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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 ii 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. iii 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. iv 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 v 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 vi 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 vii 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 viii 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 ix 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. x 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 1 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 2 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 3 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. 5 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. 8 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. 9 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. 22 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. 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Washington D C: World Bank. 74 Appendices 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