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IMPACT OF GOVERNMENT EXPENDITURE ON GROSS
DOMESTIC PRODUCT IN KENYA
D63/78857/2015
MILKAH NJOKI MUIGAI
A RESEARCH PROJECT SUBMITTED TO THE SCHOOL OF BUSINESS IN
PARTIAL FULLFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF
DEGREE OF MASTERS OF SCIENCE IN FINANCE, UNIVERSITY OF
NAIROBI
OCTOBER 2016
DECLARATION
I hereby declare with sincerity that this research project is my original work and has not
been presented for a degree award in any other university or institution of higher
learning. Information from other sources has been duly acknowledged and accorded
proper citation.
Signature…………………………………….. Date: ………………………………………
Milkah Njoki Muigai
D63/78857/2015
This research project has been submitted for examination with my approval as the
university supervisor.
Signature: …………………………………….. Date: …………………………………
Mr Nganga James Mburu
Lecturer Department of Finance and Accounting
University of Nairobi
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ACKNOWLEDGEMENTS
I Milkah Njoki Muigai give the Almighty God gratitude and praise for giving me the
strength, time, ability and knowledge to embark on this project and for His divine
intervention and protection throughout the course of this study.
Special thanks to my supervisor, Mr. Nganga James Mburu for the guidance, patience
and understanding during the course of this project. Your suggestions and corrections
gave my project a course that led to it taking a professional form most of all I am grateful
for thorough demonstration while guiding me through the project.
I am thankful to the University Of Nairobi School Of Business for providing a favourable
environment for learning.
Finally heartfelt thanks to my family for the persistence encouragement and support
without which this project would not be possible.
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DEDICATION
I dedicate my work to my loving parents Samuel Muigai Kimani together with Pauline
Njango Muigai for their foresight in education that guided them to take me to school and
for supporting me in the completion of this Project writing. Thank you and God bless you
abundantly.
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TABLE OF CONTENTS
DECLARATION ..............................................................................................................ii
ACKNOWELEDGEMENTS ........................................................................................ iii
DEDICATION .................................................................................................................iv
LIST OF TABLES .........................................................................................................vii
LIST OF FIGURES ..................................................................................................... viii
LIST OF ABBREVIATIONS......................................................................................... ix
ABSTRACT ...................................................................................................................... x
CHAPTER ONE............................................................................................................... 1
INTRODUCTION ............................................................................................................ 1
1.1 Background of the Study ............................................................................................. 1
1.1.1 The Theoretically Expected Link between Government Expenditure and GDP 5
1.1.2 Main Theories Anchoring the Study .................................................................. 7
1.1.3 Government Expenditure ................................................................................. 10
1.1.4 Gross Domestic Product ................................................................................... 13
1.1.5 Government Expenditure and Gross Domestic Product................................... 15
1.2 Research Problem ....................................................................................................... 18
1.3 Objective of the Study ................................................................................................ 20
1.4 Value of the Study ...................................................................................................... 21
CHAPTER TWO .............................................................................................................23
LITERATURE REVIEW ...............................................................................................23
2.1 Introduction ................................................................................................................. 23
2.2 Theoretical Literature Review .................................................................................... 23
2.2.1 The Peacock and Wiseman Theory.................................................................... 23
2.2.2 The Wagner’s Law of Increased Government Activities .................................. 24
2.2.3 Keynesian Theory .............................................................................................. 26
2.2.4 Musgrave Rostow’s Theory ............................................................................... 28
2.3 Empirical Literature Review ....................................................................................... 29
2.4 Determinant of Economic Growth .............................................................................. 32
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2.5 Summary of Literature Review ................................................................................... 36
CHAPTER THREE .........................................................................................................38
RESEARCH METHODOLOGY ...................................................................................38
3.1 Introduction ................................................................................................................. 38
3.2 Research Design.......................................................................................................... 38
3.3 Population and Sample ............................................................................................... 38
3.4 Data Collection ........................................................................................................... 39
3.5 Data Analysis .............................................................................................................. 40
3.6. Test of significance .................................................................................................... 41
CHAPTER FOUR ............................................................................................................42
DATA ANALYSIS, FINDINGS AND INTERPRETATIONS ....................................43
4.1 Introduction ................................................................................................................. 42
4.1.2 Kenya GDP Annual Growth Rate 2005-2015 ......................................................... 42
4.2 Data on Government Expenditure .............................................................................. 46
4.3 Summary and Interpretation of Findings .................................................................... 61
CHAPTER FIVE .............................................................................................................64
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS .................................64
5.1 Summary ..................................................................................................................... 64
5.2 Conclusions ................................................................................................................. 66
5.3 Recommendations to Policy and Practice ................................................................... 67
5.4 Limitations of the study .............................................................................................. 68
5.5 Suggestions for further study ...................................................................................... 69
REFERENCES .................................................................................................................70
Appendices ........................................................................................................................75
Appendix I :Gross domestic product by activity 2009-2013 ............................................ 75
Appendix ii: Gross domestic product by activity 2001-2005 ........................................... 76
Appendix iii: Central Government Accounts ................................................................... 77
Appendix iv:Central government Accounts...................................................................... 78
Appendix v:Classification of government expenditure by functions of government ...... 79
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LIST OF TABLES
Table 4.2.1 Central Government Expenditures (Kshs Millions) on Defence/Security
between 2004-2013 ........................................................................................................... 46
Table 4.2.2 Central Government Expenditures (Kshs Millions) on Agriculture between
2004-2013 ......................................................................................................................... 48
Table 4.2.3 Central Government Expenditures (Kshs Millions) on Health between 20042013....................................................................................................................................50
Table 4.2.4 Central Government Expenditures (Kshs Millions) on Education between
2004-2013 ......................................................................................................................... 52
Table 4.2.5 Central Government Expenditures (Kshs Millions) on GDP between 20042013 by Activity ............................................................................................................... 55
Table 4.2.6 County Government Expenditures (Kshs Millions) between 2013-2014 by
Activity ............................................................................................................................. 55
Table 4.2.7 Descriptive Statistics...................................................................................... 57
Table 4.2.8 Model Summary ............................................................................................ 57
Table 4.2.9 ANOVA Table ............................................................................................... 58
Table 4.2.10 Test for Coefficients .................................................................................... 59
Table 4.2.11 Correlation table .......................................................................................... 60
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LIST OF FIGURES
Figure1 .............................................................................................................................. 43
Figure 2 ............................................................................................................................. 44
Figure 3 ............................................................................................................................. 44
Figure 4 ............................................................................................................................. 45
Figure 5 ............................................................................................................................. 47
Figure 6 ............................................................................................................................. 49
Figure 7 ............................................................................................................................. 51
Figure 8 ............................................................................................................................. 53
Figure 9 ............................................................................................................................. 55
Figure 10 ........................................................................................................................... 56
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LIST OF ABBREVIATIONS
ANOVA
Analysis of Variance
CFS
Consolidated Fund Services
EFT
Electronic Funds Transfer
GDP
Gross Domestic Product
GNP
Gross National Product
IDP
Internally Displaced People
IFMs
Integrated Financial Management Systems
KDF
Kenya Defence Forces
KER
Kenya Economic Report
KIPPRA
Kenya Institute for Public Policy Research and Analysis
KRA
Kenya Revenue Authority
LDC
Less Developed Countries
OLS
Ordinary Least Squares
PPOA
Public Procurement Oversight Authority
RTGS
Real Time Gross Service
SPSS
Statistical Package for Social Scientists
UK
United Kingdom
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ABSTRACT
The study was carried out exhaustively find out the impact of government expenditure in
Kenya. The study had one objective to exhibit the implications of government
expenditure on GDP in the country of Kenya.
Research design employed a descriptive study of selected government functions in Kenya
including Defence/security, Health, Education and Agriculture. Secondary data was
collected from the Kenya Bureau of Statistics. Percentages changes and ANOVA tables
and T-statistics tables were employed to test the data to achieve the set goals whereas
regression analysis was used to determine the connection that lies in government
expenditures and gross domestic product. Results were presented in tables, line graphs
and bar graphs.
An observation was made which implied under 5% level of significance, the regression
model is overall statistically significant, deducing that it is a suitable prediction model for
explaining how government expenditures to different functions adds value to gross
domestic product with expenditures on education being a suitable predictor of gross
domestic product.
This study therefore advocates that for effective functioning and efficient allocation of
government revenues to different government functions, use of modern allocation
methods should be well understood and carried out all stakeholders to arrive at real
intrinsic value. Stakeholders should be equipped with satisfactory information before and
post-spending and be aware of benefits, challenges and the effects of expenditure
allocations those functions.
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CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
It is important to note that connection encompassing government expenditure and Gross
Domestic Product is an essential topic of exploration (Stieglitz, 1989).The vision of
ensuring sustainable development at a significant scale is enshrined in the government’s
development strategy document of the country. The expenditure by governments has
been observed to increase efficiency however similarly it has been observed as an
obstacle to development owing to the approach of financing. According to the World
Bank (1991), when governments borrow as a means of financing public expenditure, the
said governments are said to be competing with investors in the private sector for capital
and this precipitates crowding out private investment and prompting massive foreign debt
burden.
Stieglitz (2000) outlines that that the association among the various subset of public
expenditure, which majorly include education, health, security , infrastructure
and
agriculture growth, is a vital factor of analysis for economists dealing with the aspects of
development as the two are interconnected. Experimental studies that have been carried
out in this area have led to different results. It is worth noting that government
expenditure has been considered to be a crucial promoter of productivity in the well been
of the country status thereby enhancing the growth of the economy. To this end, public
expenditures on education and health possibly increase the degree capacity and of human
capital, which will lead to positive influence on the accumulation of physical capital in
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the economy, thereby boost the growth of the economy. Infrastructural public
expenditure leads to direct effects, whereby a change in public expenditure on
infrastructure directly influences the economic growth (Barro & Sala, 1992). Conversely,
public expenditure remains to be seen as an obstacle to economic growth for the reason
that the debts experienced by the government to finance the expenditures and, therefore,
the differences in the results of the conducted studies.
Studies conducted on this essential subject have their potentials. In general, though, these
themes are prone from the variances in the fundamental data sets, periods, dissimilar
variable measurement, and estimation techniques that can provide dissimilar outcomes.
Singh and Sahni (1984); Ram (1986); Landau (1986) establish that more public
expenditures lead to constructive effect on the growth of the economy while others pin
point that a negative result of the public expenditure on the growth of the economy. Ram
(1996) studied the public spending of 63 industrialized and emerging countries and
established that there was no steady casual pattern between economic growth and public
expenditures.
