Kenya is currently implementing the Second Medium Term Plan of Vision 2030. Growth objectives underpinning the Vision 2030 required the rate of growth of the economy to have risen from 6.1% achieved in the year 2006 to 10% in the year 2012. However, the economy recorded only 4.5% and 5.7% growth in the year 2012 and the year 2013 respectively. Even so, the government has continually spent substantial amounts of money annually to finance key Sectors in implementing Vision 2030 flagship projects, with the effect of this being fluctuations and inundations in Sectoral economic growth. Noteworthy, several studies have been carried out in Kenya to explain discrepancy between government expenditure and economic growth, but study findings have showed conflicting outcomes. Besides that, these studies have not integrated inflation, corruption and political risk that from literature have been seen as critical moderators of the relationship between government expenditure and Sectoral economic growth. This study, therefore, sought to bridge this gap by determining the effect of government expenditure on Sectoral economic growth with corruption, inflation and political risk moderating the hypothesized relationship. The general objective of this study was to investigate the effect of government expenditure on Sectoral economic growth in Kenya whereas the study specifically sought to establish the effects of current expenditure, capital expenditure and debt servicing on Sectoral economic growth in Kenya as well as the moderating effect of inflation, corruption and political risk on the relationship between government expenditure and Sectoral economic growth. The study targeted 11 sectors that receive government expenditure and adopted positivist philosophy and a causal research design. Secondary data for the period 2006-2015 was collected from government debt servicing reports, Kenya National Bureau of Statistics Statistical Abstracts, Kenya National Audit Office reports, Transparency International reports and Political Risk Services Group reports, among others. The study conducted Hausman Test, Panel Stationarity Test and Heterogeneity Test and employed Autoregressive Distributed Lag model. The study found that current expenditure and debt servicing both have significant effect on Sectoral economic growth in the long run while capital expenditure has an instantaneous and long term effect. The study also found out that corruption, inflation and political risk have significant moderating effects on the relationship between government expenditure and Sectoral economic growth in the long run. The study recommends rationalization of current expenditure and the same is transferred to capital expenditure which is growth enhancing. If the government must borrow, the loans should be concessional in nature with long term repayment periods. Additionally, the government should reduce the levels of corruption to accelerate growth through thorough scrutiny of government expenditures and proper control measures be meted. Further, the government should ensure that reasonable levels of inflation are achieved, political stability enhanced and good governance promoted to accelerate economic growth. The study finally suggests areas of future research to capture government expenditure components for county governments to further test the effect of government expenditure on Sectoral economic growth in Kenya.
CHAPTER ONE: INTRODUCTION
Background to the Study
The government essentially performs two functions viz protection which entails creation of the rule of law and enforcement of property rights: and provision of public goods and services which include roads, education, health and electricity (Economics Online, 2015). Fundamentally, Usman and Ijaiya (2010) argue that economic growth can be fostered through government expenditure on infrastructures such as roads, communications and power generation since it reduces the cost of production, increases private Sector investment and eventually profitability of firms. Loto (2011) on the other hand postulates that better standards of living to the citizens of a country will be achieved through the development of key Sectors of the economy such as health, housing, education and agriculture, as these Sectors are important in stimulating the economy of a country by addressing the nation‟s foremost needs, hence bringing about sustainable development.
Indeed, meaningful government expenditure to key Sectors of the economy can bring government services closer to the people and can enhance equity and reduce poverty; but the productivity of these allocations depends on the efficiency of resource allocation within these Sectors (Olopade & Olopade, 2010). This thinking is consistent with the agency theory that requires the agent to allocate and utilize resources efficiently and effectively to maximize shareholders wealth. In this case, the agent is the government represented by Ministries, Departments and Agencies (MDAs) while the principal is the citizenry (Leruth & Elisabeth, 2006). Thus, government service managers are expected
to work at the interest of the nation by avoiding wasteful spending and reducing levels of corruption so as to maximize ﬁnancial performance as well as shareholders‟ proﬁt, that is, the needs of citizens (Jordaan & Fourie, 2013).
Sichula (2012) argues that the government is expected to use cheaper sources of capital and utilize them in productive programs, to avoid putting the country in a debt overhang situation that traps the country in a vicious downward debt spiral. Therefore, it is important to condense debt servicing by reducing government borrowing and ensuring that borrowed loans are concessional in nature (Makau, 2008). The budget theory provides suggestions of increasing allocative efficiency in government by applying the principles of portfolio theory developed by Harry Markowitz in 1950s where budgets are taken as portfolios which should be accepted by their efficiency (Khan & Hildreth, 2002). The government should, therefore, select portfolios that will maximize the utility of the citizens, subject to the risk-return combination (Cochrane, 2007).
The dominance notion in portfolio theory is supported by Neo- Classical theory of growth by Solow-Swan (1956) that argues that government should give priority to Sectors that enhance capital accumulation, labor, and productivity. Human capital can impact growth since skilled people are more productive than unskilled. Neo-classical theory calls for the financing of infrastructure, health and education because it enhances productivity in both private and public Sectors (Dominick, 2002). Prevailing inflation rates in the country, however, can impact the growth of some Sectors since some Sectors
respond differently to a certain level of inflation, even as explained by the proponents of the Sectoral inflation theory (Ayyoub, 2015).