performance rate of 81.9% revenue
Table 1: Macroeconomic indicators
Indicators 2008 2009 2010 2011 2012
Real GDP growth rate (%) 1.5 2.7 5.8 4.4 4.6
Agriculture growth rate (%) -4.3 -2.5 6.3 1.5 3.8
Income per capita (Kshs) 57,350 62,743 66,376 77,098 84,624
Population growth rate (%) 3 2.9 3.1 2.6 3.0
Annual Average rate (%) 16.27 9.24 3.96 14.02 9.4
91 daysTreasury Bill rates (nominal) % 8.5 6.82 2.3 17.9 8.3
Exchange rate (Kshs/USD) 69.2 77.35 79.23 88.81 84.5
Public Debt as % of GDP 48.5 48.1 44.5 48.5 45.2
Public external debt as % of GDP 24.7 21.5 20.6 26.48 21.7*
Public domestic debt as % of GDP 20.6 23.5 22.2 27.78 26.0*
Source: Economic Survey 2013, CBK Monthly Economic Reviews
* Figures are for period July 2012 up to end of March 2013
Source: Economic Survey 2013
graph 1

shortfall of Ksh 21.3 billion2
. The category that had
the best performance rate against the targeted revenue
collection for the period July 2012 to March 2013 was
revenue raised from external grants, 89.4% followed
closely by total domestic borrowing and repayment,
89.2% and total tax income a distant third, 83.3%. The
lowest performing categories were revenues raised
from external loan and total non tax income. Revenue
shortfall was mainly attributed to3
depressed business
activity observed during the election period, decline in
oil volumes affecting petroleum taxes, subdued growth
in trade taxes and shift in consumption patterns for
beer and cigarettes which affected domestic excise
duty. Given the revenue shortfall there are chances that
implementation of the budget may be slowed down,
and if the government opts for domestic borrowing to
plug in the deficit, then this may result to high interest
rates.
1.4 Review of Budget 2012/13
Reports indicated that budget implementation remains
a major challenge4
. For the period July 2012 to March
2013, the Office of the Controller of Budget released
Ksh 738.2b for both recurrent and development
expenditure, representing 58.9% of the targeted
revised budget for that period. Budget implementation
rate for this period was lower than in the same period
in the previous year by 7.5%, with this slow-down
in disbursement attributed to shortfall in revenue
collection5
. Sectoral analysis shows that in the same
period, the education sector at 72.5% had absorption
rate,and incontrast,Energy,Infrastructureand ICThad
the lowest at 51.8%. Equally an analysis by the World
Bank, based on the National Treasury data indicated
that by December 2012 that National Security sector
had 100% utilization rate followed by the education
sector at 93% whereas the Energy, Infrastructure
and ICT and the Environment Protection, Water
and Housing had the lowest utilization rate of 45%
and 39% respectively. To address this issue and given
underperforming revenue, the government rationalized
expenditure by cutting recurrent spending and allowed
development spending to increase. It is important to
note that the overall rate of absorption has remained the
same at 72%6
, with recurrent expenditure absorption
capacity standing at 90.2% (higher than 84% as at the
end of June 2012) and the development expenditure
at 45.8% (compared to 55% at the end of June 2012)7
.
This implies that under spending may affect timely
implementation of planned projects as per the
budget (especially capital ones) and hence poor public
service delivery. How the government addresses
the recurrent challenges including procurement
planning and some spending entities, that lead to
poor budget implementation, and hinder meeting
donor conditionalities will determine the extent of
achievement for Budget 2013/14.
2.0 Fiscal Policy
The 2012 medium term fiscal framework according to
the Budget Policy Statement 2012, aimed at continuing
to support growth and employment despite the
economic challenges. To achieve this, the government
set out to narrow the gap between spending and
revenue but focus investment in infrastructure and
implementation of the constitution with measures
to ensure debt sustainability in the medium and long
term. As mentioned by the Cabinet Secretary for
National Treasury, the targeted revenue is predicated
on the projected economic growth, the on-going
reforms in tax and customs administration and new tax
measures and therefore how to ensure that economic
growth is sustained is imperative. Indeed the following
section interrogates this further and indicates financing
sources both local and external, as well as the overall
fiscal implications.
2.1 Revenue analysis
The Cabinet Secretary for the National Treasury
targets to collect total revenue of Kshs 1027.2 billion
in 2013/14, representing a nominal increase of 7.5%
over the budget estimates for 2012/13. Total revenue
projected for 2013/14 accounts for 24.7% of GDP.
This comprises Kshs 870.5 billion of Ordinary Revenue
and Kshs 79.3 billion of Appropriation-in-Aid. Table 2
overleaf gives a summary of overall Budget Estimates
2013/14 relative to estimates of Budget 2012/13.
2 RoK (April 2013) Third Quarter 2012/2013 Budget Implementation Review Report, Office of the Controller of Budget.
3 Ibid
4 Ibid and World Bank (June 2013) Kenya Economic Update: Time to Shift Gears –Accelerating Growth and Poverty Reduction in the New Kenya,
Edition No. 8
5 Ibid
6 World Bank (June 2013)
7 World Bank (June 2013)

Budget Highlights 2013/20145
Table 2: overall Budget Estimates2013/14 (Ksh Billion)**

Forecast
2012/13
Forecast
2013/14
%
Change
r evenue
Total Revenues 954.7 1027.2 7.6
Ordinary Revenue 870.5 961.3 9.4
Total Receipts (incl. of grants &
loans) 1180.1 1,284 8.1
Expenditure
Total Discretionary expenditure
National Government **** 1010.5
Parliamentary Service Commission 16.9 19 12.4
Judiciary 15.4 16.1 4.5
Counties’transfer *** 210
Contingency Fund 5 5 0.0
Non Discretionary expenditure
Consolidated Fund Service 346 380.3 9.9
Total overall expenditure 1459.9 1640.9 12.4
Financing:
Overall before grants and
loans -505.2 -614 21.5
Total external grants 56.2 67.4 19.9
Total external loans 169.3 187.6 10.8
-279.7 -356.9* 27.6

d
Net domestic borrowing 106.7 106.7 0
Domestic roll over 170.5 126.1 -26.0
Sovereign bond 123.9
Debt swap 0.5
Cash adjustment (LATF) 2
Total 279.68 356.7* 27.5
Source: Budget Statement 2013
• Domestic resources: The main source of
government resources is tax revenue which
includes income tax and tax on goods and services,
comprising 58.6% of estimated Budget 2013/14 a
drop from 66.2% in 2012/13. The other sources
of domestic resources including money obtained
from user fees charged for government offered
services including court fees, licenses, passport
application fees and other user charges comprise
4.3% of Budget 2013/14, whereas funds estimated
through Treasury Bills/Bonds comprise 6.5%
down from 7.3% in 2012/13, denoting low uptake
of government securities. Given the decline in
government revenue, Budget 2013/14 is anticipated
81.1%, a slight reduction from 84.5% in the previous
• Composition of ordinary revenue: For the last
5 years (2008/09-2012/13) the primary sources of
revenue have remained static, income tax averages
about 35%, as the largest source of ordinary
revenue, followed by VAT at an average of 25%,
excise duty 13%, import duty at about 11% and non-
tax revenue (Appropriation-in-Aid) at about 7%. For
the period 2013/14, the picture is no different but
its important to note that of the 2% total ordinary
revenue expected to come from investment income,
there was a drop in projections for VAT and an
increase for income tax projection. Reports show
that government revenue as a share of GDP has
declined in the recent past and this is attributed to
weaker VAT due to delays by Parliament to approve
the new VAT Bill, on which targets were based and
low excise duty collection as aforementioned. (see
pie chart)
• External resources: In the budget, external funding
is usually channeled via the development budget.
Donor assistance comes in the form of grants and
loans disbursed either as revenue or Appropriation-
in-Aid. Of the total Kshs 255 billion (15.5% of
Budget 2013/14) expected from both bilateral and
multilateral donor countries in 2013/14, external
loans will account for 73.6% and external grants
26.4%. In comparison to 2012/13, there was a
decline in external loans as a share of the total
budget from 11.6% to 11.4% and for external grants
as share of the budget from 4.5% to 4.1% in the
same period.
Total Projected Revenue 2013/14
Import Duty 10%
Excise Duty 12%
Value AddedTax
22%IncomeTax
45%
OtherTax 3%
A-in-A 6%
Investment
Income 2%

