BCOM 333: PUBLIC FINANCE

THE USE OF CONSOLIDATED AND THE PUBLIC ACCOUNTS COMMITTEE

Introduction:
The Consolidated Accounts and the Public Accounts Committee (PAC) are important
components of financial governance and oversight in many countries.

I. Consolidated Accounts:
A. Definition and Purpose:
a. The Consolidated Accounts refer to the financial statements that consolidate the
financial activities of various government entities and agencies.
b. The purpose of preparing consolidated accounts is to provide a comprehensive view
of the government's financial position, performance, and cash flows.
c. Consolidated accounts help in assessing the overall financial health of the government
and facilitate better decision-making.

B. Components of Consolidated Accounts:

a. Consolidated Balance Sheet: It presents the assets, liabilities, and equity of the
government as a whole.
b. Consolidated Income Statement: It shows the government's revenues, expenses, and
net income or loss for a specific period.
c. Consolidated Cash Flow Statement: It reflects the government's cash inflows and
outflows during a given period.

C. Importance of Consolidated Accounts:

a. Transparency: Consolidated accounts provide transparency by consolidating financial
information from various entities and presenting a holistic view of the government's
financial activities.
b. Accountability: Consolidated accounts enable stakeholders to hold the government
accountable for its financial decisions and performance.
c. Decision-making: The information in consolidated accounts assists policymakers,
legislators, and other stakeholders in making informed decisions regarding budget
allocations, taxation policies, and resource utilization.

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Consolidated Accounts:
a. Consolidation Methods: The process of preparing consolidated accounts involves
consolidating the financial statements of various government entities, such as ministries,
departments, and agencies. This is typically done using either the acquisition method or the
equity method, depending on the level of control the government has over the entities.

b. Reporting Standards: Consolidated accounts are prepared in accordance with generally

accepted accounting principles (GAAP) or international financial reporting standards (IFRS).
These standards provide guidelines for recognizing, measuring, and disclosing financial
information in a consistent and comparable manner.

c. Financial Transparency: The preparation and publication of consolidated accounts promote

financial transparency by providing a comprehensive overview of the government's financial
activities. This transparency is essential for promoting public trust and accountability.

II. Public Accounts Committee (PAC):

A. Definition and Purpose:
The Public Accounts Committee is a parliamentary committee responsible for scrutinizing
government expenditures and ensuring financial accountability.

The primary purpose of the PAC is to examine the audit reports and financial statements of
government departments and agencies to identify irregularities, inefficiencies, and potential
fraud.

B. Functions and Powers of the PAC:

a. Examination of Audit Reports: The PAC reviews the findings and recommendations
of the auditor general's reports on government expenditures and financial
management.
b. Summoning Witnesses and Officials: The PAC has the power to summon witnesses,
including government officials, to provide explanations and clarifications regarding
financial matters.
c. Recommendations and Reports: The PAC prepares reports and recommendations
based on its findings, which are presented to the parliament or legislative body for
further action.
d. Follow-up and Implementation: The PAC monitors the implementation of its
recommendations and ensures that corrective actions are taken by the government.

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C. Significance of the PAC:
a. Oversight and Accountability: The PAC plays a crucial role in holding the
government accountable for its financial decisions and actions.
b. Transparency: The PAC's scrutiny of government expenditures and audit reports
enhances transparency in public finance management.
c. Public Trust: The PAC's work builds public trust by ensuring that taxpayer funds are
utilized appropriately and in the best interest of the public.

III. Relationship between Consolidated Accounts and the PAC:

a. The Consolidated Accounts serve as a vital source of financial information for the
PAC's examination and scrutiny.
b. The PAC relies on the consolidated accounts to assess the government's financial
performance, identify discrepancies, and investigate potential financial
mismanagement.
c. The PAC's findings and recommendations, in turn, contribute to improving the quality
and accuracy of the consolidated accounts through increased accountability and
transparency.

