Does Fiscal Stance affect Public Expenditure: Evidence from Kenya

Year 2020, Volume: 5 Issue: 2, 295 - 310, 29.12.2020

James Gatauwa

https://doi.org/10.30927/ijpf.732676

Cited By: 1

Abstract

The purpose of this paper is to examine the effect of fiscal policy stance on public expenditure in Kenya while underpinned by the; Theory of fiscal policy, Peacock-Wiseman hypothesis and Wagner’s Law of increasing state activities. The methodology used was time series modelling involving the following steps; firstly, employing descriptive statistic analysis. Secondly, diagnostic testing involving stationarity test, cointegration test and Granger causality tests. Thirdly, time series modelling was done using VECM and VAR models. Finally, post-diagnostic tests involving serial correlation test and heteroscedasticity test. The research indicates that there is a negative relationship between fiscal policy stance (budget deficit) and public expenditure but fiscal stance through tax has a positive relationship with public expenditure. Fiscal policy stance and public expenditure are cointegrated as shown by the Johansen cointegration test but there is no short run causality between them as indicated by the Wald test statistics. The study is limited to fiscal policy stance and public expenditure in Kenya while considering selected macroeconomic factors. The research findings are vital to policy makers. Fiscal policy stance indirectly affects public expenditure through economic growth and macroeconomic factors. This implies that fiscal policy stance does not have a strong direct effect on public expenditure as supported by the theory of fiscal policy that contends that policy makers could have a lower incentive to pursue public interests as compared to their personal interests.

Keywords

Fiscal policy stance, economic growth, macroeconomic factors, public expenditure, Kenya

