The Relationship Between Government Budget Deficit and Domestic Debt in Kenya

Abstract

This study was carried out to determine the relationship between budget deficit and domestic debt for twenty years from1991 to 2010. Different scholars studied domestic debt and budget deficit in both developed and developing countries including Kenya. The studies considered variables that affected either domestic debt or fiscal deficit. The studies were either on domestic debt and other variables or budget deficit and other variables and therefore inconclusive as they neither contradicted nor supported the budget deficit and domestic debt relationship. The study on domestic debt and budget deficit considered government revenue but did not consider the government expenditure as one of the factors affecting domestic debt. This study in determining the relationship between budget deficit and domestic debt incorporated government expenditure as one of the variables affecting domestic debt. However no scholar has studied the relationship between budget deficit and domestic debt in particular. This study aimed at filling the gap by using the most recent data to analyze the relationship between budget deficit and domestic debt in the Kenyan economy. Secondary data was collected from quarterly budget economic reviews reports of the Ministry of finance and the monthly economic review and time series reports of Central Bank of Kenya. Multiple regression analysis was applied to investigate the relationship between the dependent and independent variable and Scatter plot analysis and Bivariate correlation analysis tests were run, they confirmed linear relationship between dependent and independent variable and tolerable collinear relationships between independent variables. Data analysis indicated that there was a positive relationship between the budget deficit, government expenditure, government revenue and domestic debt which were critical in determining the level of domestic debt. Further a negative relationship between inflation rates, interest rates and domestic debt was found and observed that they were critical in determining the levels of domestic debts.