Nexus Between Public Sector Expenditure And Public Debt In Kenya

Abstract

Public debt being an important source for bridging financial resource gap, continues to be a key macro-economic policy issue for developing countries. Existing literature highlights public expenditure as a public debt determinant. Establishing nexus between public expenditure and public debt in Kenya for the period 1980 to 2018 was the object of the study. This included determining causality direction and type of relationship existing between the aforementioned variables. Empirical analysis was based on a Vector Error Correction Model. Recurrent government expenditure negatively affect public debt whereas development government expenditure and inflation have a positive effect on public debt. Public debt did not exhibit an equilibrium relationship with either recurrent or development government expenditure in the long-run. Election years and bicameral government have a positive effect on public debt whereas exchange rate has a negative effect on public debt in the long run. Causality between public debt and development government expenditure is bidirectional whereas causality between recurrent government expenditure and public debt is unidirectional running from public debt to recurrent government expenditure. Similarly, causality between recurrent government expenditure and development government expenditure is unidirectional running from recurrent government expenditure to development government expenditure. To manage public debt the government should strive to reduce development expenditure to sustainable levels, focus on productive development and reduce its appetite for expensive loans. Also the revenue base should be expanded so that the debt burden does not deem the prospects of the national, regional and international development