Effects Of Oil Price Shocks On Tax Revenue And Government Expenditure In Kenya

Abstract

To ensure fiscal sustainability, knowing the public spending and tax revenue nexus is vital. The mismatch between public expenditure and tax revenue has resulted in large and persistent budget shortfalls in Kenya. The main aim of this research was to analyze Kenya’s public expenditure and tax revenue for the period 1980-2018. It specifically, investigated the causal link between tax revenue and public expenditure components as well as the effect of oil price shocks on this linkage. To achieve its objectives, the study employed the Vector Auto regression method. Annual time series sourced from Economic surveys and Statistical abstracts were used. The variables of interest were; development expenditure, recurrent expenditure, tax revenue, real GDP, world oil prices, and governance. The Toda-Yamamoto causality test indicated the absence of a causal relationship between tax revenue and both capital and recurrent expenditures. In line with the fiscal neutrality hypothesis. Causality was found to run from recurrent expenditure to development expenditure. The generalized impulse response functions indicated that oil prices had both positive and negative effects on tax revenue, capital expenditure and recurrent expenditure. However, all these effects were nonsignificant in all periods for the three variables. This study recommends harmonization of the various institutions tasked with expenditure and revenue decisions as well as minimal political interference in fiscal processes. It further advocates for a cut in recurrent expenditures as part of the measures aimed at reducing the overall total expenditure.