Essays on Public Spending and Economic Growth in Kenya

Abstract

Government spending and its consequence to the economic growth have pre-occupied policymakers in many countries because high level of government expenditure hinders economic growth. Nevertheless, the debate has not been settled and there is limited evidence in Kenya which makes it an important policy discourse for empirical investigation. Again, public investment and its effect in the economy are also paramount since it affects private sector investment. While different fiscal policies have various macroeconomic consequences, the issue has been ignored in the empirical literature. Therefore, there is need for an empirical analysis to determine how government expenditure financed through various methods influence economic growth. This thesis comprises of three interrelated, yet independent essays. The first essay explored how government expenditure affects economic growth. Also, the essay examined the expenditure-growth nexus with a view to understanding the causal effect between the two variables. The second essay investigated the consequence of government investment on private investment while the third essay determined how the expenditures financed using debt and tax affects economic growth in Kenya. Granger causality, Autoregressive Distributed Lag (ARDL) and Vector Error Correction Models were used for the analysis using annual time series data from 1970 to 2020. The study established that development spending and infrastructure expenditures significantly promote economic growth. Also, it was found that education and health expenditures had no significant effect on economic growth. The finding also showed investment in the public sector had a positive influence on private investment. As for funding methods, the results showed that expenditures funded through debt and revenue promotes economic growth. Debt-driven consumption expenditure has a negative impact on economic growth. The study therefore recommends government to increase the allocation of funds to the infrastructure development. This study further recommends strong public investment policies to enhance private investment. The thesis also recommends the government to use debt to finance public investments rather than using domestic tax revenues. Moreover, debt should be used to finance public investment instead of financing government consumption expenditure. Key words: Economic growth, Government expenditure, Public investment, Private Investment,