Growth Effects of Public Recurrent Expenditure in Kenya

Aims: There is a growing consensus that economic growth is a key enabler for successful and sustainable fiscal consolidation. In view of this, this paper examines the growth effects of the high budgetary allocation for public recurrent costs in Kenya. Additionally, the paper compares the growth effects of the public recurrent spending and public investment spending in Kenya at sector level.

Methodology: The study makes use of sector level macro panel data from fiscal year 1999/2000 to 2014/2015, with a cross-sectional unit of seven sectors. The Hausman test and Random effects results, the presence of panel cointegration in addition to the fact that the variables included in the model are integrated of different orders led to use of a panel ARDL (Autoregresessive Distributed Lag) model. Specifically, the Pooled Mean Group (PMG) estimator is employed in the analysis.

Results: The findings show that an increase in share of public recurrent costs in sectoral GDP has an insignificant negative effect on sectoral growth in the short run but a significant negative effect in the long run. The results also show that an increase in share of sectoral development expenditure has a positive but insignificant effect in the short run but a significant growth effect in the long run.

Conclusion: The results confirm that the persistent rise in public recurrent costs in Kenya is actually growth retarding whereas development spending is growth enhancing in the long run.