Sector budget analysis show the bulk of Budget
2013/14 is proposed to go to the Education Sector,
27%, followed by the Energy, Infrastructure and ICT
(22%) and Public Administration and International
Relations at 12% comes third. Over a third (35%) of
Budget 2013/14 is proposed to be channeled to the
three social sectors, namely: the Education, Health
and Social Protection, Culture and Recreation sectors.
This shows largely that budgetary allocation is in line
with sector priorities as outlined in the Budget Policy
Statement 2013. Although budgetary allocation does
not necessarily translate to spending it is correct to
conclude that with the exception of the ARD that
budget allocation is consistent to priority areas as
outlined in the Vision 2030 and the MTP 2008-2012.
It is commendable to note that estimates of
recurrent and development expenditure of the
National Government has adopted the long overdue
programme-based budgeting, but the other two arms
of government, the Judiciary and Parliamentary Service
Commission estimates of expenditure were presented
in line item budgeting format. Table 3 captures a
summary of recurrent and development expenditure
by votes for 2013/14. Despite the lack of information
for indicative performance of Budget 2012/13 in the
current estimates of expenditure for the three arms of
government - making it difficult to make comparisons
- we nevertheless made an attempt to compare, using
previous estimates (2012/13) and re-organized and
matched the current collapsed ministries with the
former list of ministries.
• Budget deficit: From table 1, overall budget deficit
increasedfrom Kshs505.2billionin2012/13toKshs
614 billion whereas after deducting loans and grants
the deficit reduces further to Kshs 279.8 billion and
Kshs 356.9 billion respectively. The deficit financing
options for 2013/14 as mentioned by the Cabinet
Secretary include net domestic borrowing of Kshs
106.7 billion, domestic debt rollover of Kshs 126.1
billion and through issuance of a sovereign bond
of Kshs 123.8 billion. It seems these proposals are
in line with government policy to shift from short
term debt to long term concessionary loans and
also safeguard the domestic market from unstable
interest rates.
2.2 Expenditure analysis
The total estimated overall expenditure for 2013/14 is
Kshs 1,640.9 billion, representing a nominal increase
of 12.4% from the previous year’s budget. The
estimated budget for 2013/14 relative to the size of the
economy (GDP) is approximately 47.7%.8
The budget
has been expansionary over the last five years and the
2013/14 is no different. In fact, it is significantly above
the figure provided for by the Budget Policy Statement
2013 expenditure forecasts. Despite expenditure
pressure to cater for transition to county governments,
salary demand from health, education and police
personnel, security interventions among other issues,
the question of how to contain expenditure from
spiraling and its attendant effects budget deficit and
public debt sustainability is paramount. The pie chart
below shows an illustration of how the budget, Kshs
1,640.9 billion will be split among the three arms of
government, transfers to the counties and the portions
for Consolidated Fund Services, the Equalization Fund
and the Contingency Fund.
8 Using KNBS GDP for 2012 (GDP for 2012/13
How is the Ksh 1,640.9 Bn Split?

Table 3: Summary of Estimates 2012/2013(Kshs Million)
Vote Details ofVote
Recurrent Development Total
% change of
Total Expend.
from 12/13 to
13/14
% share of
Total Budget
2013/14
Gross Expend.
2012/2013
Gross Estimates
2013/2014
Gross Expend.
2012/2013
Gross
Estimates
2013/2014
Gross Expend.
2012/2013
Gross
Estimates
2013/2014
101 The Presidency 2,603.4 3,094.4 1,979.6 990.3 4,583.0 4,084.7 (10.87) 0.2
102
Min. of Interior and
Coordination of National
government 88,576.5 98,603.8 12,221.7 10,343.6 100,798.2 108,947.4 8.08 6.6
103*
Min. of Devolution and
Planning 36,535.8 16,512.8 44,456.6 68,349.8 80,992.4 84,862.6 4.78 5.2
104 Min. of Defense 70,040.4 60,444.7 - - 70,040.4 60,444.7 (13.70) 3.7
105 Min. of Foreign Affairs 9,860.6 9,924.5 727.0 293.9 10,587.6 10,218.4 (3.49) 0.6
106 Min. of Education 86,994.8 97,101.8 25,530.1 33,457.3 112,524.9 130,559.1 16.03 8.0
107 The NationalTreasury 21,147.3 25,967.2 39,821.7 43,053.3 60,969.0 69,020.5 13.21 4.2
108 Min. of Health 53,527.4 19,811.2 31,501.5 14,936.5 85,028.9 34,747.7 (59.13) 2.1
109
Min. ofTransport and
Infrastructure 32,314.5 22,798.8 110,108.8 102,924.3 142,423.3 125,723.1 (11.73) 7.7
110
Min. of Environment,Water
and Natural Resources 16,890.4 12,443.7 50,469.8 36,111.7 67,360.2 48,555.4 (27.92) 3.0
111
Min. of Land, Housing and
Urban Development 7,189.1 4,179.8 13,700.0 11,662.5 20,889.1 15,842.3 (24.16) 1.0
112
Min.of Information and
Communication 2,503.5 2,226.5 4,792.1 7,346.1 7,295.6 9,572.6 31.21 0.6
113**
Min. of Sports, Culture and
Arts 8,374.9 2,710.8 5,324.2 681.1 13,699.1 3,391.9 (75.24) 0.2
114***
Min. of Labour, Social
Security and Services 1,870.0 1,594.3 546.0 674.4 2,416.0 2,268.7 (6.10) 0.1
115 Min. of Energy 2,773.4 2,413.2 77,174.2 76,089.0 79,947.6 78,502.2 (1.81) 4.8
116
Min.ofAgriculture,Livestock
and Fisheries 15,241.1 9,839.8 19,502.5 29,057.8 34,743.6 38,897.6 11.96 2.4
117
Min. of Industrialization and
Enterprise 3,573.0 2,830.3 3,844.2 3,035.2 7,417.2 5,865.5 (20.92) 0.4
118
Min. of East African Affairs,
Commerce andTourism 5,351.2 4,698.7 1,922.9 1,308.9 7,274.1 6,007.6 (17.41) 0.4
119 Min. of Mining - 190.1 - 384.9 - 575.0 #DIV/0! 0.0
120
Office of the Attorney
General and Dept of Justice 3,815.2 2,458.6 1,129.0 651.7 4,944.2 3,110.3 (37.09) 0.2
121
Ethic and Anti-Corruption
Commission 1,657.0 1,294.2 222.0 60.0 1,879.0 1,354.2 (27.93) 0.1
122
National Security
Intelligence Service 13,414.0 13,980.0 - 13,414.0 13,980.0 4.22 0.9
123
Directorate of Public
Prosecutions 1,007.8 1,111.8 80.0 148.0 1,087.8 1,259.8 15.81 0.1
124
Commission for the
Implementation of the
Constitution 531.5 399.4 - 531.5 399.4 (24.85) 0.0
125 Registrar of Political Parties 430.0 344.7 - 430.0 344.7 (19.84) 0.0
126 Witness Protection Agency 235.0 196.8 - 235.0 196.8 (16.26) 0.0

