Time for Treasury to revise its definition for development

Friday was the last day for submission of views on the National Treasury’s proposals on a revised Standard Chart of Accounts.

For those less familiar with public finance matters, the Chart of Accounts is a structured way of categorising budget, revenue and expenditure transactions. The standardisation of the Chart of Accounts for public entities is a requirement of the Public Finance Management Act and is intended to create consistency in government accounting and reporting. 

The current Chart of Accounts discloses a fundamental flaw which is overdue for revision. The flow commences in Section 15 of the Public Finance Management Act, which requires the two levels of government to allocate not more than 70 per cent of their revenue on recurrent expenditure, thus ensuring spending of at least 30 per cent of revenue in “development”.

The Act and the Chart of Accounts then define and classify development and recurrent expenditure. Development expenditure is defined as expenses for the creation and renewal of assets. It refers to costs incurred in order to create assets that provide long-term public goods. These include roads and similar infrastructure and establishment of and installation of equipment.

Recurrent expenditure is defined as regular expenses that go into the running of government. This includes salaries and allowances paid to government employees, and operational costs including maintenance costs incurred on equipment, buildings, and installations.

Since the onset of devolution, the national and most county governments have been unable to achieve the 30 per cent allocation for development. This has resulted in an onslaught, particularly against county governments that are accused of spending most of their budgets on recurrent expenses instead of development.

Indeed, in 2024, the Kenya Human Rights Commission sued the National Treasury and 20 county governments for violation of this statutory requirement. The High Court declared this conduct unconstitutional and issued a structural interdict that required the national government and concerned county governments to report within three months on the steps they were taking to ensure compliance.

On the face of it, these requirements appear progressive and pro-development. What is lost in this discourse is the legitimacy of the definitions of “development” and “recurrent” and its implications on spending by governments.

This classification, which casts “concrete, mortar and steel” as true development and treats expenditure on socio-economic aspects of human development as non-priority recurrent expenditure can be disastrous especially on countries like Kenya which need to invest extensive resources on these softer aspects of human development.

The latter includes expenditure on items needed to raise educational standards, feed more mouths, keep more bodies healthy. As argued recently by Prof Kiarie Mwaura, the Treasury boss in Murang’a County, a former Dean of the Faculty of Law, classifying public funds spent on fortified foods for children in early education as a recurrent expense is grossly erroneous.

Investing in a child's cognitive development is a foundational step toward creating future innovators, a critical need for developing nations. Similarly, under the current Chart of Accounts, a county government that promotes its economy through targeted programmes on health promotion, medical drugs, or agricultural extension services will be recorded as having spent 0 per cent on development.

Yet for a developing country, this is just what the population needs. In its 2018 Index of African Governance, the Mo Ibrahim Foundation reported that half of the continent’s 54 countries registered a decline in their educational, health, and social protection scores between 2013 and 2017.

Consequently, interventions that raise educational standards, feed more mouths, keep more bodies healthy, undo this decline and create a conducive environment for overall social and economic development.

The classification in the Chart of Accounts, which results in classifications of spending that indicate low levels of development expenditure despite these important expenses creates a perverse incentive.  

The classification encourages governments to cut funding for human development services and instead allocate more money to concrete, steel and mortar, to get a better developmental spending score.

Ultimately the country suffers drawbacks in human development as it settles for gleaming highways and more buildings which are not the ultimate measure of how well a country is doing. The National

Treasury should revise its approach to development and seek a healthy balance, even as we encourage continued prudence in the overall use of revenue across governments.

-The writer is an advocate of the High Court of Kenya