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

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.