201
Kenya National Human
Rights and Equality
Commission 263.6 253.2 - 263.6 253.2 (3.95) 0.0
203
Independent Electoral and
Boundaries Commission 17,579.5 3,312.7 482.5 17,579.5 3,795.2 (78.41) 0.2
206
The Commission on Revenue
Allocation 485.0 321.4 - 485.0 321.4 (33.73) 0.0
207 Public Service Commission 658.8 570.6 80.0 200.0 738.8 770.6 4.30 0.0
208
Salaries and Remuneration
Commission 510.0 375.4 - 510.0 375.4 (26.39) 0.0
209
TheTeachers Service
Commission 119,837.0 143,104.3 - 119,837.0 143,104.3 19.42 8.7
210
The National Police Service
Commission 300.0 244.8 - 300.0 244.8 (18.40) 0.0
211 Auditor General 1,672.0 1,892.0 500.0 1,672.0 2,392.0 43.06 0.1
212 Controller of Budget 681.0 422.8 - 681.0 422.8 (37.91) 0.0
213
The commission on
Administrative of Justice 350.0 298.5 - 350.0 298.5 (14.71) 0.0
214
National Gender an Equality
Commission 239.5 210.6 - 239.5 210.6 (12.07) 0.0
215
Independent Police
Oversight Authority - 153.9 - - - 153.9 #DIV/0! 0.0
xx Office of Prime Minister 1,746.4 739.0 2,485.4 - (100.00) 0.0
- - - 0.0
OTHER ARMS OF GOVT 0.0
The Judiciary 12,500.0 16,100.0 2,860.0 15,360.0 16,100.0 1.0
National Assembly - 0.0

Parliamentary Service
Commission 13,904.6 19,000.0 2,950.0 16,854.6 19,000.0 1.2
0.0
0.0

Total Discretionary
Expenditure 657,185.2 603,432.0 451,682.9 442,742.8 1,108,868.1 1,046,174.8 (5.65) 63.7
COUNTY GOVERNMENT 0.0
Transfer to counties 210,000 210,000.0 12.8
Contingency 5,000 5,000 5,000 5,000.0 0.3

Add Consolidated Fund
Services (CFS) 345,987.8 380,300 345,987.8 380,300.0 23.2
0.0
TOTAL EXPENDITURE OUTLAY 1,008,173 1,198,732 451,682.9 442,742.8 1,459,855.9 1,641,474.8 100.0

Development vote for as a share of total expenditure outlays 2013/2014 (%)
Source: Printed Estimates of Expenditure 2012/13 and 2013/14 and own calculations
NOTE
103
The Min. of devolution & planning has some responsibilities that were previously in gender and youth ministries. However, only the Min. of Gender was included in
the summation. It may not give a good comparison due to this
113
The Min. Of Sports, culture is a merging of previously youth and sports together with National Heritage and Culture. It’s however important to note that some
previous allocations and functions have been transferred to Min. of devolution
114
The Min. of Labour, Social Security and Services has the some responsibilities that were previously in Min. Of gender. However for the purposes of this exercise, the
allocation indicated covers only what was in labour to avoid double counting as 2013/14 gender budget was factored in the 103 vote

From table 3, the estimated recurrent expenditure
is Kshs 1,193 billion inclusive of Consolidated
Funds Services (CFS) of Kshs 380.3 billion whereas
development expenditure stands at Kshs 447.9 billion.
Unlike in 2012/13, the development expenditure as a
share of estimated Budget 2013/14 declined to 27.3%
from 31.3%. The Public Finance Management Act,
2012 stipulates that the National Treasury shall manage
the national government public finances in accordance
with the principles of responsibility. Section 15 (2)
(a) of this Act requires that the national and county
governments allocate a minimum of 30% of their
budgets over the medium to development expenditure.
As much as the law requires that these two levels of
government meet this 30% threshold over the medium
term, reversing on this in 2013/14 after meeting it in
last three prior years is of concern.
2.3 Consolidated Fund Services
The Consolidated Fund is established by article 206 (1)
of the Constitution of Kenya 2010 with a main purpose
to hold “all money raised or received by the National
Government”, with limited exceptions. The centrality
of the Consolidated Fund is further emphasized by
the article 207 (4) that specifically requires the approval
of the Controller of Budget for withdrawals to issue
from the Consolidated Fund. Thus the Consolidated
Fund stands as the primary payment account for the
purposes of budget policy in Kenya. A number of
payments that are clearly specified are known as the
Consolidated Fund Services (CFS) owing to the fact that
they represent the “first charge” on all public money
held in the consolidated fund. The implication is that
there is both a statutory and constitutional requirement
to ensure that these payments are prioritized in national
expenditure.
Specifically, the items that have first claim on
public resources in Kenya are; the remuneration
for constitutional office holders, the national debt,
pensions of retired public servants and subscriptions
to international organizations. Given the priority that
must be accorded to these payments, they represent
non-discretionary expenditure and thereby not subject
to direct policy challenge. For that same reason, the
growth and overall quantum of the Consolidated Fund
Services (CFS) have enormous implication for fiscal
space available for government spending.
Table 4:Trends in Nominal Changes in the Consolidated Fund
Services
2010/11 2011/12 2012/13 2013/14
Public Debt 157.2 175.4 303.6 337.3
Pensions 26.7 29.3 37.8 38.2
Salaries & Allowances 2.1 3.4 3.2 3.4
Subscriptions to
International Orgs 0.05 0.05 0.05 0
Guaranteed Debt 1.4 1.5 1.3 1.4
Total 187.5 209.5 346 380.3
Source: Estimate of Recurrent and Development Expenditure 2013/14
The composition of the CFS shows that redemption
of public debt and pensions together comprise the
bulk of the total expenditure. In the four-year period
displayed in table 4 above, the Public Debt and
pensions have constituted between 95-98% of the
CFS. Essentially therefore, in the medium-term the
CFS payments are disproportionately affected by any
changes in these variables. Changes in CFS expenditure
have been growing over the last five years, with the
portion dedicated to the public debt showing the
largest nominal increases too. These major liabilities
in the CFS are sources of expenditure risks because
they constituted a large portion of non-discretionary
expenditure while also being signals to future flexibility
in spending.
Debt as an Economic Policy Imperative
Taking together the issue of the large redemption and
the domestic debt rollover of Kshs. 126 Billion shows
that debt is a permanent fixture in CFS and will continue
to adversely affect flexibility in spending. On the other
hand, the allocation to pensions has constituted 9-10%
of the CFS and is expected to grow because of the
expectation that a substantial number of public sector
employees will be in retirement in the coming decade.
Management of the debt through regular payments
and ensuring competitive interest rates is now essential.
Long-term growth is required because the CFS has
continued to command 23% of total expenditure for
a long time.
The structure of the CFS is also pertinent for overall
budget policy because of the current discussion on
public sector wage policy. A rational and fair wage
policy in the public sector is also important at this
point because of the observed effects on flexibility in
spending and the overall weight of debt and pensions
in spending decisions. The affordability of the wages
negotiated with all public sector professionals is not
only a constitutional requirement but also necessary

