Before we discuss about the types of government budgets in Kenya, let’s define a budget. A budget is a document that sets out the government’s proposed revenues, expenditure and priorities for a specific financial year. A budget is also a financial plan for a specific period of time.
Budgeting is important to determine if the government will have enough money to execute its plans.
A financial year is a period the government utilises for accounting and budgeting purposes and for financial reporting. In Kenya, a financial year runs from 1st July of the current year to 30th June of the coming year.
Budgeting is the process of coming up with a plan to spend money.
In Kenya, the budget performance is (or shall be) reviewed quarterly (that is, after every three months) by both the national government and county governments, and also independent government bodies such as the Controller of Budget.
The government shall prepare the budget in line with Public Finance Management regulations to guide the country’s economic policy, accountability and management of public funds.
Public finance management refers to the set of laws, rules, systems and processes used by sovereign nations (and sub-national governments), to mobilize revenue, allocate public funds, undertake public spending, account for funds and audit results. (ICPAK)
In Kenya, the Constitution (Chapter 12) and the Public Finance Management Act are the major laws that guide public financial management.
The term “government” here refers to both the national government and the county governments, unless stated otherwise.
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The three types of government budgets in Kenya are the deficit budget, surplus budget and balanced budget.
A deficit here refers to the amount by which the budget falls short. Therefore, a government budget is said to be a deficit budget when the proposed expenditure exceeds the expected revenues in a particular financial year.
When a deficit in budget occurs, the government has several ways to mitigate the deficit. For example, it can increase the tax revenue, cut down on certain spending areas to reduce the deficit, or it can borrow to fund the deficit.
Most governments borrow money to fund the deficit.
The budget deficits for a country are referred to collectively as the National Debt (or Public Debt). Public debt refers to the money the government owes its lenders both domestically (e.g. commercial banks) and externally (e.g other countries, multinational corporations like World Bank and IMF, etc.).
While the deficit represents the difference between revenue and expenditure over a period of time, debt represents the total amount of money owed at a point in time.
The national government budget in Kenya has to a large extent always been operating on a deficit. This leads the government to borrow money both domestically and externally. Because of this, the public debt has grown significantly.
Many county governments inherited debts from the former local authorities (like city councils, municipal councils, etc.) which include money owed to suppliers. But in general, most counties also operate on a deficit.
However, budget absorption is a big challenge for most counties hence the underspending helps in a way to reduce the deficit at the end of the financial year.
A budget deficit in some cases is an indication that a government is mismanaged and the economy is worse.
Here’s a video for the arguments about the advantages and disadvantages of a budget deficit.
Surplus means an excess of something. Therefore, a surplus budget is the opposite of a deficit budget. A government budget is said to be a surplus budget when the expected revenues exceed the expected expenditure in a particular financial year.
When there is a budget surplus, it means the government is collecting enough money from taxes that exceed the amount it spends to provide public goods and services. Therefore, the surplus acts as a form of government “savings”.
A surplus can occur if the government increases its revenues. However, a surplus can also occur if the government lowers its expenses below the expected revenues (e.g. by cutting down on expenditure costs).
A surplus budget means that the excess funds can be utilised elsewhere. For example, the funds can be saved for the future (for when a deficit occurs), can be used to pay off government debts or to finance new ventures (e.g. new government plans in health, agriculture, education, defence, etc.).
A surplus budget is an indication that a country is managed effectively or a healthy economy. However, not having a surplus in the budget does not necessarily mean a country is poorly governed since it is not necessary for a government to maintain a budget surplus.
A government budget is said to be balanced when the expected revenues are equal to or greater than the proposed expenditure in a particular financial year. Therefore, there is neither a budget deficit nor a budget surplus (hence the accounts “balance”).
A balanced budget has no deficit but can be a possibility of a budget surplus. For a budget to be a surplus, revenue must exceed the expenditure and not the opposite.
A balanced budget indicates that, after all the revenue has been collected and all expenditures have been paid, the government has no revenue left over. It does not have surplus (extra) cash but also does not have a deficit where it owes extra money at the end of the financial year. Therefore, revenues equal expenditures.
The balanced budget can, therefore, serve the purpose of ensuring there is no budget deficit by keeping spending from growing beyond the means of the government.
Theoretically, it’s easy to balance the estimated expenditure and expected revenue but when it comes to practical implementation, such balance is hard to achieve.
N.B. to determine either of these three budget types, we subtract the total planned expenditure from the total available revenue. The result will show either a balanced budget, a budget deficit (a negative difference) or a budget surplus (a positive difference).