The Impact of Government Expenditure on Economic Growth in Kenya: 1963-2008

James N Maingi

doi:10.13189/aeb.2017.051201

Abstract

The rapid growth in government expenditure in Kenya has caused concern among policy makers on the implication of such growth. Over the three decades, government expenditure in the country grew at a faster rate than the growth rate of GDP. Given this fiscal scenario, an explanation of this requires studying the impact of government expenditure on economic growth. The specific objectives of the study were to: investigate the relationship between the components of government expenditure and economic growth; examine the effects of components of government expenditure on GDP growth rate; analyze the effects of government expenditure reforms on economic growth; and to draw policy implications from the findings. The data used were government expenditure components that included expenditure on government investment, physical infrastructure, education, health care, public debt servicing, economic affairs, general administration and services, defense, public order and national security, and government consumption. Sources of data were Kenya government documents and international financial statistics publications. The study applied Vector Auto Regression estimation technique using the annual time series data for the period 1963 to 2008 to evaluate the impact of government expenditure on economic growth. The Johansen cointegration tests revealed a long-run relationship between GDP growth rate and the selected components of government expenditure. Further, the Granger- Causality test indicated bi-directional causality between GDP growth rate and components of government expenditure. The results of impulse response functions and variance decomposition revealed that government expenditure on investment, physical infrastructure, education, health care, public debt servicing, economic affairs, general administration and services, defense, public order and national security and government consumption have effect on economic growth. Furthermore, the study established that expenditure reforms of budget rationalization, expenditure downsizing, privatization and governance affect economic growth. The study concludes that the composition of government expenditure and public expenditure reforms matter for economic growth.

Highlights

IntroductionThe general view is that government expenditure, notably on physical infrastructure and human capital, can be growth-enhancing the source of financing of such expenditures can be growth-retarding (Landau, 1983; Devarajan, 1993; Cashin, 1995; Kneller, 1999)
The government plays a leading role in determining the pattern of economic growth through public sector reforms, which determine directly how much of the country’s resources to divert to its own use, and how those resources should be allocated in order to increase economic growth
On the basis of the empirical results, the study concludes that the composition of government expenditure matters for economic growth

Summary

Introduction

The general view is that government expenditure, notably on physical infrastructure and human capital, can be growth-enhancing the source of financing of such expenditures can be growth-retarding (Landau, 1983; Devarajan, 1993; Cashin, 1995; Kneller, 1999). Lin (1994) examined some of the ways in which government expenditure can increase growth. Government expenditure may directly or indirectly increase total output through its interaction with the private sector. These included the provision of public goods and infrastructure, social services and targeted intervention such as export subsidies. This chapter summarizes the study and makes conclusions based on the results. The policy implications from the findings and areas for further research are presented

Objectives

Methods

Results

Conclusion