because the wages are in turn directly related to the
pensions that will be paid upon retirement. At the same
time, a consistently large deficit is a pointer to more
debt that will exert more claims on future spending
through obligations in the form of debt redemption.
In addition to managing waste and cleaning up
procurement, the Institute of Economic Affairs (IEA-
Kenya) considers that flexibility in budget must also be
assured through upfront management of the debt and
pensions liabilities.
2.4 Fiscal Implications (Revenue and
expenditure issues)
This section raises issues that the IEA-Kenya has noted
with regard to broad revenue mobilisation measures
and in the use and management of expenditure as far
of Budget 2013/14 is concerned.
• Observing fiscal responsibility principles: The
government’s fiscal objective is to contain non-
priority and non-productive recurrent expenditure
with the principal aim of managing the budget deficit
and exercising prudent borrowing to ensure debt
sustainability. In order to meet these objectives, the
national government should ensure that its observes
the fiscal responsibility principles with regard
to meeting the 30% threshold for development
expenditure even as much as the PFM Act, 2012 says
that this should be met over the medium term. In
addition, the National Treasury should publish the
necessary regulations that will define the thresholds
for public officers’ wages as a percentage of national
revenue, public debt borrowing and reasonable tax
rates.
• Realistic revenue targets: The projected revenue
is predicated on the projected economic growth of
5.8%in2013,scaledupon-goingreformsintaxpolicy
and administrative measures. Besides the Cabinet
Secretary plans to seal tax collection loopholes in
order to ensure sustainability in domestic resource
mobilization. It is clear that KRA has experienced
challenges in realizing the revenue targets over the
last five years and without clear measures to resolve
legislative challenges such as delay in passing of
VAT Bill, expanding the tax base and improving
tax compliance, hence the government is likely to
continue to experience budget shortfall in 2013/14.
• The Cabinet Secretary mentioned that expenditure
will be rationalized and focused on priority areas as
well as continue with austerity measures, yet the total
budgeted expenditure 2013/14 as a share of GDP
is about 47%. Implementation of this huge budget
may pose some challenges as outlined below:
(i) In order to create fiscal space and save money,
members of parliament should be keen to ensure
across the board reductions in expenditure such
as purchase of vehicles unless really necessary,
deferment of trainings, reduction on purchase
of furniture, stationery, computers and foreign
travels among other items.
(ii) IEA-Kenya notes that one of the ways of
reducing the total cost of government is to
reduce transfers to state agencies by reforming
the law on creation of state agencies as well
as abolishing those that are not efficient and
also weaning commercial viable entities from
transfers.
(iii) Despite the improved priority given to the
infrastructural investment, execution rate for
development expenditure remains a challenge
and is likely to affect service delivery. The
Cabinet Secretary should have reported on what
measures have been put in place to address
associated procurement process as one of the
causes of low execution as well as the impact of
other initiatives such as the Electronic Projects
Monitoring System (e-Pro MIS) initiated in
2010/11 to address low budget implementation.
3.0 Sector Budget Analysis
3.1 Promotion of Private Sector
Growth and Employment Creation
The Cabinet Secretary in his budget speech outlined
three main economic challenges that the country faces:
1. Elevating the economy to a higher and sustainable
growth path;
2. Creating decent jobs;
3. Significantly reducing poverty while preserving
macroeconomic stability.
He stated that these challenges would be addressed by
pursuing the following budgetary goals:
Proposal 1: Accelerate growth through improving
productivity and competitiveness and opening up
the economy to investment and trade opportunities
to boost exports.
While enhancing productivity and competitiveness is an important
step in ensuring that the economy grows, there are no specific

proposals/regulations that will result in this. Unfortunately,
productivity-enhancing proposals are only concentrated in the
agricultural sector and even then, they do not target higher labour
productivity for the labour-intense sector.
Proposal 2: Support for small and medium
enterprises through targeted financial support,
skills development, and access to market through
a revamped procurement system.
This proposal responds very well to the needs of SMEs.
However, when considering the Procurement quota it is important
to reflect on the challenges faced by the previous incentive of 10%
so that lessons maybe incorporated in the design of the new
incentive scheme. Market access is also very crucial to the growth
and development of SMEs. It’s therefore important to consider
issues of standardization and quality of output especially for an
export-led Market access strategy.
Proposal 3: Infrastructure investment programmes
for roads, railways, pipelines, ports and energy,
specifically,
• 97.9 Billion for road expansion, upgrading and
rehabilitation.
• 22 Billion for construction of two-track railway line
from Mombasa to Kisumu, thereby reducing freight
costs by 79%
• 78.5 Billion for scaling up energy investments in
reliable and affordable energy.
- 12.5 Billion for geothermal development
- 23.8 Billion is for enhancing power transmission
- 3.7 Billion for construction of the first three
berths and associated infrastructure of the
LAPSET project.
The focus on infrastructure is very vital to the growth of national
as well as regional businesses. However the choice of funding the
railway system through an import levy should be reconsidered,
because it will result in an immediate impact on prices of
imported goods, thereby worsening the upward pressure on prices
already experienced in the country. IEA-Kenya suggests the
government explores issuing sovereign bonds especially for major
infrastructural projects such as building a railway.
Proposal 4: Creating a business climate that
encourages innovation, investment, and growth,
specifically:-
• Business registration reforms: making it faster and
easier to register a business
• Obtaining construction and business permits
to be made easier in coordination with county
governments
• Reforming the tax system enhance compliance
• Biashara Kenya Bill: one-stop-shop to SMEs
covering entire business chain
Financial Sector Reforms: The Cabinet Secretary for
the National Treasury proposed far reaching changes in
the financial sector. Under the proposed changes, the
Insurance Act and the Retirement Benefits Act will be
overhauled and separate legislations enacted. There will
be one Act of Parliament which will oversee the entire
insurance industry and the other will drive regulations
of the retirement benefits industry. This will help to
strengthen the regulatory framework and ensure a
stable and growing financial sector and align the sector
to the best international practices and the Constitution.
The changes being effected in the financial sector are
steps towards establishing a single authority to manage
the sector as is done in advanced countries.
The Insurance Act requires that not less than one third
of the paid up capital of Insurance companies to be
owned by Kenyans and in case of the brokerage firms,
at least 60% of the paid up capital be owned up by
Kenyans. The amendment of the insurance bill will
see the ownership of insurance and brokerage firms
across the East African Region and this is the spirit
of the implementation of the East Africa Community
Common Market protocol. Equally, in the spirit of
deepening the penetration of the insurance market
in the region, the Insurance Bill will seek to remove
restriction on foreign ownership and registration of
agents with a view of encouraging multinational banks
and businesses across the East African Region.
3.2 Deepening Regional Integration
As a member of the East African Community (EAC)
Kenya will yield a much greater benefit not only to its
populace, but for the entire EAC region if it enhances
regional integration through interdependence approach
and by pooling of resources. This is the message that
the Cabinet Secretary passed in his Budget Statement
2013/14. One of the mandates of the Ministry of
East African Affairs, Commerce and Tourism9
is to
facilitate, coordinate, oversee, monitor and evaluate
the implementation of EAC policies, projects and
programmes for effective integration.
Trends in allocation to the former ministries of East
African Community and Ministry of Trade, 2011/12
– 2013/14, now converted into Programmes, namely:
Co-ordination of EAC Affairs in Kenya and Trade
Development and Investment (TD&I) respectively, is
captured in the table 5 overleaf.
9 The Ministry is a merger of the former ministries of East African Af-
fairs and Regional Cooperation, Trade, and Tourism into one ministry.