Jerono (2009) observes that research conducted in Kenya on the relationship between
economic growth and public expenditure produced dissimilar and opposing research
findings.
Other studies establish that more public expenditures lead to increase in economic growth
while other studies pin points that more public expenditures is growth impending while
others report that more public expenditures is not the surest way of predicting the growth
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of the Kenyan economy. Munge (2005) conducted a research on causal connection
between economic growth and public expenditure in Kenya by exploring the public share
of expenditure on GDP. The findings of the research established that there exist not any
causal relationship among the growth of the economy and the share of the Kenyan public
expenditure. The examination of the research findings by Munge (2005) further
established that there exists no evidence that public expenditure has direct contribution on
the growth of the economy. Muthui et al (2013) carried out a study on the effect of public
expenditure components on the growth of the Kenyan economy and established that the
economic growth can only be realized if there is divisional expenditure in sectors such as
health and infrastructure.
Robert Hall et al. (2012) describes Gross Domestic Product as the sum value of the entire
goods and services produced by a country for the market during the year and this must be
within the territorial confines of a country. It is achieved by tallying the total spending
by a consumer, total business spending, net exports value, and total government
spending.
One of the essential indicators of the status of a country’s economy is
attributed to the performance of gross domestic product
The approximated sum worthy of the entire final services and goods, which are produced
in a particular time by the means of production possessed by the residents of a given
country, is referred to as Gross National Product. It is generally calculated by taking the
sum of expenditures on personal consumption, expenditure by the government, total
exports, and whichever income made by residents from overseas investments, subtracting
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income made exclusive the domestic economy by foreign citizens. A net export espouses
the dissimilarity among what a state ships out subtracting any shipped in of services and
goods.
Crowding out is a fall in either private consumption or investment as a result of a rise in
interest rates attributed to increase in government expenditure.
Government Expenditure it refers to the amount spent on goods and services, public debt
servicing and on capital investment by the government. Unproductive government
expenditure is the expenditure in the nature of consumption this includes expenditure on
defence, maintenance of state, justice, administration, law and order. Recurrent
government expenditure it refers to expenditure that does not create wealth in the future
and is a lesser amount of discretionary and is made up of on-going frameworks or
undertakings. It comprises of salaries and wages, transfers payment, debt repayment,
welfare services, and administration. Development expenditure can be said to be the
expenditure that produces wealth in the future or indirectly increasing the efficiency of
private enterprise, such as education and good highways.
Economic Growth can be said to be an up surge in the output of the goods and services of
a country and it is measured by variations in real Gross Domestic Product.
Nominal gross domestic product indicates the worth attributable entirely to services and
products, which are produced in Kenya during a particular time, applying the price at the
production time.
4
Real gross domestic product espouses the worth of produced products and services;
however, majorly applies constant producer and consumer price parameters to eliminate
the influences of increasing levels of price, which in actual terms refers to inflation.
Periods of the increase in real Gross Domestic Product are associated with high increase
of well being of individuals as the high growth in the economy triggers the middle
income bracket to rise, supporting a massive and substantial level of consumption. Scott
Sumner (2011) observes that the times of negative rise in real GDP are related to inferior
incomes, lesser level of living, and lower consumption.
Per Capita Income gauges the amount of money, which a single individual earns in a
given locality. Income per capita can use the average per-person income for a region,
country, or city and is employed as an approach of appraising the conditions of living and
eminence of life in diverse regions. It can be derived for a given geographical region
(nation) by dividing the said nation’s national income versus the number of citizens.
1.1.1 The Theoretically Expected Link between Government Expenditure and GDP
Government expenditure can have positive or negative effect on total output by means of
its relations with the non-government sector. Lin (1994) explored the approach in which
the expenditure by the government may enhance growth. These comprise of the delivery
of infrastructure, social services which include schools, health sector and targeted
intervention, which include export subsidies. The dimension of the influence of
expenditure by the government on the general economic growth hinges on its foundation.
However, in evidence-based studies, it is hard to establish the specific items of public
expenditure ought to be classified as investment and which qualifies to be consumption.
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Policymakers have no agreement on the articulate impact of government expansion as to
whether it enhances or deters the growth of the economy. Proponents of superior
government contend that government frameworks offer worthy “public goods” and these
include the provision of education and putting in place sustainable infrastructure. They
also contend that upsurges in spending by the government can bolster growth of the
economy by placing wealth in the lives if its citizens
Those who advocate for diminishing spending by the government share a contrary view.
The advocates of this thought believe the government in itself is large and greater
government spending weakens economic development by moving extra funds away
results in the sector of the economy, which is productive to government that employs
them a smaller amount resourcefully. They caution that a growing public sector thwarts
efforts to apply policies, which are pro-growth and this includes basic tax reform and
personal retirement accounts because enemies can apply the being of budget deficits as a
motive to refuse policies which would act as a means of strengthening the growth of the
economy.
It is greatly important to keenly observe that the theory on economics does not wholly
translate to concrete inferences with regard to the effect of government expends on the
performance of the economy. In reality, nearly all economists conquer and admit that
there are situations, whereby lesser extents of expenditure by the government would
translate to the growth of the economy and other situations whereby greater extents of
expenditure of the government would be appropriate
6
Suppose the government does not spend, it would mean that growth in the economy
would be nil as implementing contracts, and infrastructure development, and protecting
property would be very difficult if the authorities, which possess political power does not
exist. To this end, certain extent of expenditure on the part of government is essential for
the purpose of successful operation of the state functions. All the endeavours
encompassing economic activity would be extremely low if their lack of government;
however, with the presence of an active government, it means that the said government is
able to conduct economic activities because of possible economic planning. Accordingly,
it means that even if the government is spending on its day-to-day operations, the country
is able to achieve growth because of obligations as provided by the law.
Economists agree that spending by governments leads to more debt levels in the course of
carrying out economic activities by the government, and this normally stems out of the
fact that governments can over spend or misappropriate resources. Under these
circumstances, the extent of government spending does not reap profits.
1.1.2 Main Theories Anchoring the Study
Keynesian Theory
The model of Keynesian specifies that in the time of economic meltdown, budgetary
expansions is essential as it leads to the rise in the aggregate demand, which in turn leads
to raised GDP. More government expenditure translates to more employment both sectors
of the economy (private and public). With an increase in employment, companies are
able to enhance their income and profits to an extent that the said companies are able to
provide more job opportunities leading to more production of goods and services.
7
Against this backdrop, Barro (1990) established that expansion of fiscal budget could
lead to economic growth. Barro (1990) employed the use of the Cobb-Douglas model and
established that activities of the government influence the direction and magnitude of
economic growth. Barro & Sula-i-martin (1992) observe, “One of the extreme precincts
of Keynesian theory is that it flops to sufficiently reflect the inflation problem that might
be conveyed by the increase in spending by the government”.
Wagner Theory of Organic State
A German economist by the name Wagner is among the first scholars who contributed
literatures on public expenditure. The literature points out that public expending growth
were a normal result of the growth of the economy. Specifically, the law according to
Wagner observed public expenditure to be a behavioural variable, which positively
replies to the commands of an economy that is growing. The hypothesis seeks to come up
with either a direct association with regard to government spending and income it also
determines whether there exists an indirect cause- effect relationship occasioned through
spending by the government to the growth of the economy. The Wagner law is preferred
as it in many approaches tries to explain public expenditure and economic growth.
Generally this theory is criticized as its integral assumption of observing the state as
distinct object capable of making its decisions disregarding the constituent’s population
who in real detail can choose against the dictates of the Wagner’s law.
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Musgrave Theory of Public Expenditure Growth
This major historical model by the economist Musgrave declares that in initial phases of
the growth of the economy, government-spending in the economy should be fortified.
The theory pinpoints that during the ancient phases of economic development there are
recessions and as a result of this the government should put in place measures of dealing
with this recession. However, the theory faces criticism because it negates the role played
by the private sector in ensuring the economy grows.
A fundamental interrogation is whether or not the expenditure by the government
upsurges the long run consistent state growth rate of the economy. Landau (1983);
Devarajan (1993); Cashin (1995); Kneller (1999) observe that the general opinion is that
expenditure by the government, particularly on human capital and physical infrastructure,
can promote growth even though the foundation of financing of such expenditures can
translate to derailed growth of the economy. Musgrave and Musgrave (1989) opine, “The
growth retardation is experienced because of disincentive effects associated with
taxation”.
Barro (1990) observe that the scope of the effect of expenditure by the government on
growth hinges on its form. Expenditure on investment and productive activities as well as
state-owned production ought to add positively to growth, while on the other hand,
government consumption expenditure is linked to experience retarded growth.
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1.1.3 Government Expenditure
Government spending can be defined as any expenditure initiated by local, regional, and
national governments making up a considerable portion of the Gross National Product
(GNP). The spending is in the form of investments for the future, transfer payments and
acquisitions. Future investments look into the long term survival of the country and hence
funds are directed towards infrastructure development example roads, airports and
railways (Landau, 1985). Other examples of future investments include technological and
medical research or government-subsidized housing construction. Acquisitions mean
expenditures on goods and services for individual or public consumption. It is commonly
referred to as general government spending or final consumption expenditure. It may also
include importation of goods, government salaries, education expenditure, military
acquisitions, administrative costs and funding for defence (Mitchel, 2005). Government
spending may be current in nature.
Government expenditure comprises of recurrent and development expenditures incurred
by National and County governments of a country and the value of goods and services
bought by the state and its articulations.
The recurrent expenditures are those provisions made to meet government operations
such as compensation to employees (salaries, wages and allowances) , including the
purchase and provision of goods and services(government consumption) such as transport
operating expenses, repairs and maintenance of equipment.
Recurrent expenditures consists of two categories; Non-discretionary and discretionary
expenditures. Non-discretionary expenditures are those expenses that are pre-determined
10
by the Constitution or an Act of Parliament and which constitute a direct charge on
revenues e.g. Debt service payments, pensions and gratuities, salaries, allowances for
constitutional officers and subscriptions to International Organizations. These expenses
are referred to as Consolidated Fund Services (CFS) because they are charged directly to
the Consolidated Fund. Discretionary expenditures are those expenses used by various
agencies to produce goods and services for citizens. Since they are not pre-determined by
law, they can be adjusted upwards or downwards depending on government’s long term
policy and availability of resources. They comprise of recurrent and development
expenditures.
.
