The Effect of Foreign Debt And Taxation on Government Expenditure In Kenya

Dr Angela Mucece Kithinji

doi:10.47191/ijmra/v4-i6-19

Abstract

Cases of high levels of public debt have mostly been reported in many developing countries part of which is debt borrowed abroad. Foreign debt is more preferable by many developing countries because it is cheaper to service in terms of interest costs. These countries tax their citizens heavily to raise enough finances to pay foreign debt. It was thus feasible to establish the influence of the foreign debt and taxation on expenditure of the Kenyan government. The study employed a causal research design. The period under study ranged from 2002 to 2017. The study used secondary data which was extracted from the National Bureau of Statistics, and National Economic Surveys which were available at the Government of Kenya website. Correlation statistics were conducted to establish the association between variables. Regression analysis was used to establish the effect of foreign debt and taxation on government expenditure in Kenya. The findings revealed that foreign debt and taxation influences government expenditure individually. However, on the test of the joint effect, only taxation was found to influence public expenditure significantly unlike foreign debts.

Highlights

Many developing countries prefer raising foreign debt because it is cheaper
The major concern is whether the Kenya Government should raise more of foreign debt which is cheaper in terms of interest costs while adhering to the conditionality’s of lending Countries
The study concludes that foreign debt and taxation influences government expenditure in their individual tests

Summary

Introduction

Many developing countries prefer raising foreign debt because it is cheaper. Increasing taxation becomes necessary to enable these countries to raise sufficient finances to enable these countries to service their foreign debt. Many countries depend mainly on taxation as a means of generating the required resources to meet their expenditure requirements. These countries will likely find themselves in growing fiscal imbalances when their revenue productivity falls below their expenditures. Enactment of revenue eroding measures by the governments and overspending tend to have implications on the amount of public debt to be raised. These governments are forced to raise debt to finance the activities which government cannot afford to finance with the revenue generated using economic resources (IMF & World Bank, 2001). Public debt is often a country’s largest liability especially in developing

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Conclusion