Table 5:Trend Allocation
2010/11 2011/12 2012/13 2013/14
Ministry of East
African Community 1,028.4 1,329.9 1,330.1 1,374.7
Ministry ofTrade 2,411.8 2,475.2 3,162.7 2,717.8
Source:Various Issues of Estimate of Recurrent Expenditure
Overall, there is a nominal increase of allocations
over the period 2010/11 to 2013/14 for the former
Ministry of East African Community, denoting the
commitment given to this Programme unlike in the
TD&I Programme whose allocation is expected to
reduce considerably between 2012/13 and 2013/14.
This scenario has implications to both the country
and the region. In addition, it should be noted that
one of the successes that can be realized as a result of
integration is growth of trade volumes either within
the EAC or with other trading blocks and thus these
Programmes must complement each other.
Table 6: Programmes and allocations within the Ministry for FY
2013/14
Ministry of East African Affairs, Commerce andTourism
Programmes Gross Expenditure
Percentage of
Ministry Budget
Trade Development &
Investment 2,717,815,657 45.2%
Co-ordination of East African
Community Affairs in Kenya 1,374,688,934 22.9%
Tourism Development &
Marketing 1,915,028,310 31.9%
Total Ministry Budget 6,007,532,901 100%
Source: Estimate of Recurrent and Development Expenditure 2013/14
The estimated budget for the Ministry is Kshs 6 Billion.
Of this, TD&I get Kshs 2.7 Billion while Coordination
of East African Affairs in Kenya gets Kshs 1.374 Billion
which translates to 45.2% and 22.9% of the dockets
total allocation respectively. According to the General
Economic, Commercial and Labour Affairs (GECLA)
Sector report 2012 (under which this ministry falls),
one of the strategic goals is to fast track regional
integration within the EAC, Common Market of East
and Southern Africa (COMESA) and Southern Africa
Development Community (SADC) regions, with one
of its strategic objectives being to co-ordinate regional
integration in the EAC, COMESA and the larger EAC-
COMESA-SADC Tripartite Free Trade Area (FTA)
Areas to Spur Regional Integration and Trade
The Cabinet Secretary proposed allocation of Kshs
1.37 Billion for regional integration, expected to finance
programmes including creation of an enabling business
and investment environment, tourism development,
setting up of the one-stop border post in designated
locations, and enhancing programmes that will lead to
scrapping of the Non-Tariff Barriers that have been
a huge hinderance to trade within the region. This is
a welcome move that will not only boost trade and
foreign exchange to member states, but also give rise
to better living standards. It is important to note that
the East African Legislative Assembly (EALA) passed
‘The One-Stop-Border-Posts Bill, 2012’ in April 2013.
The bill makes it mandatory for member states of the
East African Community to construct special one-stop
border posts (OSBPs) in a bid to improve trade flow
within the region.
The amendment proposed by the minister in the
Capital markets Act to provide for the issuance of
regional fixed income securities is expected to go a
long way to encourage cross listing of companies in the
region and to spur investment in different markets and
sectors by different people, thereby leading to a growth
in regional integration initiatives.
The Cabinet Secretary stated that the so-called
“Uganda list” has been reduced from 138 to 49. This
is envisaged to aid manufacturers who will be at an
advantage position and enable a favorable competitive
environment.
Infrastructure for Regional Development
In terms of infrastructure development for regional
expansion and promotion of trade, there are initiatives
including expansion of the road networks linking the
countries in the EAC so as to create opportunities for
business expansion of trade and trade opportunities
across the region. To realize this, there are a number of
development partners who have undertaken to finance
projects in infrastructure with regional dimensions,
and energy, specifically to tap power from Ethiopia and
Democratic Republic of Congo. The costs associated
with this are estimated to be Ksh. 289 Million for TD
& I for recurrent expenditure and Ksh. 39.7 Million for
development expenditure.
Also, there are plans to construct a railway line to
transport goods from the port of Mombasa to Kisumu.
This is anticipated to reduce the cost of doing business,
especially in the delivery of both raw materials to
industry as well as finished products to consumers,
both at manufacturing and consumer levels. The trickle
down effects will be felt on the member countries
populace at large.

3.3 Investment in National Security
National defense and the use of the national defense
services is a function of the national government as
provided for in the Fourth Schedule of the Constitution
of Kenya 2010. Similarly, the Constitution notes that
police services including the setting of standards
of recruitment, training of police, criminal law and
correctional services as the other key function assigned
to the national government.
Provision of safety, law and order is a constitutional
requirement necessary for national development and
prosperity of the country as one of the priorities
under Governance, Justice, Law and Order Sector
identified in the BPS 2013. Its importance as a pillar
for economic growth and one that contributes to the
improvement of quality of life for Kenya, and perhaps
the reason why the Cabinet Secretary for the National
Treasury reiterated the need to invest in provision
of this service. With regard to crime, the Economic
Survey 2013 shows that the number of crimes reported
to the Police increased by 2.8% from 75, 733 in 2011
to 77,852 in 2012. The report notes that overall, the
number of offenders went up from 82,052 in 2011
to 83,853 in 2012 with male, 83% accounting for the
majority of the offenders. One of the reform agendas
in GJLOS was the establishment of the National Police
Service Commission as provided for in the constitution
whose budgetary allocation reduced from Ksh 300
million in 2012/13 to Ksh 244.8 million in 2013/14, a
nominal reduction by 18.4%.
Police services is one of the primary Programmes
under the Ministry of Interior and Co-ordination of
National Government whose objectives is to provide
protection to both life and property, security reforms,
detection and prevention of crime and community
policing. The Cabinet Secretary proposed to allocate
Ksh 67 billion for the National Police Services which
is supposed to cater for a number of issues towards
meeting the objective of this Programme, namely:
• Kshs 4 billion for purchase of security equipment
• Kshs 4.5 billion for enhanced security operations
throughout the country
• Kshs 1.5 billion for enhanced crime research and
investigation
• Kshs 3 billion for leasing 1,200 motor vehicles
annually to improve police response to reported
crime
• Kshs 1.2 billion for a rapid development of 2,000
housing units through the National Housing
Corporation.
It is important to note that the estimates of Recurrent
and Development Expenditure show that the total
estimated allocation to Police is different from what
the Cabinet Secretary read during his budget statement.
The amount is Ksh 63.9 billion, accounting for 58.6%
of the Ministry’s total budget and hence the largest
programme in the Ministry. Since 2010/11, allocation
to the Ministry increased from Kshs 52.2 billion
to the estimated allocation of Ksh 108.95% to the
current reconstituted Ministry. Further analysis of
the Ministry’s proposed budget shows that out of the
total recurrent expenditure for Police Services, 65.4%
is committed to compensation of employees’, majority
of whom are police officers.
The Police Department had a total workforce of 42,586
officers in 2012 which was an increase of 7.2% from
the number recorded in 2011. The table below shows
the trend of police and correctional services officers
for the period 2010-2012. Interestingly the proportion
of female police officers as a percentage of total police
force on average 10% is quite low and as such, perhaps
there is need to recruit more female police officers.
While majority of spending in police service recurrent
expenditure is on personnel emoluments, 65.4%
there is still a shortage of police officers as the ratio
of police10
to population of 1:550 by 2009 was short
of the UN recommended ratio of 1:450 and despite
improvements, we are still short of the target. Besides
there is need to invest more in the recruitment of
10 Including Administration Police and total population is 40.7 million according to Economic Survey 2013
http://www.standardmedia.co.ke/?articleID=1144016735&story_title=Police-reforms-pointless-when-population-is-not-reformed-
Table 7: Number of Police Officers, Prison and Probation Officers by Sex 2010-2012
Officers
2010 2011 2012
Total % Male % Female Total % Male % Female Total % Male % Female
Police Officers 40,708 90% 10% 39,717 91% 9% 42,586 89% 11%
Prison Officers 19,993 85% 15% 19,737 85% 15% 19,878 84% 16%
Probation Officers 624 63% 38% 863 57% 43% 624 56% 44%
Source: Economic Survey 2013

