Fiscal Policy and Economic Growth in Kenya: An Aggregated Econometric Analysis

Abstract

Sustainable economic growth is the drive of policy institutions, policy makers and the government in both developed and developing countries. The growth objectives underpinning the Vision 2030 requires the rate of growth of the Kenyan economy to rise by 10% each year with the intention of shifting Kenya from a low-income country to a middle-income country. Fiscal policy could stimulate economic growth by ensuring a sense of balance between taxation and expenditure consistent with sustainable growth. Contrary, proponents and opponents of government intervention in economic activity disagree on the effect of fiscal policy on economic growth. This makes the effect of fiscal policy on uncertain and debatable. This study therefore investigated the effect of fiscal policy on economic growth in Kenya using an aggregated analysis. The study employed correlation research design using autoregressive techniques based on annual data for the period 1991 to 2012. Data was obtained from World Bank development indicators. The findings indicate that tax has a significant positive effect on economic growth in Kenya while government expenditure has a significant negative effect on growth in Kenya. Bidirectional causality existed between economic growth and tax while unidirectional causality from growth to government expenditure was exhibited in Kenya. The study therefore recommends that the government of Kenya adopts a contractionary fiscal policy geared towards reducing government expenditure and increasing taxation to promote economic growth.