According to Keynesian economics, “increased government spending raises aggregate
demand and escalates consumption, which in turn leads to increased production and
faster recovery from recessions”. Keynes (1953) argues, “The Great Depression was
ended by government spending programs such as the New Deal and military expenditure
during World War II”.
Spending by the Government requires that the government must have sources of funding
and this possible by means of a number of approaches. For instance, the main financing
of government spending emanates from taxes.
Across the world a number of
governments are caught up in deficit spending as it is the most desirable as per the
Keynesians Economists, and this requires that government borrow as an approach to
funding the future programs and projects. Gandhi (1991) observes that “Government may
also choose to take loans from foreign countries to finance expenditure. How money is
11
spent and from what source is the main component in a government’s fiscal policy”.
Ganti and Kolhuri (1979) infer that “Public expenditure policy not only accelerates
economic growth and promotes employment opportunities but also plays a useful role in
reducing poverty and inequalities in income distribution”.
The entire expenditure by government is drawn from the consolidated fund maintained by
the National Treasury under the docket of the Ministry of Finance (National Treasury as
per current administration). Although the counties are expected to have their own finance
departments they still depend on the National Treasury since the major revenues are
collected by the Kenya Revenue Authority. The National government is required to spend
in accordance with the voted provision. The expenditures are grouped in various votes
which are approved by the National Assembly. There exist numerous categories of
National government expenditures, and this encompasses the purchase and availing of
goods and services (government consumption), government purchases of goods and
service intended to create future benefits such as infrastructure investment or research
and development, spending investment (government investment) and money transfers
(Constitution of Kenya, 2010)
The counties have the responsibility to incur expenditure that was previously incurred by
the Central government. The counties must ensure that the revenue allocation from the
national government in consolidation with the revenue collected is used for the social
good of the people in their jurisdiction. They must ensure there is good infrastructure, the
health facilities are in good condition and that other projects are initiated to provide
employment to the youth. The activities of the counties must be geared towards economic
12
growth of a country as a whole (Constitution of Kenya, 2010). Barro (1990) infers that
“The nature of the impact of government expenditure on growth depends on its form.
Expenditure on investment and productive activities including state-owned production
should contribute positively to growth, whereas government consumption expenditure is
expected to be growth-retarding”
According to a report, Republic of Kenya (1979)”Since independence, various
government expenditure reforms have been implemented. The reasons for the reforms
were to raise and sustain the economic growth rate of the country. The public sector
contributes to GDP growth rate through provision of government services such as
education, health and administration, and productive activities in areas of agriculture,
manufacturing, transport and communication and trade”. While the report, Republic of
Kenya (2002) pinpointed that “The main government expenditure strategy has been
restructuring overall expenditure by directing more resources to activities that promote
faster economic growth”. To realize this objective, a number of reforms on policy such as
bringing down the level of spending by the government have been undertaken as a means
of devoting more resources for developmental purposes. Moreover, the government
underscores the essentials of stimulating the growth of the economy by re-examining
maintenance and recurrent non-wage operating expenditure.
1.1.4 Gross Domestic Product
A nation’s GDP is the total value of all final goods and services produced for the market
place during the year, within the nation’s borders. (Robert Hall et al, 2012) observes, “A
nation’s GDP is calculated by adding together total consumer spending, total government
13
spending, total business spending and the value of net exports”. Gross Domestic Product
is one of the essential indicators of a country’s economic status or health. It is also used
to gauge the living standard of a given country.
Scott (2011) suggests that “Gross Domestic Product can be expressed in nominal or real
terms. Nominal GDP reflects the value of all the goods and services which are produced
in Kenya during a given period, using their price at the time of production. Real Gross
Domestic Product also reflects the value of produced goods and services, but it uses
constant consumer and producer price indices to remove the effects of rising price levels
(inflation). Periods of real Gross Domestic Product growth are thought to promote the
welfare of people as economic growth makes it possible for average incomes to increase,
which in turn translates to a greater extent of consumption. Periods of negative real Gross
Domestic Product growth are associated with lower incomes, lower consumption and
consequently a lower standard of living”.
The estimation of Gross Domestic Product can adopt a number of approaches. Budapest
(2013) asserts that “the production estimate hinges on the values using three different
methods; the production estimate is based on the value of final output in the economy
less the inputs used up in the production process, the expenditure estimate is based on the
value of total expenditure on goods and services, excluding intermediate goods and
services, produced in the domestic economy during a given period, the income estimate
measures the incomes earned by individuals and corporations
directly from the
production of outputs (goods and services”. Further, Budapest (2013) infers that “Gross
Domestic Product is estimated on a quarterly basis and if perfect data were available, the
14
three approaches would generate equal estimates. Some of the benefits of Gross
Domestic Product are and not limited to; Gross Domestic Product is considered the
broadest indicator of economic output and growth, Real Gross Domestic Product takes
inflation into consideration, making it possible for comparisons against other historical
time periods and that the Bureau of Economic Analysis issues its own analysis document
with each GDP release, which is a great investor tool for analysing figures and trends,
and reading highlights of the very lengthy full release”.
1.1.5 Government Expenditure and Gross Domestic Product
According to Keynes (1953) points out that, “government could reverse economic
downturns by borrowing money from the private sector and then returning the money to
the private sector through various spending programs”. High levels of government
consumption are likely to escalate employment, profitability and investment through
multiplier effects on aggregate demand. Government expenditure therefore, even of a
recurrent nature, can contribute positively to economic growth. Conversely, Barro (1990)
suggests that “endogenous growth models such as predict that only productive
government expenditures will positively affect the long run growth rate”. In the
neoclassical growth model of Solow (1956), “productive government expenditure may
affect the incentive to invest in human or physical capital, but in the long-run this affects
only the equilibrium factor ratios, not the growth rate, although in general there will be
transitional growth effects”.
15
Wagner (2007)’s law of public expenditure is one of the initial attempts which emphasize
economic growth as the fundamental determinant of public sector growth. Vedder and
Gallaway (1998) argued that “as government expenditures grow incessantly, the law of
diminishing returns begins operating and beyond some point further increase in
government expenditures contributes to economic stagnation and decline”. RostowMusgrave model
(1999) carried out a research on growth of public expenditure and concluded that, “at the
early stages of economic development, the rate of growth of public expenditure will be
very high because government provides the basic infrastructural facilities and most of
these projects are capital intensive, therefore, the spending of the government will
increase steadily. The investment in education, health, roads, electricity, and water supply
are necessities that can launch the economy from the practitioner stage to the take off
stage of economic development, making government to spend and increasing amount
with time in order to develop an egalitarian society”.
Alexander (1990) conducted a study, in which he “applied OLS method for sample of 13
Organization for Economic Cooperation and Development (OECD) countries panel
during the period ranging from 1959 to 1984”. The research findings indicated that the
rise in expenditure by the government translates to a negative effect on the growth of the
economy. On the other hand, Devarajan and Vinay (1993) employed panel data involving
fourteen industrialized nations and the study examined the period 1970 to 1990 and
employed the normal least square method on 5-year moving average. They scholars
explored various functional varieties of expenditure such as on health, transport, and
education among others as explanatory variables and established that communication,
16
transport, and health possess important influence whereas defence and education have an
undesirable impact on economic growth.
Mitchell (2005) assessed the impact of expenditure by the government on the
performance of the economy in countries, which are established. Mitchell evaluated the
evidence from the international scale, examined the latest research in the world of
academia, quoted instances of nations, which have pointedly lowered spending by the
government as a part of the output by countries and examined the economic outcomes of
the aforementioned governmental reforms., Mitchell concluded that “a large and growing
government is not conducive to better economic performance”. Mitchell argued,
“Reducing the size of government would lead to higher incomes and improve American’s
competitiveness”. Gregorious and Ghosh (2007) “made use of the heterogeneous panel
data to prove a theory on the impact of government expenditure on economic growth.
Their results suggest that countries with large government expenditure tend to experience
higher economic growth”. Olorunfemi (2008) conducted a study on the strength and
direction of the association in relation to the growth of the economy and to public
investment in Nigeria, applying time series data from the period 1975- 2004 and
established that public expenditure linked positively on the development of the economy
and that there was no connexion between GDP and gross fixed capital formation.
Olorunfemi pointed out that from disaggregated analysis, the outcome disclosed that only
37.1% of expenditure by the government is directed to capital expenditure while 62.9%
share is devoted to current expenditure.
17
1.2 Research Problem
The policies formulated by policy makers concerning the increase in government
expenditure hinder or promote the growth of the economy. According to the Keynesian
macroeconomic thought, “public spending can contribute positively to economic
growth”. Therefore, an upsurge in the consumption by the government has a probability
to precipitate an upsurge in, profitability, investment, and employment through multiplier
impacts on aggregated demand. Peacock and Wiseman (1967) applied political theory as
a means to describing the effect of political occasions on public expenditure. Peacock
and Wiseman recognizes the suggestions of Wagner that “government expenditure
depends broadly on revenues raised by taxation” as cited by Black et al. (1999),
“governments would thus be in a position to continue increasing their own expenditures
and expanding their role in the economy provided their economies continue to grow
through industrialization”. Conversely, people might not be ready to pay more levies as a
means to financing such increased spending. The theory of Musgrave Rostow considers
“government expenditure as a pre-requisite of economic development”. Musgrave and
Musgrave (1989) observe that during the initial phases of the growth of the economy,
public investment as a fraction of the sum investment of the economy is established to be
great.
Differences in views come up as both supporters and detractors of the theoretical views
put up their arguments to establish or credit their positions. Mitchell (2005) contends that
enlarged expenditure by the government past these precipitates an effect that is
diminishing on the economic growth. Certainly, suppose the government is to be
supportive in enhancing a quicker growth rate, the government undertakes this by stifling
18
the distribution of funds to uses that are destructive. However the likes of Ram (1986),
came up with a two-sector production theoretical framework, applied global analogous
statistics on investment, government size, and output from a large sample of 115
countries for the year 1960-1980, and established that the overall impact of government
size on economic growth is significantly positive.
Mudaki and Masaviru (2012) conducted a study on if the structure of public expenditure
has any impact on the progress of the economy in Kenya had study outcomes, which
were inconsistent to their priori expectations. Amanja and Morrisey (2005) endeavoured
to relate growth of the economy to foreign aid and investment, and established that there
was substantial negative influence on long run growth.
In Kenya, there exist researches on the growth of the economy in Kenya however the part
of expenditure by the government on planning and devolution and its influence on GDP
has not be well studied due to the fact that devolution is a novel aspect. Kenya adopted a
new dispensation, which gave way to devolution governance. The new Constitution gave
way to the creation Ministry of Devolution and Planning and to this end, this study strives
to critically assess if the spending by the government through this ministry has influence
on GDP.