female police officers as a way of advancing gender
equality but also to have engendered community
policing post and functional gender desks. Further, it
is expected that the specific allocations to purchase
security equipment, lease vehicles and enhanced crime
research and investigation will go a long way to enhance
police mobility in combating crime and improve crime
investigation. However to ensure sustainability in
achieving these expected results and in the medium to
long term secure living and working environment and
reduce cost of doing business, there is need for further
reallocation of the Police Service budget to improve it
from the estimated 23% for use of goods and services.
3.4 Promoting Food Security and
Rural Development
According to the Economic Survey 2013, agriculture
and fisheries continue to be the major contributor to
the Kenyan economy, accounting for 26.4% of the
Growth Domestic Product (GDP) and providing
18% and 60% of the formal and total employment
respectively. Agriculture-led growth has a critical role
with regard to poverty reduction and job creation as it
has been shown to be twice as effective at lifting people
out of poverty as industry-led growth. The sector
grew by 3.8% in 2012 against 1.5% in 2011, which is
encouraging and confirms its return on a higher growth
path (Economic Survey 2013). However it remains far
below the growth rate of 2010 that peaked at 6.8%.
These enhanced performances result from high rainfall
in some regions yielding to a significant increase in total
output production of both agricultural products and
livestock and from an average increase of output prices
by 12.2%.
In the 2013/2014 Budget, the government emphasized
its commitment to improve food security by
modernizing and by investing in the agricultural sector.
From this perspective, it sets up a large programme
aiming at enhancing productivity in order to transform
Kenyan agriculture into a market-oriented economy. In
this respect, Kshs 8 billion is proposed to be allocated
to implement the on-going irrigation projects and
Kshs 3.6 billion will be granted to the Phase 1 of the
1 million acres irrigation project in Galana, which is
anticipated to lead to the creation of 3 million jobs. In
addition, Ksh 2 billion is planned to be set-aside for
the Agri-Business Fund in order to improve farmer’s
access to credit thus supporting private investment
in the agricultural sector. According to the Cabinet
Secretary, there are plans to scale this Fund to Ksh 20
billion by the fourth year for wider access by interested
farmers. A further Kshs 0.3 billion will be allocated to
machine and equipment purchase and Ksh 1.5 billion
will be used to repair roads destroyed by rainfall in rural
areas.
For the period 2013/2014 the Agricultural and Rural
Development (ARD) sector will be provided with
Kshs 38.897 billion at the national level accounting for
2.3% of the total national budget. 75% of the budget
will be directed towards capital expenditure, mainly
through the Irrigation and Drainage Development
Programme. However, it should be noted that some
functions previously under the responsibility of the
national government now have been devolved to
the counties, explaining the significant reduction of
the share of the total national budget allocated to
the ARD sector (2.3% in 2013/2014 against 4.8% in
2012/2013). Indeed, the extension service programme,
which accounted for about 66% of the total recurrent
expenditure of the Ministry of Agriculture, is now a
function and responsibility of the county governments.
Following the ARD sector Medium Term Expenditure
Framework (MTEF) 2013/14-2015/16, the total ARD
sector should be provided with Kshs 54.410 billion for
the period 2013/2014, which would imply counties
participating to the amount of Ksh 15.51312
billion.
While the current expenditure in the ARD sector greatly
remains below the Maputo Declaration benchmark
of 10% of the total national budget, Parliament and
the civil society have to ensure that counties fill their
commitment regarding agricultural spending to achieve
vision 2030 objectives.
Irrigation has a critical role in farmers’ living condition
improvement process, especially because it allows the
latter not to rely heavily on rain-fed agriculture, which
can be unreliable due to its unpredictability. In 2012,
an additional 771 hectares of land was placed under
irrigation raising the total number of farmers operating
on irrigated lands by 36% to attain 21, 464 individuals.
The total output of paddies using irrigation schemes
increased by 4% between 2011 and 2012 to achieve 83,
572 tonnes. The extension service programme must
be pursued and improved by increasing the number
of farmers reached by the program and by ensuring
that the transition to a higher participation of the
private sector in the provision of services is not to
the detriment of the most vulnerable households. The
macroeconomic policy must keep aiming at limiting
inflation of food products since food expenditure
accounts for 70% of the budget of poor households.
Moreover, a new institutional and legal framework
12 54.41 – 38.897 = 15.513

