This paper discusses the effect of public debt and budget deficit on Kenya's economic growth.
Kenya's public debt has proliferated, precipitating debate on its impact on economic performance and causing public anxiety. The purpose of this quantitative ex post facto study was to investigate the long run and causal relationship between Kenya's public debt and economic growth.
Keynesian's theory, Ricardian equivalence theory, and neoclassical theory provided the framework for the study. Research questions one and two address the causal relationship between public debt and select covariates as independent variables and actual gross domestic product (GDP) growth rate as the dependent variable.
Research question three addresses the relationship between primary budget balance and public debt. Archival data were analyzed using the vector error correction model and autoregressive distributed lag methods. Findings show a positive long-run causality between public debt and real GDP growth. The relationship between primary budget balance and public debt is positive and statistically significant, demonstrating that Kenya's debt is sustainable. Findings may be used to promote the adoption of fiscal policies that increase economic growth, savings, investments, job creation, and living standards of Kenyans.
For a good economy to thrive in any given country, there should be plenty of productive resources for its needs at that particular time. In most countries, especially Kenya, needs are growing while the resources to meet them are insufficient or even depleted completely. The growing budget has become a problem for the Kenyan government since our economies are expanding. However, the rate is not able to meet the rising demand for the ever-increasing population. At this level, the country is forced to procure internal and external debts to finance its budget deficit. However, in the long run, this does not solve the problem because the investment programs do not give good returns, hence losing.
Table of Contents
Chapter One
INTRODUCTION
1.0 Introduction
1.1 Background
1.2 Problem statement
1.3 Purpose of the study
1.4 Objectives of the study
1.5 Research question
1.6 Significance of the study
1.7 Limitation of the study
1.8 Assumptions of the study
1.9 Scope of the Study
Chapter Two
Literature Review
2.1 Introduction
2.2 Theoretical literature review
2.3 Framework for the review
2.3.1 Keynesian theory
2.3.2 Ricardian Equivalence theory
2.3.3 Functional finance theory
2.3.4 The crowding-out theory
2.3.5 Tax smoothening theory
2.4 Insight from previous similar studies
2.4.1 Public debt and deficit facing definition
2.4.2 Public debts sustainability -definition and measurement
2.5 Definition of Terms
2.6 Empirical literature review
2.7 Summary of the literature
Chapter Three
Research Methodology
3.1 Introduction
3.2 Research Design
3.3 Location of the Study
3.4 Population of the Study
3.5 Sampling Procedure and Sample Size
3.6 Research Instrument
3.7 Data Collection
3.8 Ethical consideration
3.9 Data Analysis
3.10 Analytical Model
3.11 Estimation Techniques
3.11.1 Stationarity and Unit Root Test
3.11.2 Lag Order Selection
3.11.3 Co-integration Test
3.12 Diagnostic Tests
3.12.1 Multicollinearity Test
3.12.2 Autocorrelation Test
3.12.3 Heteroscedasticity Test
Chapter Four
Results and Discussion
4.1 Introduction
4.2 Descriptive statistics and test
4.2.1 Multicollinearity Test
4.3 INTERPRETATION
Chapter Five
Conclusion and Recommedation
5.1 Introduction
Research Objectives and Focus
This study investigates the long-term causal relationship between Kenya's public debt, budget deficits, and economic performance. It aims to determine how government borrowing impacts GDP growth and to assess the sustainability of current fiscal policies in the Kenyan context.
- The causal link between public debt and real GDP growth in Kenya.
- The impact of fiscal deficits on national economic output.
- Evaluation of debt sustainability within the framework of Kenyan fiscal policy.
- Application of quantitative time-series econometric models to analyze macroeconomic trends from 2001 to 2020.
Excerpt from the Book
2.3.1 Keynesian theory
The Keynesian theory argues that the accumulation of public debts and a huge budget deficit leads to high government spending, resulting in high demand, leading to redundant resources and increased national output (Onyango 2013). He argued that a continuous increase of public debts in any economy would boost the economy's growth since procurement of debt drives the growth of output hence a multiplier process.
Keynesian argues that borrowing from private sectors and returning the funds to the private sector through spending can help the government reverse economic downturns. Thus, total spending in the economy stimulates economic growth and stability and therefore using public debts to finance no harm to the economy. According to Keynes theory of fiscal stimulus, an injection in government spending can lead to business activity and even more spending. Thus, the theory proposes that more spending boosts aggregate output and generates more income for the economy. Thus, the gross domestic product (GDP) could even surpass the initial stimulus amount (Matiti 2013). However, the Economist argues that Keynesian economics is partially considered a demand-side theory that focuses only on the changes in the economy over a short period.
Summary of Chapters
Chapter One: Provides the introduction, problem statement, and study objectives, framing the growing public debt as a central concern for Kenya's economic sustainability.
Chapter Two: Reviews key theoretical frameworks like the Keynesian and Crowding-out theories, alongside empirical literature regarding the impact of debt on economic performance.
Chapter Three: Details the research methodology, including the quantitative ex post facto design, time-series data collection from 2000-2021, and specific econometric estimation techniques.
Chapter Four: Presents the results and analysis of the collected data, utilizing descriptive statistics and diagnostic tests to interpret the relationship between the study variables.
Chapter Five: Concludes the study by summarizing findings on debt sustainability and offering policy recommendations for the Kenyan government.
Keywords
Public Debt, Budget Deficit, Economic Growth, GDP, Keynesian Theory, Fiscal Policy, Debt Sustainability, Time-Series Analysis, Econometrics, Tax Revenue, Kenya, Macroeconomics, Crowding-out Theory, Borrowing, Economic Performance.
Frequently Asked Questions
What is the core focus of this research project?
The project investigates the causal relationship between public debt and economic performance in Kenya, specifically examining how budget deficits influence GDP growth.
Which theoretical frameworks underpin this study?
The study is grounded in several theories, including the Keynesian theory, Ricardian Equivalence theory, Functional finance theory, The crowding-out theory, and Tax smoothening theory.
What is the primary objective of this study?
The main objective is to evaluate the relationship between budget deficits and economic growth in Kenya and to establish whether current debt levels are sustainable.
What research methodology was employed?
The researcher used a quantitative ex post facto design, utilizing secondary time-series data from 2001 to 2020 obtained from the IMF, Central Bank of Kenya, and other official sources.
What does the main body of the work cover?
The work covers literature reviews of relevant economic theories, detailed methodological procedures for data analysis, and an empirical investigation using regression models to interpret the data.
Which keywords define this research?
Key terms include Public Debt, Budget Deficit, Economic Growth, Fiscal Policy, Debt Sustainability, and Kenya.
What were the major findings concerning GDP growth?
The findings indicated a positive long-run causality between public debt and real GDP growth, suggesting that debt, when managed, can contribute to national economic performance.
How does the study address the problem of multicollinearity?
The study utilized VIF (Variance Inflation Factor) statistics to detect and monitor multicollinearity among the explanatory variables to ensure the validity of the regression results.
- Quote paper
- Michael Kithinji (Author), 2021, Effect of public debt and budget deficit on Kenya's economic growth, Munich, GRIN Verlag, https://www.grin.com/document/1223509