The new dispensation led to a government, which decentralized and it retained all the
three autonomous arms of government, which include the Judiciary, Parliament, and the
Executive that are decentralized to the 47 Counties according to the Article 6 of the new
19
constitution and identified in the First Schedule. To this end, the formation of the 47
counties led to new government expenditure aspects because the main goal or aim of
devolution is to decentralize resources, representation, and power to the grassroots level.
Knowledge Gap
Therefore, the study seeks to fill the gap in knowledge and will enrich the academia by
critically analyzing whether the government is making the right choices on whether to
spend more or spend smart, particularly on devolution and infrastructure and also on the
other sectors like agriculture, security and defense, education and in the health and
whether this expenditure is having a positive or negative impact on gross domestic
product.
Research Question
In this study the research question was to establish, what is the impact of government
expenditure on the GDP in Kenya?
1.3 Objective of the Study
The overall objective of the study was to determine the impact of government
expenditure on gross domestic product in Kenya. This objective was achieved by keenly
and critically examining the independent variables of the study which were government
expenditure on agriculture, security and defence, health, and devolution, planning and
infrastructure in relation to the dependent variable which was gross domestic product
(GDP).
20
1.4 Value of the Study
The main objective of this research was to formulate an investigative model for
establishing differential influences of a variety of spending by government on
components pertaining the growth of the economy. The findings of this study would
make it possible for the policy makers to develop sound and solid approaches of
assessing the components, which determine economic growth and as such, be able to
allocate public funds in a manner that evades intuition in making expenditure decisions
that precipitate calamitous economic consequences. Participants need to be educated on
prioritization of the allocated funds to the various components. The study will have an
impact on the following:
Citizens
The study will enable individuals to understand the effectiveness of public expenditure on
the growth of the economy especially on the key sectors of study, their benefits in the
investment & job opportunities created as a result, their role in paying taxes willingly and
how government expenditure is of great benefit for the country’s economic growth as it
open gates for entrepreneurial investment opportunities.
Private investors
The study will help private investors to understand more about the significance of public
spending and the growth of the economy, the competitive advantage and the incentives
which the government offers on establishment of industries e.g. construction of road
network which encourages more investors to invest in the country hence generating
employment opportunities for locals and tax holiday for the new investors.
21
Government
The study will provide useful information to the government and its agencies on matters
of policy formulation, taxation and regulation of investment policies and therefore
commit resources to key sectors of the economy that may help spur or improve the
economic growth
Practitioners and potential researchers
The information from this research will also be of undeniable importance to the students,
academicians, economists, analysis’s and potential researchers who are interested on
further research on the subject i.e. the study will contribute immensely to the body of
knowledge.
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CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
The chapter seeks to analyse both theoretical and empirical literature on government
expenditure and the growth of the economy are reviewed. The reviews are considered
important in providing a framework for understanding the effect of government
expenditure on the growth of the economy. It is imperative to note that economic theories
do not repeatedly provide tangible deductions concerning the effect of government
expenditures on the performance of the economy. However, many economists are in
tandem that there are situations whereby the level of government spending is beneficial to
the economy while other levels create retarded growth. To this end, the study adopts
hypothetical approaches, whereby the research would review theories with an aim of
undertaking their linkage to the study objective, which is the effect of government
spending on the progress of the economy.
2.2 Theoretical Literature Review
There are a number of theories advanced to explain the concept of government
expenditure. The following presents the discussion on each of them.
2.2.1 The Peacock and Wiseman Theory
Wiseman and Peacock founded the above theory and this stemmed from their study in
United Kingdom, where they endeavoured to investigate spending by governments and
their study was for the period 1890 and 1955. The key tenet of the theory is that people
never willing to pay taxes while the government always wants to spend. During the times
23
of economic meltdown, governments always increase taxes while the citizens are never
willing to accept more taxation. To this end, when governments are prone to spend and
the citizens are unwilling to pay taxes, this proposition is referred to as displacement
effect as Wiseman and Peacock (1961) point out that “displacement effect is meant to be
a short term phenomenon it normally assumes a long term trend.
In light of the above, it worthy to note that whenever something takes place in Kenya,
which is associated with economic shocks such the 1984 famine, the new era of
devolution, and the issue of internally displaced people, the government raises taxes as a
means of raising extra revenue for expenditure on the aforementioned occurrences.
Therefore, governments undertake this as a means of bridging the budget deficits;
however, the theory has shortcomings in that it does not recognize the fact that when
there are economic shocks the government can seek other avenues of raising revenue like
seeking aid through donor funding, auctioning of government assets, and borrowing from
external markets.
2.2.2 The Wagner’s Law of Increased Government Activities
Wagner's law of increased government spending is a law, which derives its name from
the founder who was called Adolph Wagner and lived from 1835 to 1917. “Wagner
advanced his ‘law of rising public expenditures’ analysing trends in the growth of public
expenditure and in the size of public sector”. Wagner’s law postulates that; “the extension
of the functions of the states precipitates an up surge in public expenditure on
administration and regulation of the economy”. Wagner (1883) observes that “the
development of modern industrial society would give rise to increasing political pressure
24
for social progress and call for increased allowance for social consideration in the
conduct of industry”. In relation to
Wagner’s law, the increase in public expenditure, which is not in parallel to the income
of a country leads to an increase in the public sector.
The focus of Wagner (1883)’s law “on the connection between the size economy size and
that of public-sector bearing in mind that goods and services are the major determiners
of the public-sector expansion rate to the former in the process of urbanization and
industrialization. This indicates the rising of the activities of the government, which
supplement for activities, which are private. To this end, Wagner (1883) proposes that
progress and success of the public sector can be achieved by coming up with rules and
regulations that are more clear and growth enhancing. Contracts which will lead to higher
government interventions followed by new levels of externalities and interdependencies.
The management of natural monopolies is also so vital and income elasticity is equally
essential as this will lead to good investment, infrastructure, welfare initiatives and also
socio cultural programs.
In light of the above, the tenets of Wagner’s law “as progressive nations industrialize, the
share of the public sector in the national economy grows continually. This necessitates an
increase in State Expenditure because of the demand for social activities of the state,
administrative and protective actions, and welfare functions”.
From socio-political viewpoint as postulated by Wagner (1883) “the state social functions
expand over time: retirement insurance, natural disaster aid (either internal or external),
environmental protection programs, among others. Economically it is marked by
25
advancement in science and technology and consequently the increase of state
assignments into science, technology and various investment projects”. To conclude, the
Wagner’s theory, the state resorts to government’s loans for covering unforeseen events
and consequently sum of government debt and rise of interest rates in the form of rise in
debt service expenditure. Another implication of this is that the increased division of
labour would be accompanied by the development of new technological processes that
would lead to the growth of monopolies in the private sector.
In Wagner's view, “private sector monopolies would not adequately take into account the
social needs of society as a whole and would therefore need to be replaced by public
corporations. Further, if private sector companies became too large, the economy would
become unstable because problems for individual companies would become problems for
society as a whole”. Accordingly, Wagner (1883) infers that “government would need to
expand to provide social benefits and services which Wagner saw as not open to
economic evaluation.
2.2.3 Keynesian Theory
The renowned economists who deliberated the relationship between the growth of the
economy and public expenditures. Keynes (1930) regards “public expenditures as an
exogenous factor which can be utilized as a policy instruments promote economic
growth” Keynesian strongly points out public expenditure can contribute immensely and
with good effects to economic growth. He therefore believed that as the government
spends more an equal effect will be reciprocated in full employment, profitability and
massive gains will be notable in the investment made by the citizens which will be as a
26
result of multiplier effects on aggregate demand. Due to the increase in aggregate demand
the supply will be triggered to increase and hence causing an increase in output.
According to Keynes (1930) “the economy is subject to fluctuations, and supply and
demand could well balance out at an equilibrium that did not deliver full employment.
The solution to this conundrum was seemingly simple: Replace the missing private
investment with public investment, financed by deliberate deficits”. Generally the
government borrows so as to be able to undertake its crucial work which are majorly seen
to be provide by the government due to the high investment needed to be able to offer the
goods and services which on normal circumstances would cripple the private sector if let
to provide the goods and services. The borrowing of funds creates a pool of public debt
toward the country because the normal budget is not sufficient to cater for all the public
needs that ought to be meet by the government. The government in return will offer or
create new jobs in the public sector to be able to serve its citizens well, and the result of
people having money for disposal created an aggregate demand occasioned by the
multiplier effect. Therefore as more money is received from the government through
public works new opportunities are created.
Knack and Keefer (1995). Infers that “Keynes's analysis laid the basis for the field of
macroeconomics, which treats the economy as a whole and focuses on government's use
of fiscal policy spending, deficits, and tax. These tools could be used to manage
aggregate demand and thus ensure full employment”. Therefore, the government
generally reduces the level of expenditure in the periods when the economy is either
expanding or recovery
27
According to the theory of Keynes, it is the responsibility of the government to ensure
that the economy is going in the right direction as it is the duty of the government to put
in place measures, which will intervene when there is market failure. Moreover, the
Keynesian theory postulates that governments play an essential role in terms of market
intervention when there are imperfect markets. In many economies in both emerging and
industrialized nations, Keynesian theory provided intellectual basis for a welfare oriented
method of self-determination. Knack and Keefer (1995) infers that “The widespread
absorption of the Keynesian message has in large measure been responsible for the
generally high levels of employment achieved by most developed countries and for a
significant reorientation in attitudes toward the role of the state in economic life”.
2.2.4 Musgrave Rostow’s Theory
Musgrave propounded this theory as he observed changes in the income elasticity of
demand for public services in three ranges of per capita income. Musgrave (1969)
observes that “at the high levels of per capita income, typical of developed economics,
the rate of public sector growth tends to fall as the more basic wants are being satisfied”.
Musgrave (1969) posits that “at low levels of per capita income, demand for public
services tends to be very low, this is so because according to him such income is devoted
to satisfying primary needs and that when per capita income starts to rise above these
levels of low income, the demand for services supplied by the public sector such as
health, education and transport starts to rise, thereby forcing government to increase
expenditure on them”.
