Effect of Government Expenditure Composition on Economic Growth in Kenya

Abstract

Economic growth is a critical objective for many developing countries, including Kenya, where government expenditure plays a vital role in shaping economic performance. However, the composition of this expenditure—specifically the balance between development and recurrent spending—can significantly influence economic outcomes. This study was motivated by the need to understand how different components of government expenditure impact economic growth in Kenya. The primary objective of the study was to determine the effect of government expenditure composition on economic growth, with a particular focus on development and recurrent expenditures. The study was anchored on the Keynesian theory, supported by endogenous growth theory and public choice theory. A descriptive research design was employed, utilizing secondary data sourced from the Kenya National Bureau of Statistics and the Central Bank of Kenya (CBK) for the period 2014 to 2023. The dependent variable, economic growth, was measured by the quarterly GDP growth rate, while the independent variables included development expenditure, recurrent expenditure, interest rates, and inflation. The analysis involved correlation and regression techniques to explore the relationships between these variables. The model summary indicated that the independent variables explained 55.0% of the variance in economic growth (Adjusted R Square = 0.550). Regression results revealed that development expenditure had a significant positive impact on economic growth (β = 0.325, p < 0.001), while inflation had a significant negative effect (β = -0.131, p < 0.001). In contrast, recurrent expenditure (β = 0.001, p = 0.229) and interest rates (β = 0.000, p = 0.384) did not have significant effects on economic growth. The study concludes that development expenditure is a key driver of economic growth in Kenya, emphasizing the importance of government investment in infrastructure and other growth-enhancing projects. In contrast, recurrent expenditure, while necessary for government operations, does not directly contribute to economic growth. Additionally, the negative impact of inflation on economic growth underscores the importance of maintaining price stability through effective monetary and fiscal policies. Based on these findings, it is recommended that the Kenyan government prioritize development expenditure in its budget allocations and implement measures to manage recurrent expenditure more efficiently. Moreover, policymakers should focus on controlling inflation to create a stable macroeconomic environment conducive to growth. Future research should consider incorporating a broader range of variables, employing advanced analytical techniques to address potential endogeneity issues, and exploring regional variations within Kenya to better understand the localized impacts of government expenditure on economic growth.