Conclusion:
 The Consolidated Accounts and the Public Accounts Committee are essential
components of financial governance and oversight.
 Consolidated accounts provide a comprehensive view of the government's financial
position, while the PAC ensures accountability and transparency in public finance
management.
 The relationship between these entities is symbiotic, with consolidated accounts
serving as a crucial tool for the PAC's examination and the PAC's findings
contributing to the improvement of consolidated accounts.
 Together, they play a crucial role in safeguarding public funds and promoting
effective financial management in the government.

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 THE STRUCTURE OF EXPENDITURES AND ITS GROWTH OVERTIME;
EXPENDITURE PATTERNS

Introduction:
Understanding the structure of expenditures and their growth over time is crucial for
analyzing the allocation of resources in an economy and assessing government policies.

I. Expenditure Structure:

A. Definition:
 Expenditure structure refers to the composition or breakdown of total expenditures in
an economy or a specific sector.
 It provides insights into how resources are allocated across different categories of
spending, such as consumption, investment, government expenditures, and net
exports.

B. Components of Expenditure Structure:

a. Consumption Expenditure: It represents the spending by households on goods and
services to satisfy their needs and wants.
b. Investment Expenditure: It includes spending on capital goods, such as machinery,
equipment, and infrastructure, aimed at enhancing production capacity and future
economic growth.
c. Government Expenditure: It encompasses the spending by the government on public
goods and services, including education, healthcare, defense, infrastructure
development, and social welfare programs.
d. Net Exports: It represents the difference between a country's exports and imports,
indicating the contribution of international trade to the overall expenditure structure.

II. Growth of Expenditures over Time:

A. Factors Influencing Expenditure Growth:

i. Economic Growth: As economies expand, there is typically an increase in overall
expenditures due to rising incomes, consumption patterns, and investment
opportunities.
ii. Population Growth: A growing population can lead to increased consumption and
greater demand for public goods and services, resulting in higher government
expenditures.

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 iii. Inflation: Rising prices can lead to increased expenditure levels as the cost of goods
and services increases over time.
iv. Policy Changes: Changes in government policies, such as tax reforms, social welfare
programs, or infrastructure development initiatives, can impact expenditure growth in
specific sectors.

B. Analysis of Expenditure Growth:

Analyzing the growth of expenditures involves comparing expenditure patterns across
different time periods, assessing the factors contributing to growth, and identifying any shifts
in the expenditure structure.

Long-term trends and patterns can provide insights into the priorities, policy choices, and
economic development of a country or sector.

III. Expenditure Patterns:

A. Sectoral Expenditure Patterns:

Expenditure patterns vary across different sectors of the economy, such as agriculture,
industry, services, and public administration.

These patterns reflect the relative importance of each sector in terms of resource allocation
and economic activity.

B. Social Expenditure Patterns:

Social expenditure patterns focus on government spending in areas such as education,
healthcare, social welfare, and housing.

These patterns reflect the government's priorities in providing essential services and
addressing social needs within the economy.

C. International Expenditure Patterns:

International expenditure patterns analyze the composition of a country's imports and exports.

It provides insights into the structure of trade, the competitiveness of industries, and the
reliance on specific goods or services from other countries.

Expenditure Structure:

A. Consumption Expenditure:
Consumption expenditure is a major component of overall expenditures in an economy.

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It includes expenditures by households on goods and services such as food, clothing, housing,
transportation, healthcare, and leisure activities.

Consumption expenditure is influenced by factors such as income levels, consumer

preferences, inflation, and access to credit.

B. Investment Expenditure:
Investment expenditure refers to spending on capital goods and productive assets that
contribute to future economic growth.

It includes expenditures on machinery, equipment, infrastructure, research and development,

and construction.

Investment expenditure plays a crucial role in enhancing productivity, expanding production

capacity, and fostering innovation.

C. Government Expenditure:
Government expenditure comprises the spending by the government on public goods and
services.

It includes expenditures on education, healthcare, defense, public infrastructure, social

welfare programs, and administrative costs.

Government expenditure is a key policy tool for promoting economic development,

addressing social needs, and ensuring public welfare.

D. Net Exports:
Net exports represent the difference between a country's exports and imports.

Positive net exports indicate that a country is exporting more goods and services than it is
importing, contributing to economic growth and generating income.

