Effect of Public Debt on Household Consumption Expenditure in Kenya

Abstract

The purpose of this study was to determine the impact of public debt on Kenya's socioeconomic welfare. As a proxy for socioeconomic wellbeing, household consumption expenditure was utilized. Three theoretical models, namely the Overhang Debt Hypothesis, the Ricardian Equivalence Theory, and the Keynesian macroeconomic theory, serve as the foundation for this study. It utilized a quantitative research strategy based on a non-experimental research design. Data for the study was gathered from secondary sources, such as the IMF, KNBS, and World Bank. Data was analyzed by means of correlation analysis and OLS regression analysis in accordance with validity measures derived from the ADF Stationarity test and additional diagnostic tests. The size of the public debt has been observed to have no statistically significant effect on household spending. Debt servicing had a negative and statistically significant effect on household spending, while exchange rate had a positive and statistically significant effect on household spending. This study found that although public borrowing has a small positive effect on household spending, the effect is statistically insignificant. Even though the statistically significant and negative effect is small, it only occurs when debt service obligations begin to accumulate. The study discourages a government's reliance on debt as a primary source of financing due to the fact that its negative impact is not felt until the debt is repaid.