Transforming public debt from an obstacle into an enabler of socio-economic progress requires the collective effort of all actors within the public finance ecosystem. Writes Cuba Houghton, a Kenyan economist and public finance practitioner.
The golden rule of public borrowing has long been that it is justified when used for development purposes. The central idea is that when borrowing is used to create assets that generate income, such as constructing a major highway, these assets will essentially pay for themselves, meaning a country is not worse off after taking on the debt.
However, emerging evidence from Kenya reveals that the application of this golden rule is not so simple and clear-cut in practice. While Kenya’s public finance law confines borrowing to development purposes, the excessive borrowing over the last 12 years has come at a significant socio-economic cost.
New research from public finance think tank Bajeti Hub shows that for every 1% increase in Kenya’s public debt stock annually, spending on social services in health, education, and social protection fell proportionally by 3%. This means that in a year like 2024, every KSh 100 billion (US$ 740M) increase in debt saw combined spending on health, education, and social protection fall by KSh 30 billion (US$ 220M).
The Social Cost of Public Debt
Rising debt has gradually squeezed Kenya’s social spending over three decade. As public debt grows, the interest and principal payments that must be made to lenders also grow. These payments can be made from two sources: ordinary tax revenue, which is finite, and additional borrowing (refinancing), which is less constrained. Also important is that these payments are a first charge on government’s bank account, meaning they have to be paid before most other costs.
As the size of debt payments grows, more tax revenue must be collected or more money borrowed in order to consistently avoid defaulting. However, spending on health, education, and social protection is typically funded from the same pot of money as these debt payments. This means teachers' salaries and cash transfers to the elderly, for example, must compete with rising public debt payments to be paid throughout the financial year. But due to their first-charge status, public debt payments almost always win.
The dominating effect of public debt is clearly visible in the data. In 2010, the proportion of ordinary tax revenue spent on debt payments and education were the same at 30%. By 2023 the proportion spent on debt payments was nearly triple that spent on education, despite the fact that less than 3% of the education budget was funded from borrowing in the previous five years.
Trends in the Proportion of Debt Servicing, Social Spending and Ordinary Revenue. Source: Economic Surveys, KNBS | Annual Debt Management Report, National Treasury
So while Kenya spends relatively less of its revenue on health, education, and social protection in favour of debt, the debt it is servicing often does not benefit these sectors much in the first place.
The Hope for Good Governance
Kenya’s public debt crisis is, among other factors, a result of failures in its public finance system to ensure the sustainable management of public debt. This system comprises an ecosystem of actors from across government working to manage public resources - actors that, if strengthened and connected, could perform their planning, execution, and oversight roles much better.
The social cost of public debt can be reversed if the quality of Kenya’s governance improves. By improving citizen voice and accountability, respect for the rule of law, government effectiveness, and control of corruption, public debt can empirically have a positive effect on social spending. Good governance can turn the social cost of debt into a social benefit.