Negative net exports imply that a country is importing more than it is exporting, which may
indicate trade deficits and potential challenges in the balance of payments.

Growth of Expenditures over Time:

A. Economic Growth:
Economic growth typically leads to an increase in overall expenditures in an economy.

As incomes rise, individuals and households tend to increase their consumption expenditure,
driving economic activity.
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Higher economic growth also creates opportunities for increased investment expenditure, as
businesses expand and seek to enhance productivity.

B. Population Growth:
Population growth can have an impact on expenditure levels.

A growing population may result in increased consumption as more people demand goods
and services.

Government expenditure on public services, infrastructure, and social welfare programs may
also rise to meet the needs of a larger population.

C. Inflation:
Inflation, or the general increase in prices over time, can contribute to expenditure growth.

As prices rise, the cost of goods and services increases, leading to higher expenditure levels
to maintain the same level of consumption.

Inflation can also impact government expenditure as the costs of providing public goods and
services may increase.

D. Policy Changes:
Changes in government policies can influence expenditure growth.

For example, the implementation of tax reforms, changes to social welfare programs, or
increased investment in infrastructure can affect expenditure patterns in specific sectors.

Policy changes can be aimed at stimulating economic growth, addressing social needs, or
promoting specific industries.

Conclusion:
a. The structure of expenditures and its growth over time are essential elements for
understanding resource allocation, economic development, and government policies.
b. Analyzing the expenditure structure helps identify patterns, shifts, and priorities in
consumption, investment, government spending, and international trade.
c. By examining expenditure data, policymakers, economists, and researchers can gain
valuable insights into the dynamics of an economy and make informed decisions to
promote sustainable economic growth and development.

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 COST BENEFIT AND COST EFFECTIVENESS ANALYSIS

Introduction:
Cost benefit analysis (CBA) and cost effectiveness analysis (CEA) are two essential tools
used in economics and public policy to evaluate the efficiency and effectiveness of projects,
programs, and policies.

I. Cost Benefit Analysis (CBA):

A. Definition:
Cost benefit analysis is a systematic approach used to assess the economic desirability of a
project or policy by comparing its costs and benefits.

It aims to determine whether the benefits of a project outweigh its costs and whether the
project provides a net positive impact.

B. Key Components of CBA:

i. Identification and Measurement of Costs: Identify and quantify all relevant costs
associated with the project, including initial investment costs, ongoing operational
costs, maintenance costs, and any external costs.
ii. Identification and Measurement of Benefits: Identify and quantify all relevant benefits
generated by the project, such as increased revenues, cost savings, improved quality
of life, environmental benefits, and social impacts.
iii. Time Value of Money: Consider the timing of costs and benefits by discounting
future cash flows to account for the opportunity cost of capital and calculating the net
present value (NPV) of the project.
iv. Sensitivity Analysis: Conduct sensitivity analysis to assess the impact of uncertainties
and variations in the estimated costs and benefits on the project's overall viability.

C. Application of CBA:
CBA is widely used in various sectors, including infrastructure development, environmental
projects, public health interventions, education programs, and social welfare initiatives.

Governments, organizations, and policymakers use CBA to make informed decisions

regarding project selection, resource allocation, and policy prioritization.

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Advantages of CBA:
i. CBA provides a comprehensive framework for evaluating projects or policies by
considering both costs and benefits.
ii. It helps decision-makers consider the broader economic and social impacts of their
choices.
iii. CBA allows for the comparison of different projects or policies, enabling informed
decision-making on resource allocation.
iv. It provides a structured and systematic approach for considering the trade-offs
between costs and benefits.

Limitations of CBA:
i. CBA relies on the accurate estimation and monetization of costs and benefits, which
can be challenging, especially for intangible or non-market impacts.
ii. The choice of discount rate in CBA can heavily influence the results, as it affects the
calculation of the net present value (NPV).
iii. CBA may not adequately capture distributional impacts, as it focuses on aggregate
benefits and costs.
iv. It can be subjective in assigning values to non-market goods or services, such as
environmental preservation or cultural heritage.

