The Effect of Performance-Based Budgeting (PBB) on Budget Performance in Kenya

Abstract

Purpose: The primary aim of this study is to examine the effect of Performance-Based Budgeting (PBB) on budget performance in Kenya. Specifically, the study seeks to determine whether the adoption and implementation of PBB, as a public financial management reform, has contributed to improved budget execution rates and fiscal discipline. By applying econometric analysis to secondary time-series data from 2012/2013 to 2023/2024, the study evaluates both the short-run and long-run relationships between PBB and budget performance, while considering the influence of control variables such as revenue collection efficiency and the debt-to-GDP ratio. Ultimately, the study aims to provide empirical evidence on whether PBB has enhanced efficiency, accountability, and resource utilization within Kenya’s public budgeting system.

Methodology: This study adopted a positivist research philosophy, relying on empirical data and quantitative analysis to objectively test hypotheses on the effect of Performance-Based Budgeting (PBB) on budget performance in Kenya. A correlational research design was employed to establish the nature and strength of relationships among variables. The dependent variable was budget performance, proxied by the Budget Execution Rate (BER), while the key independent variable was PBB, and control variables included revenue collection efficiency and the debt-to-GDP ratio. The study used quarterly secondary time-series data covering the financial years 2012/2013 to 2023/2024, drawn from the National Treasury, Controller of Budget, Auditor-General, and World Bank reports, yielding 44 data points. Data analysis followed a structured econometric approach: unit root testing using the Augmented Dickey-Fuller (ADF) test, Johansen cointegration analysis to assess long-run relationships, and estimation of a Vector Error Correction Model (VECM) to capture both long-run equilibrium and short-run dynamics. Descriptive statistics and correlation analysis complemented the econometric modeling, while hypothesis testing relied on standard errors, t-statistics, p-values, and confidence intervals.

Findings: The study found that Performance-Based Budgeting (PBB) has a significant and positive effect on budget performance in Kenya in the short run, with improvements in PBB leading to higher budget execution rates after one to two quarters. However, Johansen cointegration analysis revealed no statistically significant long-run relationship between PBB and budget performance, suggesting that PBB reforms have yet to be fully institutionalized to deliver sustained improvements. Further analysis showed that PBB itself is positively shaped by participatory budgeting, medium-term expenditure frameworks, and transparency mechanisms, while rising debt burdens constrain its effectiveness. These results indicate that although PBB reforms enhance expenditure efficiency in the short term, their long-term impact remains limited by institutional, political, and capacity-related challenges.

Unique Contribution to Theory, Practice and Policy: This study contributes to theory, practice, and policy by showing that while Performance-Based Budgeting (PBB) enhances budget performance in Kenya in the short run, its long-run impact remains negligible. The findings refine New Public Management (NPM) and Principal–Agent Theory (PAT) by illustrating how institutional and political constraints weaken the intended efficiency and accountability gains of PBB. Practically, the study demonstrates that PBB’s effectiveness depends on complementary reforms such as participatory budgeting, medium-term expenditure frameworks, and transparency mechanisms. For policy, it highlights the need to institutionalize PBB through legal enforcement, robust performance data systems, and stronger fiscal discipline measures. Overall, the research underscores that PBB must move beyond compliance reporting to become a transformative tool for improving public financial management.