Constraints to Fiscal Consolidation Efforts in Kenya: Analysis of the Persistent Growth in Public Recurrent Costs

Abstract

Aims: Kenya faces substantial fiscal consolidation needs in order to create fiscal space for financing its Vision 2030 development projects, sustainable development goals and the current government’s election pledges. To achieve these, the country needs to allocate resources optimally. However, the government has found it a challenge to control the persistent growth in public recurrent costs, which has further led to challenges in carrying out sustainable fiscal consolidation. This paper looks into the factors behind the persistent rise in public recurrent costs in Kenya that have also acted as constraints to fiscal consolidation efforts in the country. Methodology: The study employs four ARDL error correction models in the analysis using 2000 Quarter 1 to 2015 Quarter 4 time series data. Results: The study shows that persistent rise in public recurrent costs is influenced by the real minimum wage adjustments and the devotion of real tax revenue towards recurrent spending at the expense of development expenditures. Inflation was found to erode the real value of non-wage public spending leading to upward adjustment of their nominal values. Real effective exchange rates was found to be significant in explaining the increases in real development expenditure. Surprisingly, an occurrence of a general election was found to lead to a decline in real public recurrent costs and compensation of government employees implying that the government tend to focus more on fiscal discipline during the election periods. Conclusion: The study concludes that the persistent growth in public recurrent costs and the growth in public investment spending are not influenced significantly by the same factors and that frequent public wage adjustments and the devotion of domestic taxes to financing public recurrent costs are the main constraints to sustainable fiscal consolidation efforts in Kenya.