Relationship Between Budget Absorption and Economic Growth in Kenya

Abstract

Budget absorption is an aspect that shows the efficiency in using public funds allocated to specific sectors and is expressed as a percentage of the total budget. As a fiscal policy tool, the government applies the budget to allocate resources to various sectors of the economy in order to among other objectives, stimulate economic growth. The purpose of this study was to ascertain the effect of budget absorption on economic growth in Kenya. Budget absorption was operationalized using the annual budget allocation, the budget absorption rate, and the revenue performance as the proxies. Economic growth was measured using the Gross Domestic Product (GDP). The study was anchored on the stewardship theory and supported by the agency theory and resource dependency theory. The study was undertaken using the descriptive research design. Secondary data on the inflation rate, the annual budgetary allocations, revenue, and expenditure reported, was obtained from reliable government sources including KNBS, CBK, the National Treasury, OCOB, and 21 national government ministry records for the 5-year period 2015/2016 to 2019/2020. The natural logarithms of the collected data were used in the analysis. Inferential (regression) analysis was used to obtain the preferred model of the study. The analysis led to two models; model 1 (uncontrolled) and model 2 (controlled using inflation). The analysis of variance of the two models established p-values greater than 0.05, which established that the models were significant. The findings revealed a positive relationship between economic growth (expressed as the annual percentage (%) change in GDP) and annual budget allocation, budget absorption rate, and revenue performance. Increasing budgetary allocation, the budget absorption rate, and revenue performance would lead to an increase in GDP (economic growth) of a country. Among the three independent variables, revenue performance had the biggest impact. The relationship was influenced by inflation whose controlling nature indicated a reduction in economic growth, budget allocation, budget absorption rate, and revenue performance. The findings will be of value to scholars and government policy makers. The study concludes on the need to enhance revenue collection efforts vis a vis the targets as the revenue performance has a significant impact on economic growth. Additionally, the level of budget absorption was determined to have a bigger impact on the economy that the actual budget allocation. This is a call on the government and its related entities to become more efficient and deliberate in absorbing the allocated budget. The results of the study also indicated that inflation affects all the variables negatively. It is therefore imperative that the regulatory bodies take action to reduce inflation.