References

• Amanja, D., and Morrissey, O. (2005), “Fiscal policy and economic growth in Kenya”, CREDIT Research Paper No. 05/06.
• Bagdigen, M., and Cetintas, H. (2003), “Causality between public expenditure and economic growth: the Turkish case”, MPRA Paper No. 8576, MPRA.
• Barro, R. (1991), “Economic growth in a cross section of countries”, Quarterly Journal of Economics, Vol. 106, pp. 407– 444.
• Barro, R., and Grilli, V. (1994), European macroeconomics, Basingstoke, Hampshire: Macmillan.
• Beetsma, R., Giuliodori, M., and Klaassen, F. (2008), “The effects of public spending shocks on trade balances and budget deficits in the European Union”, Journal of the European Economic Association, Vol. 6 No. 2-3, pp. 414 – 423.
• Bird, N., and Kirira, N. (2009), “Government institutions, public expenditure and the role of development partners: Meeting Kenya’s environmental challenges,” Overseas Development Institute Report, ODI.
• Bui, D.T. (2020), “Fiscal sustainability in developing Asia – new evidence from panel correlated common effect model”, Journal of Asian Business and Economic Studies, Vol. 27 No. 1, pp. 66– 80.
• Clark, T., and Dilnot, A. (2001), “Measuring the UK fiscal stance since the Second World War”, The Institute for Fiscal Studies, Briefing Note No. 26.
• Deskins, J., Hill, B., and Ullrich, L. (2010), “Education spending and state economic growth: Are all dollars created equal?” Economic Development Quarterly, Vol. 24 No. 1, pp. 45–59.
• Dornbusch, R., Fischer, S., and Startz, R. (2017), Macroeconomics, 13th Ed, New York: McGraw Hill.
• Gatauwa, J.M, Kaijage, E.S., Sifunjo, K., and Kiriti-Nganga, T.W. (2017), “Fiscal policy stance and public expenditure in Kenya”, The Pan-African Journal of Business and Management, Vol. 1 No. 2, pp. 61 – 80.
• Glomm, G., and Rioja, F. (2006), Fiscal policy and long-run growth in Brazil, Mimeo, Indiana University.
• Han, S., and Mulligan, B. (2008), “Inflation and the size of government”, Federal Reserve Bank of St. Louis Review, Vol. 90 No. 3, pp. 245–267.
• Henrekson, M. (1993), “Wagner’s Law: A spurious relationship?” Public Finance, Vol. 48 No. 2, pp. 406 – 415.
• Johansen, L. (1965), Public economics, Amsterdam: North Holland Publishing Co.
• Kim, S. (2019), “Fiscal autonomy and stabilization: An empirical analysis of US State governments” Journal of Financial Economic Policy, Emerald Publishing Limited, 1757-6385. DOI 10.1108/JFEP-06-2019-0106.
• Magazzino, C. (2011), “The nexus between public expenditure and inflation in the Mediterranean countries”, MPRA Paper No. 28493, MPRA.
• Mosoti, M. (2014), The growth of public expenditure in Kenya: Exploring the causes (1980-2012)”, Unpublished M.A. Thesis, University of Nairobi.
• Musgrave, R. (1959), The theory of public finance, New York: McGraw-Hill.
• Muthui, J., Kosimbei, G., Maingi, J., and Thuku, G. (2013), “The impact of public expenditure components on economic growth in Kenya 1964-2011”, International Journal of Business and Social Science, Vol. 4 No. 4, pp. 233–253.
• Nafula, N., Kimalu, P., Kiringai, J., Owino, R., Manda, D., and Karingi, S. (2004), “Budget mechanisms and public expenditure tracking in Kenya”, KIPPRA Discussion Paper No. 37, KIPPRA.
• Njeru, J. (2003), “The impact of foreign aid on public expenditure: The case of Kenya”, AERC Research Paper No. 135, AERC.
• Njuru, S., Ombuki, C., Wawire, N., and Okeri, S. (2014), “Impact of government expenditure on private investment in Kenya”, Research journali’s Journal of Economics, Vol. 2 No. 8, pp. 1–19.
• Pailwar, V. (2008), Economic environment of business, New Delhi: Prentice-Hall of India, Private Limited.
• Peacock, A., and Wiseman, J. (1961), The growth of public expenditure in the United Kingdom, Princeton: Princeton University Press.
• Perotti, R. (2007), “Fiscal policy in developing countries: a framework and some questions”, World Bank Research Working Paper No. 4365, World Bank.
• Remmer, K. (2004), “Does foreign aid promote the expansion of government?” American Journal of Political Science, Vol. 48 No. 1, pp. 77–92.
• Romer, P. (1990), “Human capital and growth: Theory and evidence”, Carnegie-Rochester Conference Series on Public Policy, Vol. 40, pp. 47–57.
• Sabir, S., and Qamar, M. (2019). “Fiscal policy, institutions and growth: Evidence from the developing Asian countries”, International Journal of Social Economics, Vol. 46 No. 6, pp. 822–837.
• Sakyi, D., and Adams, S. (2012), “Democracy, government spending and economic growth: The case of Ghana, 1960–2008”, Margin—The Journal of Applied Economic Research, Vol. 6 No. 3, pp. 361–383.
• Sans, I., and Velazquez, F. (2002), “Determinants of the composition of government expenditure by functions”, European Economy Group Working Paper No.13, ECG.
• Semmler, W., Greiner, A., Diallo, B., Rezai, A., and Rajaram, A. (2007), “Fiscal policy, public expenditure composition and growth”, World Bank Policy Research Working Paper No. 4405, World Bank.
• Shonchoy, A. (2010), “What is happening with the government expenditure of developing countries – A panel data study”, In Proceedings of the German Development Economics Conference, Hannover, Germany.
• Srinivasan, P. (2013), “Causality between public expenditure and economic growth: The Indian case”, International Journal of Economics and Management, Vol. 7 No. 2, pp. 335 – 347.
• Stancik, J., and Valila, T. (2012), “Changes in the fiscal stance and the composition of public spending”, Empirical Economics, Vol. 43, pp. 199 – 217.
• Tanzi, V. (2006), “Fiscal policy: When theory collides with reality”, CEPS Working Document No. 246, CEPS.
• Tsai, P.H. (2014), “State fiscal rules and composition changes in public spending before the election”, Public Finance Review, Vol. 42 No. 1, pp. 58-91.
• Temple, J. (2003), “The long-run implications of growth theories”, Journal of Economic Surveys, Vol. 17 No. 3, pp. 497–510.
• Wagner, A. (1863), “Grundlegung der politischen ökonomie”, Available at: http://www.google.com. (accessed on August 2019).
• Zikmund, W. (2002), Business research methods, 7th Ed. Thomson/South-Western.