Government Expenditure and Economic Growth in Kenya

Abstract

Despite Kenya being one of the fastest growing economies in Africa, Kenya continues to face key challenges in economic growth. The government therefore has a key responsibility to instigate consistent and inclusive economic growth if the country is to achieve the economic pillar of the Vision 2030 of attaining an economic growth rate of 10% consistently. The aim of study therefore was to assess the relationship between government expenditure and economic growth in Kenya with the specific objectives being to assess the relationship of the types of government expenditure and economic growth in Kenya while incorporating the moderating effect of inflation on the relationship. The theoretical framework of the study was based on the Wagner’s organic state theory, Keynesian theory (1936), Wise and Peacock theory and the Musgrave theory of public expenditure. The study adopted a quantitative causal research design and a modified Barro (1990) model to assess the causality and the existence of short and long run relationships. The study adopted techniques like the Vector autoregression model (VAR), granger causality test, test for cointegration and the Vector error correction model (VECM) to analyze short run relationships, long run relationships of the variables and causation between the variables. Findings of the study showed that the types of government expenditure collectively granger causes economic growth and more specifically in the short run the study concluded that economic growth has had an insignificant relationship with government consumption expenditure, a negative relationship with government expenditure, a positive relationship with government transfer payments and an insignificant relationship with inflation. Similarly, in the long run the study concluded that economic growth has had a negative relationship with government consumption expenditure, a positive relationship with government investment expenditure, a negative with government transfer payments and the moderating the moderating effect of inflation was noted to be negative relationship. The findings of the study will not only contribute to the existing literature but it will also be used to develop fresh methods and techniques for boosting Kenya's economic growth in relation to government spending by both the government officials and other policy makers in an effort to achieve the economic pillar of vision 2030 and beyond.