Does Fiscal Stance affect Public Expenditure: Evidence from Kenya

Abstract

The purpose of this paper is to examine the effect of fiscal policy stance on public expenditure in Kenya while underpinned by the; Theory of fiscal policy, Peacock-Wiseman hypothesis and Wagner’s Law of increasing state activities. The methodology used was time series modelling involving the following steps; firstly, employing descriptive statistic analysis. Secondly, diagnostic testing involving stationarity test, cointegration test and Granger causality tests. Thirdly, time series modelling was done using VECM and VAR models. Finally, post-diagnostic tests involving serial correlation test and heteroscedasticity test. The research indicates that there is a negative relationship between fiscal policy stance (budget deficit) and public expenditure but fiscal stance through tax has a positive relationship with public expenditure. Fiscal policy stance and public expenditure are cointegrated as shown by the Johansen cointegration test but there is no short run causality between them as indicated by the Wald test statistics. The study is limited to fiscal policy stance and public expenditure in Kenya while considering selected macroeconomic factors. The research findings are vital to policy makers. Fiscal policy stance indirectly affects public expenditure through economic growth and macroeconomic factors. This implies that fiscal policy stance does not have a strong direct effect on public expenditure as supported by the theory of fiscal policy that contends that policy makers could have a lower incentive to pursue public interests as compared to their personal interests.