Impact of Capital and Recurrent Expenditure on Public Debt in Kenya

Abstract

Public expenditure is a fiscal policy measure taken to influence a country’s economy and is therefore an important tool for boosting economic growth. In Kenya, the level of spending is way higher than the revenue collected hence budget deficits are majorly financed through public debt. However, the soaring levels of debt overtime have become a problem for the government even as it continues to expand its debt ceiling overtime. This study sought to investigate the long run relationship between public debt and the productive and non- productive components of expenditure i.e. capital and recurrent expenditure. The study utilized the endogenous growth model to study this relationship. Annual time series data for public debt, capital expenditure, recurrent expenditure and interest rates were collected from various Economic Surveys and Annual Public Debt reports between 1980 to 2015. Augmented dickey fuller and Philip Perron tests were used to test the stationarity of the data and the Johansen cointegration test was utilized to determine presence of long run relationship. Vector error correction model (VECM) was used for analysis since cointegration was established in the series. The results showed that there was a significant positive relationship between public debt and recurrent expenditure and a significant negative relationship between public debt and capital expenditure. It also found that the government of Kenya borrows heavily to finance its recurrent expenditure thus explaining the continued rise in the level of public debt.