County Governments Reject Ksh20 Billion Cut in Treasury Allocation

A key meeting between John Mbadi, the Cabinet Secretary for National Treasury and Planning, and the Council of Governors (COG) has sparked intense debate over the allocation of funds to Kenya’s county governments for the 2024/25 financial year. The National Treasury’s proposal to allocate Ksh380 billion, instead of the previously agreed Ksh400 billion, was flatly rejected by county governors, setting the stage for a potential budgetary crisis that could severely hamper county operations. This financial dispute highlights the tension between national and county governments, which are struggling to balance fiscal constraints while ensuring service delivery, especially in critical sectors like healthcare.

The Sticking Point: Revenue Sharing and the Ksh20 Billion Deficit

At the heart of the disagreement is the Ksh20 billion reduction in Treasury’s allocation to counties. The COG insists that Ksh400 billion had been the agreed-upon amount for counties, a figure that had already been factored into county budgets for the coming financial year. The counties are understandably concerned that such a significant reduction in funding will impact their ability to provide essential services, particularly healthcare, which is already underfunded.

According to Ahmed Abdullahi, Vice Chair of the COG, “This reduction will have a ripple effect, hindering our ability to meet the expectations of our citizens. Healthcare, being the most affected, will see delays in service provision and inadequate funding for ongoing programs.”

Baringo Governor Benjamin Cheboi also expressed concerns about the potential cuts, noting that counties will have to make difficult decisions, including laying off workers or reducing the scope of their services. “Adjusting to a Sh20 billion reduction would force counties to make tough decisions,” Cheboi emphasized. “We’ve already budgeted for Sh400 billion, and recalibrating budgets at this stage will not only slow down projects but could also cause service disruptions.”

The National Treasury’s Position: A Shrunken Budget

John Mbadi, defending the Treasury’s position, explained that the government is operating under significant fiscal constraints. The initial revenue projections of Ksh2.913 trillion for the current financial year were sharply revised downward to Ksh2.6 trillion after the withdrawal of the 2024 Finance Bill. This revenue shortfall of Ksh344 billion has created a budgetary squeeze, forcing the national government to make difficult trade-offs.

Mbadi detailed how the Treasury’s current financial situation left little room for maneuvering. With Ksh1.1 trillion set aside for loan repayments, Ksh1.2 trillion allocated for the Consolidated Fund, and over Ksh900 billion earmarked for the national government’s wage bill, the remaining funds are barely sufficient to cover additional expenditures. “Given the current fiscal constraints, we can only offer Ksh380 billion to counties,” Mbadi explained. “While we understand the governors’ concerns, the numbers don’t lie. We simply cannot afford the Ksh400 billion without cutting into other vital programs.”

This explanation did little to appease the county governors. They pointed out that counties are already facing delays in disbursement, making it difficult to maintain essential services. Some counties have resorted to borrowing from local commercial institutions at high-interest rates just to keep their operations running. For instance, delayed disbursements in the healthcare sector could force counties to cut back on critical services such as emergency care and the ongoing rollout of the government’s new health system.

The Health Sector: A Vulnerable Target

Healthcare has emerged as the focal point in this budgetary tug-of-war, with both sides expressing concerns over the potential fallout from the funding impasse. The county governments argue that reducing their allocations by Ksh20 billion would significantly impair healthcare delivery. In the same breath, Mbadi acknowledged the challenges facing healthcare but asserted that the government is committed to addressing them. He pledged to ensure that healthcare receives its fair share of funding, with a goal of resolving the fiscal issues by the end of the year.

Mbadi further committed to resuming timely disbursements to counties by December 2024, a move aimed at easing the financial pressures that have forced counties to borrow from local institutions. He explained that Ksh31.8 billion had already been disbursed for July and additional funds would be released for August, hoping to placate some of the governors’ immediate concerns.

The Ministry of Health’s Public Health Care Fund, which is set at Ksh35 billion annually, faces a staggering deficit of Ksh30.9 billion, with only Ksh4.1 billion currently available. Additionally, the Emergency and Chronic Care Fund, which is supposed to receive Ksh3.8 billion per year, has been allocated only Ksh2 billion this year. This funding gap is putting enormous strain on the system, raising fears that essential services might have to be scaled down or halted altogether.

Mediation and Potential Resolutions

In an attempt to resolve the deadlock, Mbadi announced that the issue would be referred to a mediation committee composed of key government agencies and representatives from both the National Treasury and the county governments. The committee is expected to convene in the coming days to reach a compromise and avoid disruptions to county services.

Despite the deadlock, both the national government and county governors have expressed optimism that the impasse can be resolved. Mbadi noted, “The governors remain firm on their demand for Ksh400 billion, which was initially agreed upon, and I believe we will resolve this impasse soon.”

The creation of a mediation committee is a positive step forward, but it remains to be seen whether it will yield a resolution that satisfies both sides. County governors have made it clear that they cannot operate with reduced allocations, especially in sectors as vital as healthcare. The National Treasury, on the other hand, must contend with the realities of reduced revenue and fiscal constraints.

Potential Fiscal Reforms

To address the wider budgetary challenges, Mbadi outlined several tax reforms proposed by the Treasury that could help generate additional revenue. One of the key areas he identified is the rental income tax sector, which currently generates Ksh17 billion annually. According to Mbadi, the sector has the potential to raise over Ksh100 billion if properly harnessed. Additionally, the Treasury has proposed reducing Value Added Tax (VAT) from 16% to 14%, a measure aimed at stimulating consumer spending.

Another area of focus is personal income tax, where the Treasury expects an additional Ksh500 million. These reforms, coupled with efforts to reform the Kenya Revenue Authority (KRA) by adopting new technologies and reducing revenue leakages, are part of a broader strategy to stabilize the government’s fiscal position.

Mbadi emphasized the need for prudent resource use across all levels of government, noting that eliminating wastage and improving efficiency would allow the government to allocate more resources to critical sectors like healthcare. He projected a reduction in the fiscal deficit, forecasting that it would decrease from 5.6% of GDP last year to 4.4% this year, with a further reduction to 4% in the next financial year.

The Road Ahead: Navigating the Fiscal Storm

The ongoing standoff between the National Treasury and county governments underscores the complexity of balancing fiscal discipline with the need to fund essential services. With both sides digging in their heels, the mediation committee will have its work cut out to find a solution that satisfies all parties involved.

At its core, this budgetary crisis reflects deeper structural issues within Kenya’s public finance system. The reliance on county governments to deliver key services, coupled with the national government’s fiscal constraints, highlights the need for comprehensive reforms to ensure that both levels of government can meet their obligations without compromising service delivery.

As the mediation process unfolds, the public and other stakeholders will be watching closely to see how this impasse is resolved. For county governments, securing adequate funding is crucial to maintaining operations and providing services to citizens. For the national government, ensuring fiscal responsibility while keeping counties adequately funded is a balancing act that will define the coming financial year.

Conclusion

The Ksh20 billion reduction in county allocations presents a significant challenge for both the national and county governments in Kenya. While the National Treasury grapples with revenue shortfalls and fiscal constraints, counties are struggling to maintain essential services, especially in healthcare. The mediation process, tax reforms, and efforts to improve efficiency in government spending will be crucial in resolving this impasse. Ultimately, the solution must balance fiscal discipline with the need to provide vital services across Kenya’s counties.