Effect of Tax and Debt Financed Government Expenditure on Economic Growth in Kenya

Abstract

This study aims at analyzing the effect of tax and debt-financed government expenditure on economic growth in Kenya using time series data from 1980-2014. Vector Error Correction Model (VECM) was used to analyze the data. The empirical findings showed that public investment expenditure financed by issuing debt has positive effect on economic growth. The results also indicated that financing government consumption expenditure using debt has negative effect on economic growth. With regards to tax revenue, the results indicated that tax financed public consumption spending affects economic growth negatively. Moreover, the results showed financing government investment expenditure using tax revenue promotes economic growth. Based on the findings, this study therefore recommends fiscal authorities in to use borrowing to finance investment expenditure as opposed financing consumption spending. Additionally, given the adverse effects of debt-accumulation on growth performance, policy makers should focus more on domestic revenue mobilization to finance government expenditures.