must be implemented, especially to improve access to
market and property rights in order to enable farmers
escape from subsistence farming.
3.5 Social Sectors
The social pillar of the Vision 2030 identifies the need
to promote access and equity in the availability of
essential health and education services. It is therefore
imperative to have at a critical analysis of how the
government allocated funds to the social in the financial
year 2013/2014.
3.5.1 Education
The expansion of education opportunities has been a
longstanding objective of the Government of Kenya
since independence in 1963. From the year 2003,
allocations to the education sector have averaged 18%
of the total government budget. This spending has
consistently been guided by the government objectives
of meeting the Millennium Development Goals and
the obligation of education for all Kenyans.
During this financial year, the proposed allocation to the
Education sector is Kshs 273.3 billion which includes
the allocation to the Teacher Service Commission
(TSC). As a share of the total budget, the Ministry
of Education allocation was 8% while that for TSC
was 8.7%. These allocations are consistent with the
guidance of the Secretary of education of improving
quality and transforming the educational system for
knowledge based economy. Of this total, the Cabinet
Secretary allocated Kshs 10.3 billion towards Free
Primary Education, School Feeding Programme of
Ksh 20.6 billion, Free Day Secondary Education of
Kshs 20.9 billion as well as secondary school bursary of
Ksh 1.17 billion which captures some of the promises
the Jubilee Coalition made. Other additional issues
highlighted under the education sector in the budget
include the following;
• Transforming the education system to e-teaching
and e-leaning approaches by giving out 1.35 million
laptops to class one pupils in the medium term.
• The sector will have a guided approach to the
planning, management and coordination of
scientific and technological activities in line with the
government priority polices with financing of Kshs
887 million.
• The TSC budget has been increased to Ksh143
billion from the 2012/2013 budget of Kshs137
billion with the additional Kshs 6 billion expected to
be partly used in honor of the 1997 salary agreement.
• In the current allocations, basic education will
receive Ksh32 billion, secondary education Kshs
23.2 billion, and tertiary education Kshs 62.4 billion.
Part of the Ksh 32 billion for basic education will
go to fund new programmes such as provision of
free milk and expansion of existing school feeding
programmes as well existing plans like free primary
education
• Kshs 4.5 billion allocated to quality assurance and
standards in the public education sector that has
witnessed rapid enrolment rates in the past decade.
• Another Kshs 4.9 billion will be injected into the
Higher Education Loans Board and Kshs 1.17 billion
goes to Secondary Schools bursary. Up to 6,500 of
students in public technical institutions will also
receive bursaries from the government. The primary
question that arises from this allocation is why the
HELB needs further infusion of money while it is
designed as a scheme that allows collections to fund
new applicants.
3.5.2 Health
The budget allocation for the fiscal year 2013/2014
was Kshs 34.7 billion compared to Ksh 55.1 billion
in the last financial year 2012/2013. This difference
is explained by the devolution of health services and
sharing of management of facilities between the
national and County Governments. In the absence of
full details on the costing conducted by the Treasury, it
is not possible to tell whether the figures represent any
material changes.
The Cabinet Secretary in his Budget Statement 2013/14
made the following proposal:
• Kshs 3.8 billion for free access to maternal health
• Kshs700 million for free access to all health centres
and dispensaries
• Kshs 3.1 billion and Kshs 522 million for recruitment
of 30community nurses and 10 community health
workers respectively per constituency
• Kshs 1.2 billion for provision of 1500 affordable
housing units to healthcare workers
• Kshs 200 million for the construction of healthcare
facilities in slum areas of Nairobi, Kisumu and
Mombasa
The pertinent policy issue is whether the allocations
for health workers and nurses at the constituency
level takes account of the differences in population
and coverage in constituencies. In addition, it is not
clear whether this money is part of the allocation for
counties or is provided as a conditional transfer by
the national government to counties. This presents a
management problem because there are no institutions
at the county level that would be qualified to manage
the transfers at the level below counties. Such a policy
move shows that the health sector is being fragmented

unnecessarily with roles and transfers being made
without consultation and agreement with counties.
The focus of the proposals made is largely based on
preventive measures rather than curative; with the
recruitment of community nurses and health workers at
the lowest levels, 1 and 2 conforming to the objectives
of vision 2030 of Kenya. However, small amount has
been allocated for the whole 2013/2014 financial year
to preventive and promotive health care services than
to the curative health contradicting the vision’s goal
of shifting from curative to preventive health. The
budget proposals focus on the MDGs 4, 5 and 6, where
matters of child mortality, improving maternal health
and combating HIV/AIDS, Malaria and other diseases
are addressed. Nevertheless, the shift of resources
from Curative Health towards Preventive and Health is a
positive development.
3.5.3 Allocationstowards RealizingSocialEquity.
A large proportion of Kenyans live below the
poverty line and priority has been made to deepen the
protection for the vulnerable, poor, elderly and persons
with disabilities.
Gender allocation
a) Kshs 30 million allocated towards the provision of
sanitary towels for girls from poor families in primary
schools. It is a sensible policy but the absence of
clear numbers of beneficiaries makes it difficult to
judge whether this effort is adequate in comparison
to the needs.
Allocation to marginalized Groups
a) Kshs 903 million has been allocated to the provision
of ARVs
b) Kshs 200 million for the Slum upgrading programme
c) Kshs 3.4 billion for Equalization fund to the counties
d) Kshs 300 million allocated for provision of land for
resettling the Internally Displaced Persons.
e) Kshs 7.5 billion has been allocated for doubling the
number of orphans and vulnerable children covered
by cash transfers from 115,00 to 310,000.
f) Ksh 770 million allocated for doubling the coverage
of those with extreme disability from 14,700 to
29,400.
g) Kshs 452 million allocated for doubling the number
of other disabled persons under coverage of cash
transfer.
h) Ksh 100 million for albinos
i) Ksh 400 million for presidential secondary school
bursary scheme for orphans. Ksh 356 million
allocated for urban food subsidy
j) Corroborativeinfrastructureinvestmentintheregion
through the expansion of road network linking the
countries to create business opportunities as well as
investing in several regional power generation and
transmission projects.
Key issues and concerns with respect to the allocations
are as follows;
The performance of the previous disbursements and
an assessment of the attainment of the goals of the
cash transfers has not been made public. While the
budget statement made reference to an allocation of
Kshs. 100 and Kshs. 356 million to albinos and the
urban food subsidy, the absence of details and numbers
makes it difficult to comment on the adequacy of the
programmes or the fitness for the defined problem.
3.6 Allocations to the Youth
To achieve objectives of the Vision 2030, the
government has to ensure that the abilities of youth,
women and people with disabilities are harnessed. From
this perspective, Ksh 6 billion in addition to SMEs and
Agribusiness funds will be set aside to facilitate youth
business creation. A clear and transparent auditing of
such funding needs to be conducted in order to ensure
the right and effective utilization of the provision. As
some employers may be reluctant to employ youth
becauseof lackof professionalexperience,aprogramme
of subsidies will be implemented to reduce the fiscal
burden on employer when hiring youth. In addition, the
preference on reservation of procurement for youth,
women and people with disabilities will increase from
10% to 30%, with the assumption that this will enable
these categories to better participate in the national
economy. It is doubtful that creation of employment by
creating this policy distortion is justifiable. An efficient
and fully transparent procurement system would be
a better policy than introducing a distortion in policy
which will merely transfer public funds to selected
enterprises.
3.7 Devolution and Budget 2013-2014
The 2013/2014 budget is critical in laying a firm
foundation for the devolved system of government
in Kenya, The Cabinet Secretary allocated Kshs. 210
billion to County Governments of which Kshs. 190
Billion is unconditional and a further Kshs. 20 Billion
is conditional. Reviewing the budget documents
presented and placed in the public domain, it is unclear
whether the assumptions used in costing the functions
are realistic for each individual county. For that reason,
it is not possible to state unequivocally whether these
allocations are sufficient to fund functions assigned
to the devolved units. What is concerning is that
the cabinet secretary has already indicated that the

