CRA consultative meeting with the Council of Governors over Recurrent Expenditure Budget Ceilings for 2025/26: A Critical Review

On December 6, 2024, the Commission met with the Council of Governors (CoG) to discuss the County Governments’ recurrent expenditure budget ceilings for the fiscal year 2025/26. This meeting was not only an opportunity for stakeholders to engage with the CRA on the technicalities of the budgetary recommendations, but also a critical platform to address the underlying issues plaguing the financial landscape of the 47 county governments in Kenya.

The legal mandate and role of CRA in Recurrent Expenditure Budget Ceilings

The CRA is constitutionally mandated under Article 216 (2) of the Constitution of Kenya to make recommendations to the Senate on the allocation of funds to counties, including recurrent expenditure ceilings. This mandate is enshrined in the Public Finance Management (PFM) Act, Section 107 (2A), which directs the CRA to set these ceilings in a manner that ensures fiscal discipline at the county level. Since its establishment, the CRA has consistently been at the forefront of guiding county governments on how to allocate their budgets efficiently and equitably, with a keen focus on ensuring that devolution goals are met despite limited resources.

Key issues raised during the meeting

  1. Mismatched Budget Allocations and the Strain on Service Delivery

One of the key points raised in the meeting was the challenge of balancing revenue expectations with the fiscal constraints faced by county governments. Our Vice Chair Koitamet Olekina, highlighted that the budgetary ceilings for the 2025/26 fiscal year were set within a ‘contracting fiscal space’, an acknowledgment of the wider economic difficulties affecting Kenya. With a reduced rate of inflation and increasing costs of goods and services, the budget ceilings for county recurrent expenditures reflect the difficult realities of Kenya’s economic landscape.

However, the meeting exposed the ongoing tension between county assemblies and county executives, with the former often receiving budgetary increases that are not backed by any substantial rationale. This situation has led to a mismatch in the financial capacity between the two arms of government. County executives, which handle service delivery and development programs, find themselves burdened with revenue underperformance while county assemblies get their full allocation, even in instances where the revenues fall short of expectations.

2. Inconsistencies Between PFM Regulations and CARA

A major concern raised by the Council of Governors was the persistent inconsistencies between the recurrent expenditure ceilings set by the CRA and those approved by the Senate. In many instances, the Senate has amended CRA’s recommendations, particularly in increasing allocations for county assemblies without providing a justifiable basis for such amendments. This creates a situation where county executives are forced to bear the brunt of revenue shortfalls, which can impede their ability to deliver essential services.

The amendments to the PFM Act in 2021, particularly Section 130, which requires county assemblies to budget for unspent funds from previous years, have exacerbated this issue. While the CRA has recommended that county assemblies’ ceilings be set as upper limits, the reality is that county governments have little flexibility in adjusting their budgets to accommodate for unanticipated revenue deficits, especially when the Senate arbitrarily alters CRA’s recommendations.

The Council of Governors has called for a revision of Section 130 of the PFM Act to ensure that the ceilings for county assemblies are not treated as actual appropriations but as maximum limits. Furthermore, there is a need for greater transparency and justification from the Senate when deviating from the CRA’s recommendations. Such revisions would ensure that county executives are not left shouldering the financial burden while county assemblies enjoy an inflated budget without a clear need.

3. The Issue of Non-Ceiling Items in County Assemblies’ Expenditures

Another critical issue discussed was the inclusion of non-ceiling items in the county assemblies’ recurrent expenditure ceilings. According to the Public Finance Management (County Governments) Regulations 2015, county assemblies’ approved expenditures should not exceed 7% of the total county revenue or twice the personnel emoluments, whichever is lower. However, this rule has been undermined by the inclusion of non-ceiling items like car grants, loans, and mortgages. These items, which are meant to be one-off allocations, have often been rolled over into subsequent years, thereby inflating the budget ceilings.

The Council of Governors has recommended that non-ceiling items be clearly demarcated in the budget and treated as one-off allocations, even if their implementation spans multiple years. This recommendation is crucial for ensuring that county assemblies’ expenditure remains within reasonable bounds and that funds are used more efficiently. There is also a call to ensure that ceiling growth rates align with actual revenue growth, preventing the continued over-inflation of county assembly budgets that undermine the financial stability of county governments.

Enhancing County Executives’ Budget Ceilings for FY 2025/26

While the Council of Governors raised several concerns about county assembly budgets, it also emphasized the need for enhanced budgets for county executives. The governors argued that the increasing cost of operations—due to inflation, rising fuel prices, and the general increase in the cost of living—necessitates an upward adjustment in the recurrent expenditure ceilings for county executives. Additionally, the emerging need for structured public participation in planning, budgeting, and project implementation further necessitates enhanced funding to allow county governments to fulfill their constitutional mandate effectively.

Public participation is a cornerstone of devolution, yet it remains underfunded in many counties. CRA has retained provisions for public participation in the 2025/26 ceilings, acknowledging the critical role it plays in aligning county budgets with the needs of the citizens. Similarly, the need for adequate training of county staff on the new fiscal management systems and budgeting processes cannot be overstated. The CRA’s recommendation to include funding for training programs is a step in the right direction, but the real test lies in whether these allocations will be effectively utilized.

Another area that requires attention is the capacity building of county staff. The CRA has recognized the need for continuous training, particularly in areas such as program-based budgeting and the transition from cash to accrual accounting. Without adequate funding to train staff, county governments may struggle to adapt to new budgeting frameworks and ensure that their financial management practices remain robust and transparent.

Fiscal responsibility and transparency in budgeting

The CRA’s role in promoting fiscal responsibility and ensuring that county governments adhere to sound financial management principles is undoubtedly crucial. However, persistent challenges, including inconsistencies in Senate-approved ceilings, non-adherence to budget guidelines by county assemblies, and unaddressed systemic inefficiencies in the budgeting process, indicate that significant improvements are needed.

The CRA intends to advocate for stronger oversight mechanisms that not only monitor budgetary allocations but also hold counties accountable for any deviations from the established ceilings.

In conclusion, the CRA’s consultative meeting with the Council of Governors on the 2025/26 recurrent expenditure ceilings highlights the ongoing challenges that county governments face in managing their finances amidst a tight fiscal space. While the CRA has made significant strides in ensuring fiscal discipline through its budgetary recommendations, the lack of alignment between county assembly and executive budgets, the arbitrary amendments by the Senate, and the inflation of budget ceilings for non-essential items remain pressing concerns.

The CRA’s efforts to enhance transparency and promote fiscal responsibility through public participation, continuous staff training, and a clearer delineation of non-ceiling items are commendable. However, more robust reforms are needed to address the systemic inefficiencies and ensure that county governments can meet their devolved responsibilities effectively.

As Kenya moves forward with devolution, the CRA intends to continue to advocate for stronger financial management frameworks that prioritize the efficient use of public resources, align with the actual revenue performance of counties, and ensure that the fiscal space is optimized for the benefit of all citizens. The recommendations from this consultative meeting serve as a call to action for both county governments and the Senate to collaborate more effectively in addressing the financial challenges faced by county governments.