A budget is not an event but a cycle that runs continuously: while this year's budget is being executed, next year's is being prepared and last year's is being audited. Understanding the cycle — its four stages, its calendar, and where power sits at each — is the map you need to locate any budget problem and any reform opportunity.
The four stages
- Formulation — the executive (the finance ministry, coordinating with spending ministries) prepares the draft budget: setting the aggregate resource envelope, issuing ceilings to ministries, receiving their bids, and reconciling demands with resources. This is where most real allocation happens, inside the executive, before the legislature ever sees it.
- Approval (authorisation) — the legislature debates, amends (within its powers), and enacts the budget as law (the Appropriation Act), granting the executive legal authority to spend. This is the power of the purse.
- Execution — the budget is implemented: funds are released, commitments made, goods and services procured and paid for, throughout the financial year. This is where plans meet reality.
- Audit and oversight — after the year ends, the supreme audit institution (the Auditor-General) audits the accounts, and the legislature (via a Public Accounts Committee) scrutinises whether money was spent legally and well. This closes the loop and feeds back into the next cycle.
The medium-term expenditure framework
The MTEF: where discipline meets demand
Annual budgeting alone is too short-sighted (it ignores the future cost of today's decisions) and too easily captured by incremental bidding. The medium-term expenditure framework (MTEF) addresses this by setting spending within a 3-year, top-down macro-fiscal envelope (what is affordable, consistent with fiscal discipline) and reconciling it with bottom-up costed sector plans (what ministries need). The MTEF is the institutional meeting point of Schick's first two objectives: the top-down ceiling enforces aggregate discipline, while the allocation within it pursues allocative efficiency. Its weakness in practice is that the 'medium-term' numbers for years 2 and 3 are often ignored when those years arrive, so the framework becomes a presentational ritual rather than a binding constraint.
The calendar
The cycle runs on a legal calendar. In Kenya, for a financial year starting 1 July: the Budget Policy Statement (setting the broad fiscal framework and ceilings) goes to Parliament by mid-February; the detailed estimates follow; and the Appropriation Act must be passed before 30 June so spending can begin on 1 July. Meanwhile the previous year's accounts are being audited. The calendar is not bureaucratic trivia — missing its deadlines (late estimates, late appropriation) cascades into execution problems (a government operating on a 'vote on account' stopgap cannot plan or procure properly).
Leverage points and failures
Each stage has characteristic failures, and locating a problem at the right stage is the key diagnostic skill:
- Formulation failures — unrealistic revenue forecasts (over-optimistic projections that make the budget look balanced but guarantee in-year cuts), and weak prioritisation (incremental bidding rather than strategic allocation).
- Approval failures — a legislature that rubber-stamps (no real scrutiny) or one that adds unfunded spending; weak amendment rules or weak technical capacity (which is why an independent Parliamentary Budget Office matters).
- Execution failures — the gap between the approved budget and what is actually spent (poor budget credibility): under-spending of capital budgets, over-spending of recurrent, arrears, and frequent supplementary budgets that undo the original plan.
- Oversight failures — the audit-to-action gap (audits find problems but nothing happens — the Governance course's broken accountability chain), so the loop never feeds back.
Exercise
A country passes a credible-looking budget every year, but by mid-year it is always in trouble: revenue falls short of projections, the finance ministry cuts development spending across the board to stay afloat, and two or three supplementary budgets reshuffle everything. The Auditor-General's reports pile up unactioned. (1) Identify at which stage(s) of the cycle the problems originate. (2) Explain how a formulation-stage failure causes the mid-year execution crisis. (3) What role should the MTEF and an independent fiscal/budget office play in preventing this? (4) Explain why the unactioned audit reports mean the cycle is not actually closing, and what that costs.