Transition Authority has already published gazette
notices on the specific functions to be transferred to
counties on 1st July 2013. The gazette notices has not
been available for public scrutiny and it is doubtful
that it would fulfill the constitutional requirements in
schedule 4, part two of the Constitution of Kenya.
Allocations made to Health and Agriculture suggest
that the National government retains responsibility for
these services.
4.0 Taxation Proposals
Table 8:Taxation Proposals
Taxation Proposal Intention/Rationale Comment
A .Value AddedTaxation
Re-tabling the VAT bill which aims to simplify, modernize and reduce the cost of compliance and administration. The Treasury estimates that upon
enactment, the KRA would raise an additional Kshs 10 billion. Based on preliminary concerns, there is opposition to expanding VAT to cover food and
essential commodities as proposed in the previous bill.
B. IncomeTax
Improve compounding framework for income tax on
tax offences
Enhance the tax administration and
deepening tax reforms
Encourage tax payers to comply with income tax
Act. Sorting tax cases out court is encouraged but
at the risk that expose KRA officials to bribery.
Impose a withholding tax on winnings from gaming
and betting.
Promote fairness and equity in the tax
system.
Winners of gaming and betting to equally
contribute toward the exchequer.
Amendment of the Income Tax Act to empower the
commissioner in proving tax evasion and collection of
tax.
deepening tax reforms
Empowering the commissioner to deter tax
evasion and enhance tax compliance.
Reviewing capitalgains taxwitha viewtoformulating
modalities for its effective enforcement.
Promote fairness and equity in the tax
system.
Targetingthewealthiermembersofthesocietyto
contribute to national agenda.
C. Excise Duties
Remission of exercise duty on KEG from 100% to 50%
for a period of 3 years.
Generate and Increase Revenue collection
to the exchequer.
Discourage the consumption of illicit and
dangerous brews
Reduction to 50% of excise duty on beers made from
millet, sorghum and cassava.
Generate and Increase revenue collection
to the exchequer.
Stimulate the agricultural activity in the region
where these products are grown.
D. Import Duty
Exempt import duty on items used to facilitate railway
operations.
Support the expansion and development
of the railway network in the region.
Consider which specific firms to benefit from tax
increase
Increase import duty on welding electrodes from 10%
to 25%.
Cushioning the local manufacturers from
import.
Why cushion specific industries from competition.
Increase import duty on millstones and grindstones
from 10% to 25%.
the cheap imports
Which industries would benefit from this?
Increase import duty on plastic tubes for packing of
toothpaste, cosmetics and similar products from 10%
to 25%.
the cheap imports
Promote growth in local industries
Promote employment and alleviate
poverty
Promote beehive keeping as an economic activity
in the country
E. Customs
Introduce railway development Levy of 1.5% on all
imported goods.
Raise funds for the construction of a
standardgaugerailwaylinefromMombasa
to Kisumu
It is not a good policy design. Why importers are
always subsidized.
There is need for a clear focus that counties are the core
service delivery units and hence all matters affecting
services assigned to them should be allocated as such
and in a manner consistent with the obligations of the
Transition Authority in accordance with the transition
to Devolved Government law.

Exempt duty on items used to facilitate railway
operations.
Support the expansion and development
of the railway network in the region.
Provide incentive to investors in the railway
industry.
F. OtherTaxation Measures
Introduction of tax rebate to tax-compliant business
and NGOs.
Enhance access to jobs and training for
qualified but inexperienced youth
To address the reluctance of employers to employ
inexperienced but qualified youth graduating
from educational institutions
Exemption of premiums from employers on group life
and group personal accident policy covers
Encourage more employers to cover
employee ongrouplifeandgrouppersonal
accident policy covers
Extend a tax benefit to employees who have
cover over the group life thus attracting more
employees by taking off their medical cost and
enabling them to be more productive.
Extension for 5 years, on persons with disability tax
exemption status.
Tax relief for persons with disability. why the 2 years extension?
Alignment of tax exemption with the new
constitution particularly VAT, Excise and income
tax.
Ensuring all Kenyan contribute to revenue
collection.
Equity in tax collection and improved tax
collectionfromallKenyansandtoalignthemwith
the new constitution.
Amendment to the customs law to introduce customs
warehouse rent on goods that remain at the port of
importation for more than 21 days.
Reduce congestion at the port and address
the importers practice of turning the port
into a storage area.
Commendable in terms of ensuring prompt deals.
Need to address operational efficiencies by KRA
too.
Creation of a single tax appeals tribunal merging VAT
tribunal, customs and excise tribunal and tax local
committees
Enhanced dispute solution on tax cases. May improve dispute resolution framework, instill
professionalism, and fast track conclusion of tax
cases.
Prescription of procedures and guidelines for the
implementation of excisable goods management
system 2013.
deepening tax reforms.
Mapping out all rental property in the urban areas and
putting in a place a robust institutional framework or
taxation.
Increase in revenue collection Same promise as year 2012
Amendment of the insurance Act to open up the
ownership of insurance companies and brokerage
firms to other citizens of the East African Community
(EAC)
Strengthening financial system for
sustainable development within the East
Africa Community.
Implementation of the EAC common market
protocol.
Overhaul of the Insurance Act to align it with best
international practices and the constitution.
Strengthening financial institutions and
ensuring a stable and growing insurance
sector
Comprehensive review of the Retirement Benefits Act
to align it with best international practices and the
constitution.
Strengthening financial system for
sustainable development.
Provide details of the bill and declare principles
Amendment to the Kenya Deposits Insurance Act to
ensure adequate protection to depositors
Strengtheningtheregulatoryframeworkof
the Kenya deposits insurance corporation
Protection of deposits and savings through
a strong mandate and corporate governance
disclosure.
Amendment of the Capital Market Act to allow the
issue of regional fixed income securities.
Raising funds from across the regional
capital markets.
Recognition of persons licensed by the other EAC
capital markets regulators.
Amendment of the Banking Act to increase the
penalties to counter unethical or illegal business
activities
Strengthening the banking sector To deter and reduce the number of institutions
violating of the banking Act.

5.0 Conclusions
For a successful implementation of Budget 2013 /14
and for future Budgets. The following are some points
worth noting:
• For effective public participation in the budget
process, there is need to ensure that at the very
minimum, all the budget documents as required
by the PFM, law, are published and publicized in a
timely fashion.
• There is need for the National Government to
lead the way in observing the provision of fiscal
responsibility principles in Budget formulation
with regard to 30% threshold for development
expenditure, wages, public debt and reasonableness
of tax rates in order to maintain fiscal discipline and
macro stability.
• It is commendable that the National Government
adopted programme-based budgeting; however
there is need to consolidate past gains in ensuring
that budget documents in their presentation are
comprehensive in detail, for instance, more detail
on economic classification, as well as detail on
government of Kenya and donor component
of development expenditure should be reflected
among other relevant information to make it easy
to understand the numbers. Besides, the budget
estimates did not have prior years’ (Budget 2012/13)
information, making difficult the comparison of
the two budget estimates. Revenue shortfalls have
persisted amidst expenditure pressures thus a need
to ensure that revenue targets are realistic and
capture any emerging risks.
• Budget implementation especially for the
development expenditure has been a recurring
problem and there seems to be no significant traction
in resolving the causes of low absorption rates.
• Flexibility in the budget must be assured through
upfront management of the debt and pensions
liabilities.
• It seems the estimates of the National Government
recurrent and development expenditure contained
allocation to some functions that are supposed to
be under the jurisdiction of county government.
For example, one of the indicators of the Livestock
Resources Management and Development
Programme is to construct abattoirs which are
clearly a function for the counties.

The Institute of Economic Affairs
(IEA -Kenya) is a Public Policy think
tank and a civic forum that seeks to
promote pluralism of ideas through open,
active and informed public debates on
key policy issues. The Institute provides
research backup to policy makers, including
members of parliament through research
and advocacy. The IEA is independent of
political parties, pressure groups, lobbies
and any other partisan interests
© 2013 Institute of Economic Affairs
Budget Information Programme
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Email: admin@ieakenya.or.ke
Website: www.ieakenya.or.ke
Written by:
Institute of Economic Affairs with
contribution from MUHURI, HERAF &
Chemi Chemi Ya Ukweli
Edited By:
Otiato Guguyu
Oscar Ochieng’
Audi C. Zilper
Board of Directors:
Betty Maina
Charles Onyango-Obbo
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