Effect of Own Source Revenue on Performance of County Governments in Kenya

Abstract

Fiscal decentralization is a critical aspect of governance in many countries, including Kenya, as it grants local governments the autonomy to manage their finances and deliver public services effectively. Understanding the impact of fiscal decentralization on economic performance at the county level is essential for informed policy decisions. This study investigates the influence of own source revenue on the performance of county governments in Kenya, underpinned by the fiscal decentralization theory, agency theory, and public choice theory. Secondary data was utilized, comprising information from the Office of the Auditor General, the Office of the Controller of the Budget, the Kenya National Bureau of Statistics, and Annual Government Budget Implementation Review Reports (AGBIRR). Data was collected over a five-year period from 2018 to 2022 for all 47 counties in Kenya, resulting in a dataset with 235 observations. The research employed a quantitative approach with data analysis techniques encompassing descriptive statistics, correlation analysis, and regression analysis. The regression model included Performance as the dependent variable, measured by Gross County Product, and independent variables of Own source revenue, Revenue transfer, and Recurrent spending. The analysis involved examining model summary statistics, analysis of variance, and model coefficients. The correlation analysis indicated positive associations between Performance and Own source revenue (r = 0.232, p = 0.000), Revenue transfer (r = 0.468, p = 0.000), and Recurrent spending (r = 0.189, p = 0.004). In the regression analysis, the model explained 25% of the variance in county economic performance (R-squared = 0.250). Own source revenue had a positive but relatively small effect (Beta = 0.148, p = 0.013), while Revenue transfer had a stronger positive impact (Beta = 0.432, p = 0.000). Recurrent spending did not show a significant effect (Beta = 0.074, p = 0.217). The analysis of variance confirmed the significance of the model (F = 25.714, p = 0.000). The study concludes that both local revenue generation and revenue transfers from the national government are significant in shaping county economic performance in Kenya. While the effect of recurrent spending was not statistically significant, it remains crucial for the daily operation of county governments. To enhance county economic performance, policymakers should focus on strategies to boost local revenue collection and ensure equitable and transparent distribution of revenue transfers. Additionally, a comprehensive development approach that considers various factors, including governance quality and regional disparities, should be adopted. Future research should consider a longitudinal analysis, qualitative investigations into unobserved factors, comparative studies with other countries, and policy evaluations.