Relationship between budget deficit and economic growth in Kenya

Abstract

It is important to determine the relationship between debt and economic growth empirically in order to examine how debt contributes to economic growth, whether positively or negatively, and the significance of its contribution. The widening budget deficit in Kenya has also become a major concern because increasingly more debt is needed to finance the government’s budget deficit should it continue to widen. Empirical Studies have found mixed results on the nature of the relationship between budget deficit and economic growth, this study seek to fill the existing research gap by answering the following research question, what is relationship between budget deficit and economic growth in Kenya? The study adopted a descriptive cross-sectional research design. Secondary data from central bank for a 10-year period from where secondary data was selected. Data was collected for the period starting from 2003 to 2012 from Central Bank of Kenya. The data that was collected in the study was quantitative in nature. Regression analysis was used to analyze the data and find out whether there exists a relationship between budget deficit and economic growth in Kenya. In this research, a dynamic econometric model was employed to assess the joint relationship between budget deficit and economic growth in Kenya. From the findings budget deficit negatively affect the economic growth in the country, as it was found from the regression and correlation analsyis that there was a negative relationship between eceonomic growth and budget deficit The study also concludes that gross investment in the country positively influence the country economic growth as it was revealed that increase in gross investment postively influence the country eceonomic growth . The study further revealed that increase in inflation rate, exchange rate and interest rate, negatively influence the country economic growth. Increases in inflation rate scare away investor as it reduces the currency purchasing power thus decreasing the economic growth in the country