Practical Applications of CBA:

i. CBA is commonly used in infrastructure projects, such as transportation systems,
energy generation facilities, and public utilities.
ii. It is also applied in environmental policy assessments, evaluating pollution control
measures, conservation programs, and renewable energy projects.
iii. CBA is utilized in healthcare policy evaluations, assessing the costs and benefits of
medical treatments, preventive interventions, and public health campaigns.
iv. Governments often employ CBA in social welfare programs, education initiatives,
and urban development projects.

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 II. Cost Effectiveness Analysis (CEA):

Definition:
Cost effectiveness analysis is a methodology used to compare alternative interventions or
programs by evaluating their costs relative to their effectiveness in achieving a specific
outcome or objective.

It aims to identify the most efficient option that provides the desired outcomes at the lowest
cost.

Key Components of CEA:

i. Definition of Outcome Measures: Clearly define the specific outcome or objective to
be achieved by the intervention, such as disease reduction, educational attainment, or
environmental improvement.
ii. Identification and Measurement of Costs: Identify and measure the costs associated
with each alternative intervention, including implementation costs, operational costs,
and any indirect costs.
iii. Measurement of Effectiveness: Quantify the effectiveness of each intervention in
achieving the desired outcome measure, using appropriate metrics and indicators.
iv. Comparison of Cost-Effectiveness Ratios: Calculate the cost-effectiveness ratios by
dividing the costs of each intervention by its corresponding effectiveness measure.
v. Sensitivity Analysis: Conduct sensitivity analysis to assess the robustness of the
results and the impact of uncertainties in cost and effectiveness estimates.

Application of CEA:
CEA is commonly used in healthcare, education, and social programs where multiple
interventions or treatments are available, and resources are limited.

It helps decision-makers prioritize interventions and allocate resources efficiently based on

their cost-effectiveness ratios.

Advantages of CEA:
a. CEA allows for the comparison of alternative interventions or programs in terms of
their cost-effectiveness, helping decision-makers identify the most efficient option.
b. It provides a more focused analysis by considering the specific outcomes or objectives
of the interventions.

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 c. CEA is particularly useful when resources are limited, as it helps allocate resources to
interventions that offer the greatest impact per unit of cost.
d. CEA can accommodate diverse outcome measures, allowing for the evaluation of
interventions in different sectors, such as healthcare, education, and social welfare.

Limitations of CEA:
i. CEA does not consider the full range of costs and benefits associated with
interventions, focusing primarily on the costs and a specific outcome measure.
ii. It may not capture broader impacts or externalities associated with an intervention,
such as spillover effects or unintended consequences.
iii. CEA relies on accurate and reliable data on costs and effectiveness, which may not
always be readily available.
iv. The choice of outcome measures in CEA can be subjective and may not fully capture
the complexities of the interventions or programs being evaluated.

Practical Applications of CEA:

a. CEA is widely used in healthcare to compare the cost-effectiveness of different
medical treatments, preventive measures, and healthcare interventions.
b. It is employed in education policy evaluations to assess the cost-effectiveness of
educational programs, interventions to improve student outcomes, or school
infrastructure investments.
c. CEA is utilized in social programs, such as poverty alleviation initiatives, job training
programs, and community development projects, to determine the most effective use
of resources.

Conclusion:
Cost benefit analysis and cost effectiveness analysis are valuable tools for evaluating the
efficiency and effectiveness of projects, programs, and policies.

Cost benefit analysis assesses whether the benefits of a project outweigh its costs, while cost
effectiveness analysis compares alternative interventions based on their costs relative to their
effectiveness.

These analytical approaches provide decision-makers with valuable information to make

informed choices, allocate resources efficiently, and maximize the social and economic
benefits of their initiatives.

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 FISCAL FUNCTIONS AND INSTITUTIONS IN KENYA

Fiscal Functions:

Definition and Objectives:

Fiscal functions refer to the activities and responsibilities of the government in managing
public finances, including revenue generation, expenditure allocation, and fiscal policy
formulation.

The primary objectives of fiscal functions are to ensure fiscal sustainability, economic
stability, and efficient allocation of resources.