(Musgrave, 1969) contends that “there exist a functional association between the
economic growth and the growth of the government activities; so that the government
28
sector grows faster than the economy. Thus, all kinds of government, irrespective of their
level of intentions (Peaceful or war), and size, indicate the same tendency of increasing
public expenditure”. When the economy progresses, there is a rise of urban centres, with
the allied social vices such as crime that need government intervention as a means of
reducing the said occurrences. Large urban centres need security as a means to upholding
order and law. For the government to undertake these functions there are costs incurred
by the government, which translates to added public expenditure. Musgrave and
Musgrave (1989) opined that “as progressive nations industrialize, the share of the public
sector in national economy grows continually”.
Accordingly, the theory postulates that when government-spending increases, there is
more development and it increases when governments upsurge recurrent expenditure.
However, it is of equal importance to note that increase in recurrent expenditure does not
automatically translate to enormous economic growth. Therefore, the causal effect of
growth of the economy on capital expenditure by the government is more substantial
when juxtaposed with recurrent expenditure by the government.
2.3 Empirical Literature Review
Several empirical literatures have been carried out on the impact of government revenue
and expenditure on the growth of the economy. These studies have looked at aggregate
and disaggregate levels. The following is a brief discussion on each of them.
Landau (1983) employed panel data of 27 less developed countries to study the
association between the components of expenditure by the government and growth of the
economy. The methodology used by the study was Ordinary Least Squares (OLS). The
variable used was government expenditure, which was broadly categorized as productive
29
and consumption expenditure. The research findings established that consumption
expenditure possessed a deleterious impact on growth of the economy, whereas
productive expenditure possessed a positive impact on growth of the economy. To this
end, the study established that public investment on transport and communication was
positively associated with economic growth. This finding was supported by the result of
Canning and Fay (1995) on infrastructure and growth, which revealed a strong
association between the physical stock of roads and growth. Secondly, general
investment was positively correlated with growth while public enterprises investment was
negatively correlated with growth. The strength of the finding is that it offers moderate
support for the view that infrastructure investment fosters growth, but public investment
in general does not. The weakness of the study was that it did not conduct causality tests.
Koori (1984) examined “the presence and nature of the crowding effect in Kenya using
Ordinary Least Squares and found that phenomenon growth in domestic deficit financing
of government expenditure crowded out private borrowing”. The study employed the
time series data. The research established that the form of public sector investment
expenditure completely crowded out the private investment in the manufacturing
industry, electricity and water sectors. The study considered only one side of the
government expenditure that is public investment and did not consider public
consumption. The core weakness of the study was failure to measure for long run
association between the variables using co integration analysis.
Ram (1986) came up with a a two-sector production theoretical framework and used
international comparable data on size of the government, investment, and output from
30
summers and Heston (1984) for a big sample of 115 countries 1960-1980. Similar earlier
researches, cross-sectional analysis have been conducted in his study. In Ram’s
theoretical model, he established that the overall effect of government size on economic
growth is significantly positive.
Aschauer (1989) conducted a study on the impact of expenditure by the government on
growth of the economy in the U.S.A and established that, expenditure on the main
infrastructure such as roads translated to more growth of the economy. On the other
hand,
When governments spend more on infrastructure like court and police houses, there is
little significance on the economic growth. However, Aschauer noted that spending on
education has a positive impact on the growth of the economy. “Although, Kenya is the
most industrially developed country in East Africa, manufacturing still accounts for only
14% of its revenue. These levels of manufacturing signify only a slight upsurge since
independence. Growth of the sector after independence, initially paid, has stagnated since
the 1980s, disadvantaged by scarcities in hydroelectric power, high energy costs, decrepit
transport infrastructure and the dumping of low-cost exports”.
Maingi (2010) carried out a research on the influence of expenditure by the government
on the growth of the Kenyan economy and established that enhanced expenditure by the
government on sectors such as education and infrastructure translated to improved
growth of the economy. Maingi (2010) notes that when the government spends on areas,
for instance, servicing debts translated to retarded growth of the economy.
31
2.4 Determinant of Economic Growth
Barro and Martin (1992) point out “Investment is one of the most fundamental
determinants of economic growth identified by both neoclassical and endogenous growth
models. However, in the Neo classical model investment has impact on the transitional
period, while the endogenous growth models argue for more permanent effects”.
Similarly, Lensink and Morrissey (2006) observe, “The importance attached to
investment by these theories has led to an enormous amount of empirical studies
examining the relationship between investment and economic growth”
Hermes and (2000) suggests that “Innovation and Research & Development R&D
activities can play a major role in economic progress increasing productivity and growth.
This is due to increasing use of technology that enables introduction of new and superior
products and processes. This role has been stressed by various endogenous growth
models, and the strong relation between Innovation/R&D and economic growth has been
empirically affirmed by many studies”. Human capital contributes greatly in the growth
of the economy in a number of endogenous growth models as well as one of the
important extensions of the model of neoclassical growth. Since the term ‘human capital’
denotes mainly to workers’ attainment of abilities and expertise through schooling and
exercise, many of studies have measured the eminence of human capital by means of
substitutions correlated to education.
Economic policies and macroeconomic have also great potential as determinants of
economic performance since they can set the framework within which economic growth
takes place.
32
According to Fischer (1993) “Economic policies can influence several aspects of an
economy through investment in human capital and infrastructure, improvement of
political and legal institutions and so on. Macroeconomic conditions are regarded as
necessary but not sufficient conditions for economic growth”. Overall, a stable
macroeconomic setting may favour economic growth, particularly, by means of lowering
of improbability, while macroeconomic instability may possess a negative effect on
growth through its effects on productivity and investment. Fischer identified
macroeconomic factors that affect development and they include inflation, deficits of the
budget, tax burdens, and fiscal policy.
In the words of (Borensztein et al. (1998) “Foreign Direct Investment performs a crucial
role of internationalizing economic activity and it is a primary source of technology
transfer and economic growth. This key role is stressed in numerous models of
endogenous growth theory. The empirical literature examining the influence of Foreign
Direct Investment on growth has offered more-or-less consistent findings upholding a
significant positive link between the two”.
Borensztein et al. (1998) contend, “Openness to trade has been used extensively in the
economic growth literature as a major determinant of growth performance. There are
sound theoretical reasons for believing that there is a strong and positive link between
openness and growth. Openness affects economic growth through several channels such
as exploitation of comparative advantage, technology transfer and diffusion of
knowledge, increasing scale economies and exposure to competition”. Openness is
commonly gauged by the ratio of exports to Gross Domestic Product. Economies that are
33
more open to trade and capital flows possess greater Gross Domestic Product per capita
and grew faster
Institutional framework is variable, which affect growth of the economy. Rodrik (2000)
“highlights five key institutions (property rights, regulatory institutions, institutions for
macroeconomic stabilization, institutions for social insurance and institutions of conflict
management), which not only exert direct influence on economic growth, but also affect
other determinants of growth such as the physical and human capital, investment,
technical changes and the economic growth processes”. Against this backdrop Easterly
(2001) argued that “none of the traditional factors would have any effect on the
performance of the economy given that there had not been developed a stable and
trustworthy institutional environment”. Knack and Keefer (1995) infers “The most
frequently used measures of the quality of institutions in the empirical literature include
government repudiation of contracts, risk of expropriation, corruption, property rights,
the rule of law and bureaucratic quality”.
A number of researchers have made an effort to measure the quality of the political
environment using variables such as political instability, political and civil freedom, and
political regimes. Brunetti (1997) “distinguishes five categories of relevant political
variables: democracy, government stability, political violence, political volatility and
subjective perception of politics. There exist an association between the growth of the
economy and political factors”. Lipset (1959) studies “how the growth of the economy
influences the political regime and established that “political instability would increase
34
uncertainty, discouraging investment and eventually hindering economic growth”.
Alesina et al. (1994) opine that “The degree of democracy is also associated with
economic growth, yet the association is much more complex, since democracy may both
retard and enhance the growth of the economy based on a number of channels, which it
permeates through”.
Knack and Keefer (1997) observe “Trusting economies are expected to have stronger
incentives to innovate, to accumulate physical capital and to exhibit richer human
resources, all of which are conductive to economic growth”. Easterly and Levine (1997)
point out that “Ethnic diversity, in turn, may have a negative impact on growth by
reducing trust, increasing polarization and promoting the adoption of policies that have
neutral or even negative effects in terms of growth”. A number of other social cultural
influences have been observed in the literature, which include ethnic composition and
fragmentation, language, religion, beliefs, attitudes and social/ethnic conflicts, but their
relation to economic growth seems to be indirect and unclear. For example, “cultural
diversity may have a negative impact on growth due to emergence of social uncertainty
or even of social conflicts, or a positive effect since it may give rise to a pluralistic
environment where cooperation can flourish”.
Armstrong and Read (2004) affirm that” natural resources, climate, topography and ‘land
lockedness’ have a direct impact on economic growth affecting (agricultural)
productivity, economic structure, transport costs and competitiveness”. Hall and Jones
(1999) suggest that “Geographical factors including absolute values of latitude, distances
35
from the equator, proportion of land within 100km of the coast, average temperatures and
average rainfall, soil quality and disease ecology are known to have impact on the growth
rate of an economy”.
Kelley and Schmidt (2000) argue that “Many demographic aspects have been related to
economic progress. The aspects investigated, age distribution, growth population, density
of the population, migration and, seem to play the major role in economic growth. High
population growth, for example, could have an indirect influence on the growth of the
economy manipulating the dependency ratio, investment and saving behaviour and
quality of human capital”. The composition of the population has also important
implications for growth. A huge working-age populace is assumed to be conductive to
growth, while population with many young and elderly dependents is seen as
impediment. Population density, in turn, may be positively related with growth of the
economy because of more specialities, diffusion of knowledge. Migration may influence
the potential of growth of both the exporting and importing nations.
2.5 Summary of Literature Review
The first part of the literature review highlighted basic theories that have been used to
support the effects of government expenditure on economic growth. The researcher
discussed three theories; the Keynesian theory, Wagner’s theory of increasing state
activities, and Musgrave theory of public expenditure growth. From these theories have
different views of the effect of government spending on economic growth. According to
Keynesian view, “government could reverse economic downturns by borrowing money
from the private sector and then returning the money to the private sector through various
36
spending programs. High levels of government consumption are likely to increase
employment, profitability and investment via multiplier effects on aggregate demand”.
Thus, government expenditure, even of a recurrent nature, can contribute positively to
economic growth. Wagner’s theory on the other hand emphasizes, “Increase in public
demand leads to more that proportional increase I national income. Musgrave theory on
the other hand observes that at the high levels of per capita income, typical of developed
economics, the rate of public sector growth tends to fall as the more basic wants are being
satisfied”.
