The economic implications of Kenya’s expenditure trends in light of the Big 4 Agenda

18 Aug, 2021 0 comments
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By Charles Kibigo

Wagner’s law of state, also known as the law of increasing state spending, holds that for any country, public expenditure rises constantly as income growth expands. Loosely translated, with economic growth and development, a nation will experience an increase in the activities of public sector, which is generally proxied by sectoral expansion of public expenditure in a country. The underlying claims of this principle, which is named after the German economist Adolph Wagner (1835–1917) is what is of significance for this blog: To begin with, economic growth results in an increase in complexity requiring continued introduction of new laws and development of the legal structure; Additionally, urbanization increases negative externalities, such as congestion and crime, which necessitate intervention; and finally, the goods supplied by the public sector have a high income elasticity of demand. If the elasticity of demand exceeds one, public sector expenditure will consequently rise as a proportion of income.

Since decentralization in 2013, Kenya’s size of the public sector has grown in nominal terms, proxied by the increase in sectoral public expenditure as indicated by figure 1.

Figure 1: National Government Expenditure Trends since 2013/2014.

Source: Author’s Computations

The growth in public sector spending can be attributed to the devolution complexities brought about by the increased fiscal, administrative and governance responsibilities meant to enhance efficiency in public service delivery to the lowest possible units on the periphery. With devolution coming into effect in 2013, it was only rational to anticipate that the national government would fill in size as an ever-increasing number of fiscal resources trickled down stream to county governments. The national government also needed to ensure that county governments align themselves with its priorities of ensuring that public service delivery reaches the grassroots efficiently and cost-effectively. These priorities later became the Big 4 Agenda.

One would expect the National Treasury’s expenditure allocations to prioritize the achievement of the big 4 agenda in their respective economic sectors. Figure 2 depicts the aggregate sectoral allocation of national government expenditure from 2013/14 to 2019/20 in a nutshell.

Figure 2: Sectoral expenditure allocation (in %) by the National Government from 2013/14 to 2019/20

Source: Author’s Computations

From the figure above, Energy, Infrastructure and ICT, Education, Public Administration and International Relations (PAIR), Governance, Justice, Law and Order (GJLO) and National Security sectors represent the greater part of the absolute national government consumption pie, appreciating on average a twofold digit proportions of 23%, 23%, 14%, 13% and 10% respectively over the course of the last 7 years under review. Justifiably, Education is the key to a country’s competitiveness and a solid economy, and continued public investment in education is needed in order to support improvements in student achievement and put the economy on the path to sustained growth. In a sense, a country’s economy becomes more productive as the proportion of educated workers increases since educated workers can more efficiently carry out tasks that require literacy and critical thinking.

In the same breath, in order to maintain a smooth functioning between the agriculture and industrial sectors, a sound socio-economic infrastructure is necessary. Thus, the government must invest substantially in the development of overhead capitals like energy, power, information and communications systems among other infrastructure in order to augment different sectoral growth in the country. Kenya is currently one of Africa’s fastest growing ICT markets where ICTs have increased productivity in all spheres of production process and enabled expansion of skills, contributing to improved standards of living for Kenyans (ITA). With the ICT sector poised for exponential growth in years to come, it would make sense for the government to tap into the gains of the sector through increased investments in ICT infrastructure (structures and systems) in order to enhance the creation of jobs in the domestic economy through the digital market place platform. However, these investments ought to be balanced out between recurrent and development priorities to ensure that exponential and inclusive growth is sustained in the future.

Of major concern is the fact that out of the ten economic sectors in Kenya, none of the big 4 economic sectors features in the first five sectors represented by figure 3.

Figure 3: National Government Expenditure Share across Sectors since Devolution from largest to smallest.

Source: Controller of Budgets Reports

It is on the extreme end of the expenditure allocation continuum that sectors like Agriculture, Rural and Urban Development (ARUD), Health and Social Protection, Culture and Recreation (SPCR) enjoy a meagre share of national government expenditure, despite being the top priority sectors in the big 4 agenda for the government. These three sectors have cumulatively accounted for less than 15% of the aggregate national government expenditure in the last 7 years. The rates of expenditure growth in these three sectors have also been unstable (Figure 4). Consequently, little has been realized in the achievement of the big 4 since their launch in December 2017 and the national government may have to be overly ambitious in order to achieve the same in the remaining one year. This will warrant a shift in the expenditure priorities if the big 4 are to be achieved, especially towards the last leg of the current regime.

Figure 4: Rates of expenditure growth in the big 4 sectors have been unstable since 2013/14.

Source: Author’s Computations

The implied expenditure prioritization will have to reconsider the proportion of total national government expenditure channeled to specific sectors of the economy, bearing in mind that recurrent expenditure across the big 4 priority sectors have always outweighed the development expenditure considerably. There have not been so many hospitals built to achieve universal health coverage, public resources meant for construction of dams to facilitate sustainable agriculture through irrigation have been embezzled and little exists to be shown for affordable housing in the country as a huge population of citizens continue to live in slums.

Based on the above analysis, the realization of the big four agenda remains a facade amid the national government’s public discourse which has been and is being justified through the National Treasury’s huge borrowing to finance the big 4 agenda. The country’s initiative to ramp up public debt on account of financing the priority agenda stands to derive little or no gains, given the fact that a huge proportion of national government expenditure has gone into financing recurrent obligation across most of the economic sectors since devolution.

Policy Recommendations:

Foremost, bearing in mind that high levels of government consumption are likely to increase employment, profitability and investment via multiplier effects on aggregate demand, The National Treasury should consider increasing sectoral allocations of government expenditure, even of recurrent nature, to contribute positively to economic growth. However, the sectoral allocations should prioritize increased spending to economic sectors which not only yield highest returns to the economy in terms of economic growth, but also ensure continuous and sustainable positive returns to the economy in the foreseeable future. These are sectors like Agriculture, Health and Natural Resources which have over the devolution years, experienced very dismal allocation of the national expenditure budgets, and whose increased expenditure allocation will augur well with the realization of envisaged food security and universal health coverage in the country in the long-run.

Additionally, at a time when Covid-19 Pandemic continues to ravage Kenya’s economy through loss of job opportunities both in the formal and informal sectors, the government should prioritize the containment of the virus through revamped expenditure in the health sector. This can be done by hiring more medical personnel and vaccinating the vast majority of the working class so as to forestall the spread of the contagious virus, and also facilitate the speedy recovery of the slumping economy by allowing the working-class Kenyan citizens to return to work. Likewise, the health sector share of development expenditure allocation needs to be ramped up unreservedly in order build more level 3 and 4 hospitals for the in line with the realization of the national government. In doing this, the national government spending will be in line with the realization of universal health coverage in the country, which is among the key agenda for the big 4.

Lastly, the share of expenditure allocation in the social protection, culture and recreation (SPCR) sector ought to be ramped up sizably, in order to facilitate the construction of affordable housing units in line with government’s priority project of providing affordable housing in the country. This will not meet the increased aggregate demand for affordable housing in Kenya, but will also create jobs in the real estate sector in line with the realization of one of the key big four agenda.

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