Revenue allocation and expenditure in counties: The rift between recurrent and development expenditure in Public Finance Management

Abstract

Decentralization of fiscal functions has enabled counties in Kenya to control their expenditure under the guidelines of the Public Finance Management Act. The first objective of this study is to investigate the factors that cause the rift in the distribution of revenue between recurrent and development expenditure in different counties in Kenya. The population of the first analysis in this study was all the 47 counties. The data was collected over a six year period from financial year 2013/2014 until 2018/2019. The study used a two-step system GMM estimation method to treat the Nickel Bias found in the dynamic panel data. The ratio of recurrent to development expenditure was the dependent variable which represented the rift. The findings from this study showed that revenue, personnel emoluments and the election period were determinants affecting the rift between recurrent and development expenditure. The second objective of this study is to establish the factors that make some counties fail to absorb their development budget. Data was collected from 10 randomly selected counties over the six year period. The second analysis also used a two-step GMM estimation method and the results showed that only own-source revenue had an effect on the development absorption rate.