From the empirical literature review, various findings have also contradicted each other.
Some of them relate economic growth increase to government expenditure while other
attributes negative economic growth to government expenditure as well. It is worth
noting that the differences in the outcome of these findings could be as a result of the
different exploratory variables used in different combinations and different contexts. But
what remains for sure is that government expenditure has a great impact on the economic
development of a country.
As revealed from the literature reviewed, different exploratory variables lead to different
outcomes in the study of economic growth and public expenditure. All these studies were
done indifferent African contexts. However, none of those reviewed was based on
Kenyan context as most of similar studies done in Kenya are not documented and
therefore not traceable. These studies hardly gave policy recommendations and
implications. A study on economic growth and expenditure becomes even more useful
when the researcher provides policy recommendations at the end of the study.
37
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Introduction
This section described the design of the research, sample design, target population,
methods of data collection, analysis of data, and ethical issues.
3.2 Research Design
As stated by Mugenda and Mugenda (1999), a research design refers to the structure or
plan of a research, which strives to find appropriate solutions to research questions,
which comprises of an summary of the research work ranging the from hypothesis,
methods and techniques for gathering and analyzing data and presenting the outcomes in
a form which can be understood. Orodho (2003) and Kothari (2004) describe “a
descriptive survey design as a design that seeks to portray accurately the characteristics
of a particular individual, situation or a group”. Descriptive Research encompasses the
collection and analysis of quantitative data as an approach to describing various
phenomenons’. To this end, the study adopted the data from 2005 to 2015.
3.3 Population and Sample
As stated by Mugenda and Mugenda (2003), “target population is that population to
which a researcher wants to generalize the results of the study” while Borg and Gall
define target population “as a universal set of the study of all members of real or
hypothetical set of people, events or objects to which an investigation wishes to
generalize the results”.
38
The population of the research encompassed five ministries and they include the ministry
of agriculture, health, security and defence, devolution, planning and infrastructure, and
education
In the words of Mugenda and Mugenda (2003) “Sampling is the procedure of choosing a
number of individuals for a study in such a way that the individuals selected are
representative of the the large group from which they were selected”. The study adopted
purposive sampling as a sampling technique and this was due to the convenience
purposes as the research understood the target population. According to Kothari (2004)
purposive sampling encompasses deliberate choosing of study respondents who are
representative of the target population.
3.4 Data Collection
The study adopted the use of secondary data as an approach to analysing the impact of
expenditure by the government on the growth of the Kenyan economy. According to
Arasa (2008), “secondary data is information that has already been collected for another
purpose other than the current purpose of another researcher”. Conversely, Arasa
pinpoints that the secondary data adopted for a particular study should possess relevance
to the topic of study coupled with the utility of the contemporary research. Against this
backdrop, the research gathered time series data of education, infrastructure, and health
expenditures by the Kenyan government for the period 2005 to 2015. The researcher
accessed this data from government and international organizations publications. The
international publications contained data from organizations such as the IMF and the
World Bank.
39
3.5 Data Analysis
The study adopted the use of inferential and descriptive statistics as an approach to
analysing the collected data. The researcher sorted, coded and checked for completeness
of the collected data. Descriptive statistics, which include the frequencies, percentages,
and mean score for each study variable was calculated and tabulated by applying the
frequency distribution tables. As a means to testing the association between the variables
of the study, the study adopted the use of inferential tests such as the regression analysis.
To this end, the research used SPSS version 17.0 in the process of data analysis and
presented the findings in form of graphs and frequency tables. According to Mugenda
(2008) Statistical Packages for Social Sciences is a computer package applied to analyse
data including descriptive statistics as a means of generating percentages, tables,
frequencies and graphs, inferential and multivariate statistical analysis.
A multivariate regression model was applied to establish the impact of spending by the
government on GDP and to be tested through the use of SPSS software.
The regression model below was used in determining the relationship
Y = β0+ β1X1 + β2X2 + β3X3 + β4X4 + β5X5 + e
Where, Y = Dependent Variables i.e. GDP
β0 = the constant
є = error term
Β1-n = the regression coefficient or change included in Y by each X
X1- Government expenditure in Devolution, Planning and Infrastructure
X2- Government spending in Agriculture
X3- Government expenditure in Security and Defence
X4- Government expenditure in Education
X5- Government expenditure in Health
40
3.6. Test of significance
The study tested the level of statistical significance of the findings at 5% using the
Analysis of variance technique (ANOVA). A 5% level of significance is another way of
saying that 95% of the time that a sample is taken from the population, the study will be
likely to generate the same results. The ANOVA solves the difficulty that arises with
either z-test or t-test when examining the significance of the difference amongst more
than two samples at the same time. If the results of the test fall within the 5% level of
significance, it means that the sample selected is a true representation of the population.
41
CHAPTER FOUR
DATA ANALYSIS, FINDINGS AND INTERPRETATIONS
4.1 Introduction
The section encompasses the analysis of data and interpretation of findings. The objective
of this study was to determine the influence of government expenditures on gross
domestic product in Kenya. This objective was achieved by keenly and critically
examining the independent variables of the study which were government expenditure on
agriculture, security and defence, health, and devolution, planning and infrastructure in
relation to the dependent variable which was gross domestic product (GDP).
Secondary data was collected from Kenya Bureau of Statistics. It was edited, coded and
analyzed by descriptive statistics. The data was presented using tables, percentages tables
and depicted using graphs. Useful model for this study was tested using ANOVA
correlations tables and T-test tables as shown in the following sections.
4.1.2 Kenya GDP Annual Growth Rate 2005-2015
The Gross Domestic Product in Kenya grew by 5.9 % year-on-year in the first quarter of
2016, following a 5.7 % increase in the previous period. Quicker rates of growth were
observed in manufacturing, whereby there was a 3.6 % from 1.2 % in fourth quarter.
Retail and Wholesale trade expanded to 7.3 % down from 6 % while in the transportation
sector underwent 8.4 % from growth down from 5.5 %). On the other hand, the education
sector saw a 5.5 % expansion from 4.2 %. Moreover, insurance and financial sector
increased to 8 % from 6.5 %. Besides, the activities in real estate rebounded to 6.7 %
from -4.9 % in fourth quarter whereas the agricultural plummeted to 4.8 % from 11.8 %.
The construction industry decreased to 9.9 % from 14.9 %. Restaurants and
42
accommodation expanded to 12.1 % from a 21.2 % jump in the earlier quarter but
marking the second straight period of expansion after 2 years of decrease because of
insecurity, which is known to decrease the tourism numbers. Quarter-on-quarter, the
economy of Kenya decreased by 1.5 %, in the first decrease in two years. Gross Domestic
Product Annual Rate of growth in Kenya averaged at 5.43 % from 2004 until 2016,
attaining an all-time greater of 12.40 % in the Q4 of 2010 and a record low of 0.20 % in
the Q4 of 2008. The Kenya National Bureau of Statistics reports gross Domestic Product
Annual Growth Rate in Kenya.
Figure1
43
Figure 2
Figure 3
44
Figure 4
In East Africa, Kenya is among the most developed country. Forestry, Fishing, and
Agriculture, which encompasses tea and coffee cultivation, are some of the major sectors
of the economy. In other words, the agricultural sector in Kenya is the principal sector of
the economy and represents about 22 % while the Manufacturing sector comes second
with a gross Domestic Product of close to 11 %. Other key sectors of the Kenyan
economy are Real Estate, which has a gross Domestic Product of 8 % while the
Wholesale and Retail Trade, Transport and Storage, and Education all have a gross
Domestic Product of 7 %. The activities of Financial and Insurance have a GDP of close
to 6 %) while the Construction sector has a 5 % GDP.
This page offers the up-to-date stated value for the Gross Domestic Product Annual
Growth Rate of Kenya coupled with the earlier releases, short-term forecast and longterm prediction, historical high and low, economic calendar, survey consensus and news.
45
Kenya GDP Annual Growth Rate - actual data, historical chart and calendar of releases was last updated on September of 2016.
4.2 Data on Government Expenditure
Table 4.2.1 Central Government Expenditures (Kshs Millions) on Defence/Security
between 2004-2013
Years
Expenditures
Percentage change
2003/2004
23,397.08
0.11
2004/2005
20,979.25
(0.10)
2005/2006
25,608.64
0.22
2006/2007
25,122.90
(0.02)
2007/2008
39,482.73
0.57
2008/2009
41,183.21
0.04
2009/2010
47,852.48
0.16
2010/2011
54,021.92
0.13
2011/2012
65,035.52
0.20
2012/2013
72,728.57
0.12
2013/2014
80,538.40
0.11
Total
495,950.70
From the analysis of data concerning central government expenditures on
defence/security between 2004 and 2013, it was found that government spending to
enhance security was not constant between the years. The spending increased by 11%
46
between 2003 and 2004, followed by a decrease of 10% in 2005. The 2006 spending on
defence/ security function increased by 22% with 2% decrease in financial year
2006/2007 but thereafter spending was significantly increased by 57% in 2007/2008
financial year. Between 2007/2008, 2008/2009, 2010/2011, 2011/2012, 2012/2013 and
2013/2014 the government spending on security and defence was increased by 4%, 16%,
13%, 20%, 12% and 11% respectively. The highest government spending on security and
defence was between 2007/2008 financial years due to post-election violence which
erupted after elections while the lowest spending was between financial year 2004/2005.
Figure 5
National government Expenditures on
security/defense
90,000.00
Expenditures,
80,538.40
80,000.00
70,000.00
Activity
60,000.00
50,000.00
40,000.00
30,000.00
20,000.00
10,000.00
-
47
Table 4.2.2 Central Government Expenditures (Kshs Millions) on Agriculture
between 2004-2013
Years
Expenditures
Percentage change
2003/2004
12,206.63
0.205
2004/2005
10,266.17
(0.16)
2005/2006
9,920.27
(0.03)
2006/2007
12,889.21
0.30
2007/2008
19,867.25
0.54
2008/2009
23,876.75
0.20
2009/2010
25,330.89
0.06
2010/2011
44,250.10
0.75
2011/2012
28,652.54
(0.35)
2012/2013
42,015.76
0.47
2013/2014
50,060.00
0.19
Total
279,335.57
Table 4.2.2 presents central government expenditures on Agriculture which is the root of
the Kenyan economy. The highest spending increase by the national government was
found to be 2010/2011, and 2007/2008 financial years with over 50% increase on
agricultural expenditures that is 75% and 54% increase respectively. The results also
found that government spending on agriculture was also significant between 2003/2004,
2006/2007, 2008/2009, 2012/2013 and 2013/2014 with 20.5%, 30%, 20%, 47% and 19%
percentage increase respectively compared to previous financial years. National
48
government spending on agriculture was minimally reduced or decreased between
2004/2005, 2005/2006, 2009/2010 and 2011/2012 financial years with 16%, 3%, 6% and
35% decrease compared to previous financial year.