Key Components of Fiscal Functions:

a. Revenue Generation: The government collects revenues through various sources, such
as taxes, fees, tariffs, and non-tax revenues, to finance public expenditures and
services.
b. Expenditure Allocation: Government budgets allocate funds to different sectors and
programs based on priorities, including education, healthcare, infrastructure, defense,
social welfare, and public administration.
c. Fiscal Policy Formulation: Fiscal policy involves decisions on taxation, public
spending, and borrowing to achieve macroeconomic objectives, such as economic
growth, price stability, and income distribution.

Fiscal Institutions in Kenya:

1. National Treasury:
The National Treasury is the key fiscal institution in Kenya responsible for formulating and
implementing economic and fiscal policies.

It prepares the annual national budget, manages public debt, and oversees fiscal operations to
achieve macroeconomic stability.

2. Kenya Revenue Authority (KRA):

The KRA is responsible for revenue collection in Kenya, administering and enforcing
taxation laws and regulations.

It plays a crucial role in ensuring efficient and effective revenue mobilization to support
public expenditure needs.

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 3. Controller of Budget:
The Controller of Budget monitors and oversees the implementation of the budget, ensuring
transparency, accountability, and proper utilization of public funds.

It provides independent oversight to prevent excessive spending and promotes fiscal

discipline.

4. Parliamentary Budget Office:

The Parliamentary Budget Office provides independent analysis and advice to the Parliament
on budgetary matters.

It conducts research, evaluates budget proposals, and supports lawmakers in making

informed decisions regarding public finances.

Fiscal Functions:
1. Revenue Generation:

Kenya relies on various sources of revenue, including taxation, to finance public

expenditures. Key taxes include income tax, value-added tax (VAT), excise duties, and
customs duties.

The government has implemented reforms to improve revenue collection, such as the
digitization of tax systems, widening the tax base, and combating tax evasion.

2. Expenditure Allocation:

The government's budget allocates funds to different sectors and programs based on national
priorities and development goals.

In recent years, Kenya has aimed to increase budgetary allocations to key sectors such as
education, healthcare, infrastructure, and agriculture to promote inclusive growth and
development.

3. Fiscal Policy Formulation:

The National Treasury formulates fiscal policies to achieve macroeconomic objectives, such
as controlling inflation, promoting investment, and reducing poverty.

Fiscal policies are designed to balance revenue generation with expenditure needs and debt
sustainability, taking into account economic conditions and development priorities.

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Fiscal Challenges in Kenya:
a. Revenue Mobilization: Kenya faces challenges in expanding its revenue base,
reducing tax evasion, and enhancing tax compliance to increase revenue generation.
b. Public Debt Management: The country has experienced a rapid increase in public
debt, requiring effective debt management strategies to maintain fiscal sustainability.
c. Expenditure Efficiency: Ensuring efficient and effective utilization of public funds
remains a challenge, including addressing issues of corruption, wasteful spending, and
improving public service delivery.
d. Fiscal Decentralization: The devolution of powers and resources to county
governments presents challenges in coordinating fiscal policies, revenue sharing, and
maintaining fiscal discipline at the sub-national level.

Fiscal Reforms:
Kenya has implemented several fiscal reforms to address these challenges, including
strengthening revenue administration, improving public financial management systems, and
enhancing budgetary transparency and accountability.

The government has undertaken measures to contain public debt, enhance expenditure
efficiency, and promote fiscal discipline through fiscal rules and regulations.

Conclusion:
Fiscal functions and institutions play a crucial role in managing public finances, promoting
fiscal stability, and achieving sustainable economic growth.

In Kenya, institutions such as the National Treasury, Kenya Revenue Authority, Controller of
Budget, and Parliamentary Budget Office have specific responsibilities in fiscal management.

Addressing fiscal challenges, implementing reforms, and maintaining sound fiscal policies
are crucial for Kenya's economic development, efficient resource allocation, and improved
public service delivery.

KENYA’S TAX SYSTEM. MECHANISMS OF TAX COLLECTIONS

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COMPARISON OF TAX SYSTEMS IN EAST AFRICA.

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