Figure 6
National government Expenditures on
Agriculture
60,000.00
50,000.00
40,000.00
30,000.00
Expenditures
20,000.00
10,000.00
-
49
Table 4.2.3 Central Government Expenditures (Kshs Millions) on Health between
2004-2013
Years
Expenditures
Percentage change
2003/2004
15,304.38
0.094
2004/2005
16,308.89
0.07
2005/2006
22,963.79
0.41
2006/2007
27,690.44
0.21
2007/2008
32,699.02
0.18
2008/2009
32,181.17
(0.02)
2009/2010
38,361.32
0.19
2010/2011
54,531.41
0.42
2011/2012
61,103.11
0.12
2012/2013
71,851.74
0.18
2013/2014
38,576.20
(0.46)
Total
411,571.47
Table 4.2.3 shows national government spending on public health. From the analysis of
the data, it was found that government spending on health issues has been fluctuating
significantly for the period selected for this study. The highest government spending was
noted between 2005/2006 and 2010/2011 financial year with 41% and 42% increase
compared to previous financial year. The most insignificantly affected financial years
was between 2008/2009, 2013/2014 government accounting years with 2% and 46%
decrease compared to previous financial years. Some of the financial years have
50
significant increase of government spending on health matters, between 2006/2007,
2007/2008, 2009/2010, 2011/2012 and 2012/2013 financial years with 21%, 18%, 19%,
12% and 18% increase compared to previous years.
Figure 7
National government Expenditures on Health
80,000.00
70,000.00
60,000.00
50,000.00
40,000.00
Expenditures
30,000.00
20,000.00
10,000.00
-
51
Table 4.2.4 Central Government Expenditures (Kshs Millions) on Education
between 2004-2013
Years
Expenditures
Percentage change
2003/2004
78,138.64
0.17
2004/2005
84,726.32
0.08
2005/2006
96,027.43
0.13
2006/2007
108,490.00
0.13
2007/2008
129,563.41
0.19
2008/2009
144,439.15
0.11
2009/2010
182,336.22
0.26
2010/2011
197,501.97
0.08
2011/2012
205,510.45
0.04
2012/2013
220,338.08
0.07
2013/2014
302,168.10
0.37
Total
1,749,239.77
Table 4.2.4 presents national government spending on education. Education is the
backbone of Kenya’s economy. The national government focus on education has been
experienced over the years with introduction of free primary education and introduction
of fee subsidy on secondary school fees. The analysis of national government spending
on education for the period selected for this study was analysed and depicted as shown
above. The results revealed that between 2009/2010 and 2013/2014 financial year the
ministry of education received 26% and 37% increase compared to previous years’
52
government spending. Between 2003/2004, 2006/2007, 2007/2008 and 2008/2009 the
ministry of education received significant increase of national government spending
compared to previous years with 17%, 13%, 13%, 19% and 11% respectively. The least
increased years are between 2004/2005, 2010/2011, 2011/2012 and 2012/2013 financial
years.
Figure 8
National government Expenditures on
education
350,000.00
300,000.00
250,000.00
200,000.00
150,000.00
Expenditures
100,000.00
50,000.00
-
53
Table 4.2.5 Central Government Expenditures (Kshs Millions) on GDP between
2004-2013 by Activity
Years
Agriculture
Defence
Health
Education
Total
2004
561,638.00
47,071.00
26,409.00
72,630.00
707,748.00
2005
599,524.00
46,464.00
27,250.00
72,848.00
746,086.00
2006
757,659.00
73,359.00
41,151.00
111,574.00
983,743.00
2007
821,934.00
79,466.00
44,706.00
125,280.00
1,071,386.00
2008
941,507.00
106,431.00
51,591.00
132,229.00
1,231,758.00
2009
1,110,576.00
118,662.00
60,196.00
142,235.00
1,431,669.00
2010
1,091,854.00
141,648.00
65,170.00
158,738.00
1,457,410.00
2011
1,452,319.00
151,321.00
74,979.00
176,537.00
1,855,156.00
2012
1,674,850.00
186,339.00
81,850.00
207,065.00
2,150,104.00
2013
1,923,638.00
256,025.00
72,914.00
253,768.00
2,506,345.00
Total
10,935,499.00
1,206,786.00 546,216.00
1,452,904.00 14,141,405.00
Table 4.2.5 presents the analysis of national government expenditure contributions to
gross domestic products by function. The analysis was based on key government
functions including defence/ security, agriculture, health and education. From the
analysis of the findings it was found that agriculture which is the backbone of Kenya’s
economy contributed the highest with over 10 billion impact on Kenya’s gross domestic
product. Education and defence impact was significant compared to agriculture with over
one billion contribution for the period selected for the study. The health expenditure
54
contribution to gross domestic product was the least for the functions selected for this
study.
Figure 9
Table 4.2.6 County Government Expenditures (Kshs Millions) between 2013-2014
by Activity
Activity
Expenditures 2013/2014
Defence
9,861.23
Agriculture
919.46
Health
3,281.15
Education
1,314.08
55
Table 4.2.6 presents county government expenditures between 2013/2014 financial years.
The analysis of the data revealed that 210 billion was allocated to county governments for
2013/2014 financial year. 190 billion was equitably allocated to county governments.
Nairobi County was allocated the highest while Lamu received the lowest allocation at
1.5 billion. For the total amount allocated to county governments 9.861.23 billion was
directed to defence and security in the counties while 919.46, 3281.15, 1314.08 million
was directed to agriculture, health and education functions.
Figure 10
County government Expenditures 2013/2014
10,000.00
8,000.00
6,000.00
Expenditures 2013/2014
4,000.00
2,000.00
Defense
Agriculture
Health
Education
56
Table 4.2.7 Descriptive Statistics
N
Minimum
Maximum Mean
Defence
10
20,979.25
72,728.57 4.15414 18,257.45243
Agriculture
10
9,920.27
44,250.10 2.29284 12,530.11990
Health
10
15,304.38
71,851.74 3.73004 19,229.99586
Education
10
78,138.64
220,338.08 1.44715 53,291.84539
GDP
10
7.085
2.516
Valid
N
Std. Deviation
1.41416 5.974485
(list
10
wise)
Table 4.2.7 presents activities descriptive statistics in relations to their contribution to
gross domestic product. Education which received highest national government allocation
has the highest standard deviation compared to other functions with Agriculture having
the lowest deviation from the average mean as depicted on the table.
Table 4.2.8 Model Summary
Adjusted
Model R
1
.995a
R Std.
Error
R Square Square
Estimate
.990
79286.15054
.982
of
the
a. Predictors: (Constant), Education, Agriculture, Health, Defence
Table 4.2.8 indicates that there is an R2 value of 98.2%. This value shows that the four
independent variables explain 98.2% of the variance in the gross domestic product for the
57
years selected for this study. These independent variables are the functions that contribute
to national economy. It is clear that they contribute to a large extent to the level of
performance of economy in Kenya. It therefore suffices to conclude that these
departments are essential in enhancing the performance of national government given
that the unexplained variance is only 1.8%.
Table 4.2.9 ANOVA Table
Sum
Model
1
Squares
of
df
Mean Square F
Regression 3.18112
4
7.95311
Residual
3.14310
5
6.2869
Total
3.21312
9
Sig.
126.508 .000a
a. Predictors: (Constant), Education, Agriculture, Health, Defence
b. Dependent Variable: GDP
For 5% level of significance, the numerator df=5 and denominator df=4, critical F value
is 2.74. Table 4.2.9 shows computed F value as 126.508. Hence, the regression model is
overall statistically significant, meaning that it is a suitable prediction model for
explaining how government expenditures to different functions adds value to gross
domestic product.
58
Table 4.2.10 Test for Coefficients
Unstandardized
Standardized
95% Confidence Interval
Coefficients
Coefficients
for B
Lower
Model
1
B
Std. Error
Beta
t
(Constant) 199430.864 104117.654
Defence
Sig. Bound
Upper Bound
1.915 .114 -68212.086 467073.815
10.148
8.609
.310
1.179 .292 -11.983
32.278
Agriculture -1.832
5.536
-.038
-.331 .754 -16.063
12.399
Health
6.748
.734
3.378 .020 5.447
40.140
2.459
-.009
-.042 .968 -6.425
6.218
22.794
Education -.104
a. Dependent Variable: GDP
Where: x1 = Defence/security; x2 = Agriculture; x3 = Health and x4 = Education.
Using a significance level of 5%, any variable having a significant value greater than 5%
is not statistically significant. These are x1 (
),
x2 ( ), and x4 ( ), only x3 is statistically
significant (0.2%). This means that expenditure on health is a suitable predictor of gross
domestic product. This means that for every unit increase in national government
spending on health, the gross domestic product increases by 0.734 units.
59
Table 4.2.11 Correlation table
Defence
Pearson
Correlation
Defence
Agriculture
Health
Education GDP
1
.896**
.977**
.974**
.983**
.000
.000
.000
.000
Sig. (2-tailed)
Agriculture
Health
Education
GDP
N
10
10
10
10
10
Pearson
Correlation
.896**
1
.904**
.919**
.894**
Sig. (2-tailed)
.000
.000
.000
.000
N
10
10
10
10
10
Pearson
Correlation
.977**
.904**
1
.960**
.993**
Sig. (2-tailed)
.000
.000
.000
.000
N
10
10
10
10
10
Pearson
Correlation
.974**
.919**
.960**
1
.961**
Sig. (2-tailed)
.000
.000
.000
N
10
10
10
10
10
Pearson
Correlation
.983**
.894**
.993**
.961**
1
Sig. (2-tailed)
.000
.000
.000
.000
N
10
10
10
10
.000
10
**. Correlation is significant at the 0.01 level (2-tailed).
From the analysis of the findings, it is clear that is a very strong association between
defence and agriculture (p=0.896), defence and health (p=0.977) and defence and
education (p=0.974). There is also a perfect positive relation between gross domestic
product and defence (p=0.983), gross domestic product and agriculture (p=0.894), gross
domestic product and health (p=0.993) and gross domestic product and education
(p=0.961).
60
4.3 Summary and Interpretation of Findings
From the analysis of data concerning central government expenditures on
defence/security between 2004 and 2013, it was found that government spending to
enhance security was not constant between the years. The 2006 spending on defence/
security function increased by a larger percentage but 2007/2008 financial year increased
by larger percentage compared to other financial years under analysis for this study.
Between 2007/2008, 2008/2009, 2010/2011, 2011/2012, 2012/2013 and 2013/2014 the
government expenditure on matters related to security and defence increased respectively
with the highest government expenditure on security and defence recorded between
2007/2008 financial years.
Central government expenditures on Agriculture which is the root of the Kenyan
economy increases over the period studied. The highest spending increase by the national
government was found to be 2010/2011, and 2007/2008 financial years with over 50%
increase respectively. The results also found that government spending on agriculture was
also significant between 2003/2004, 2006/2007, 2008/2009, 2012/2013 and 2013/2014
compared to previous financial years. National government spending on agriculture was
minimally reduced or decreased between 2004/2005, 2005/2006, 2009/2010 and
2011/2012 financial years compared to previous financial year.
From the analysis of the data, it was found that government spending on health issues
has been fluctuating significantly for the period selected for this study. The highest
government spending was noted between 2005/2006 and 2010/2011 financial year
compared to previous financial years. The most insignificantly affected financial years
were between 2008/2009, 2013/2014 government accounting years with 2% and 46%
61
decrease compared to previous financial years. Some of the financial years have
significant increase of government spending on health matters, between 2006/2007,
2007/2008, 2009/2010, 2011/2012 and 2012/2013 financial years compared to previous
years.
Education is the backbone of Kenya’s economy. The national government focus on
education has been experienced over the years with introduction of free primary
education and introduction of fee subsidy on secondary school fees. The results revealed
that between 2009/2010 and 2013/2014 financial years the ministry of education received
an increase compared to previous year government spending. Between 2003/2004,
2006/2007, 2007/2008 and 2008/2009 the ministry of education received significant
increase of national government spending compared to previous years respectively. The
least increased national government financial years were between 2004/2005, 2010/2011,
2011/2012 and 2012/2013.
The KIPPRA Economic Report 2013 examines the recent performance of the economy in
Kenyan and offers an evaluation of the medium term views under various assumptions,
which are different. The report presents the economy’s performance and reports that the
economy of Kenya showed better performance of the economy in year 2012. This was
possible due to an annual growth of 4.6 % in Gross Domestic Product juxtaposed to 4.4
% in 2011.This is mainly due to the rise in the total government expenditure in the last
five years (Kenya Economic Report 2013). The analysis of national government
expenditure contributions to gross domestic products by function based on key
government functions including defence/ security, agriculture, health and education
found that agriculture which is the backbone of Kenya’s economy contributed the highest
62
Kenya’s gross domestic product compared to other functions. Education and defence
impact was significant compared to agriculture for the period selected for the study. The
health expenditure contribution to gross domestic product indicated the least for the
functions selected for this study.
According to the IEA, in the analysis of public expenditure report, the projected sum
spending for 2013/14 was Kshs 1,640.9 billion, indicating a nominal rise of 12.4% from
the 2012/2013 budget. The approximated budget for 2013/14 comparative to economy
size (Gross Domestic Product) is estimated at 47.7% of the budget has been increasing
over the previous 5 years and the 2013/14 is no different. Spending by the County
governments for 2013/2014 financial years showed that 210 billion was channelled to
county governments for 2013/2014 financial year. 190 billion was equitably allocated to
county governments. Nairobi County was allocated the highest while Lamu received the
lowest allocation at 1.5 billion. For the total amount allocated to county governments
9.861.23 billion was directed to defence and security in the counties while 919.46,
3281.15, 1314.08 billion was directed to agriculture, health and education functions.
Finally, According to the World Bank (2013), “the growth rate of the Kenyan economy
has not matched even once Africa’s growth rate in the course of the past decade, though
the two were close in most years. Kenya’s relatively weak performance of the economy
can be related to three main factors and they include internal shocks, lack of natural
resources, and economic fundamentals”.
63
CHAPTER FIVE
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
5.1 Summary
The overall objective of this research project was to establish the effect of government
expenditures on gross domestic product, standards of living for the Kenyan citizens and
private industries in Kenya. The connection between spending by the government and
GDP is an essential topic of study as the two are interconnected (Stieglitz, 1989). The
vision of ensuring sustainable development at a significant scale is captured in the
government’s development strategy document of the country.
Spending by the
government has been observed to increase productivity however on the argument; it is
argued that government spending hinders development owing to its approach of
financing.
In National Income Accounting, Spending by the government encompasses the entire
government investment and consumption however it ignores transfer payments carried
out by the government. It refers to the spending incurred by National and County
governments of a country and the value of services and products purchased by the
government and its articulations. In Kenya the main objectives of public expenditure are;
to finance government operations-recurrent expenditure, development expenditures and
transfer payments, Provisions of public goods i.e. provision for education, health
services, and infrastructure, Transfer payments-to elderly citizens, poor and unemployed
and calamity struck citizens and to support public services.
64
According to Republic of Kenya (2007), with reference to the Vision 2030, the
government of Kenya aims to realize a growth rate of the economy, which is over 10 %
by the year 2030. For the Kenyan government to realize vision 2030, it has suggested the
control of spending by the government as a means of ensuring that it does not translate to
crowding out of private investments. Expansion in consumption by the government has a
high probability of translating to a rise in profitability, investment, and employment
through multiplier effects on aggregated demand. Peacock and Wiseman (1967)
employed a political theory to describe the effect of political happenings on public
expenditure.
Kenya’s Gross Domestic Product grew by 1.60 % during the third quarter of 2013 over
the last quarter. In Kenya, the growth rate of Gross Domestic Product is reported by the
Kenya National Bureau of Statistics. From 2005 until 2013, Kenya GDP Growth Rate
averaged 1.2 %.
The economy of Kenya showed better performance during the year 2012 owing to an
annual growth of 4.6 % in gross domestic product juxtaposed to 4.4 % during the year
2011. The growth of the economy can be attributed to a stable macroeconomic
environment, which made it possible for inflation to come down and stabilization of
exchange rates against kept foreign currencies. It is evident that most of the empirical
literature captures the context of the developed countries. Against this backdrop, the
studies investigating government expenditure and growth of the economy of developing
countries show similar results to the Kenyan context while other studies exhibit sharp
differences (Jerono, 2002). Secondary data was collected from Kenya National Bureau of
65
Statistics. It was edited, coded and analyzed by descriptive statistics. The data was
presented using tables, percentages tables and depicted using graphs.
5.2 Conclusions
The findings indicated that there was an R2 value of 98.2%. This value indicated that the
four independent variables explain 98.2% of the variance in the gross domestic product
for the years selected for this study. These independent variables are the functions that
contribute to national economy. It is clear that they contribute to a large extent to the
level of performance of economy in Kenya. For 5% level of significance, the regression
model is overall statistically significant, meaning that it is a suitable prediction model for
explaining how government expenditures to different functions adds value to gross
domestic product with expenditures on health being a suitable predictor of gross domestic
product. This means that for every unit increase in national government spending on
health, the gross domestic product increases by 0.734 units.
Finally, it is very clear that there is a very strong association between defence and
agriculture (p=0.896), defence and health (p=0.977) and defence and education
(p=0.974). There is also a perfect positive relation between gross domestic product and
defence (p=0.983), gross domestic product and agriculture (p=0.894), gross domestic
product and health (p=0.993) and gross domestic product and education (p=0.961).
Government expenditure classified by different functions contributes more to Kenya’s
Gross Domestic Product thus driving the economy.
66
5.3 Recommendations to Policy and Practice
The study therefore recommends that for effective functioning and efficient allocation of
government revenues to different government functions use of modern allocation
methods should be well understood and carried out by all stakeholders to arrive at real
intrinsic value.
The researcher also recommended that stakeholders should be equipped with adequate
information before and post-spending and be aware of benefits, challenges and the
effects of expenditure allocations in that functions enforce their developments especially
after expanding their operations geographical network to cater for increasing demand in
public services through adoption of technology.
From the findings, it was also clear that to improve efficiency wholly, functions need to
pay attention to the new developments in the economy and collaborative innovations. A
body should be established to oversee and guide the implementation, usage and
assessment of the performance after the county government operation.
The study has confirmed that functional interdependency is very significant in enhancing
the performance of government undertakings. All functions and other interrelated
organizations should be advised to embrace the concept so that they can be able to reap
the benefits of integrated departmental functions. This enables real time processing of
transactions. Other functions should also be encouraged to adopt the same in order to
provide faster and efficient services to their Kenyans citizens.
67
5.4 Limitations of the study
The study, though successfully achieved its objectives experienced several drawbacks
which acted as limitations to its successful completion. These include the following;
The data used was secondary in nature which was not purposely collected for the current
study and therefore it was not easy to access the data from the planned sources which led
to untimely research.
The use of secondary data also which is prone to personal biasness limited the study since
the data cannot be adequately reliable due to these personal errors and biasness.
The literature informing the study was limited with little evidence on local perspective.
This therefore affected the review of the trends in the variables studied over the years.
It was not economical for the researcher to search for data online which was not readily
available thus being time and financial resources consuming.
The study also had limited focus on Kenyan government due to availability of time and
data to which could have also been expensive in studying a considerably larger region to
include other countries in the same economic group and evaluate their different economic
situations.
The findings of this study and application thereof are limited to government function in
Kenya. They may not be applicable directly to other organizations operating in Kenya
outside the government operations. It is therefore important to note that they can only be
used for comparative purposes and not any direct application in another country.
68
5.5 Suggestions for further study
A comparative study can be carried out to establish whether functional integration in
other countries is able to yield the same effect on gross domestic product. This will assist
in comparing with the Kenyan experience and provide concrete facts upon which reliable
conclusions can be made.
Functional integration largely relies on the ERP system as the primary integration tool.
Information technology is very dynamic and keeps on changing hence the need to
replicate this study in line with major trends that may affect the performance of
government departments among other public designated activities.
More research can be carried out in other companies operating internally and externally
to gather adequate information that can be used to formulate a sustainable framework for
advising the government on the value expected from implementation and of the
functional interdependence.
69
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Appendices
Appendix I :Gross domestic product by activity 2009-2013
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Appendix ii: Gross domestic product by activity 2001-2005
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Appendix iii: Central Government Accounts
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Appendix iv:Central government Accounts
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Appendix v: Classification of government expenditure by functions of
government
79