Determining the Effects of Primary Budget Deficits on Economic Growth in Kenya

The purpose of this article is to investigate the effects of primary budget deficits on economic growth. The nature and direction of causality between the primary budget deficit and economic growth are examined. These have been contested in both rich and developing countries in recent years. The paper examines the case of Kenya from 1980 to 2016 in order to contribute to the ongoing debate. The data is meant to help policymakers in Kenya achieve macroeconomic stability and long-term economic growth for shared prosperity.

Introduction: A non-interest budget shortfall is referred to as a primary budget deficit. By eliminating non-interest payments from the budget, it assesses the discretionary budgetary posture.

Study Design: The study uses Stata econometrics software to create a quantitative time-series research design.

Study Location and Duration: Evidence from Kenya between 1980 and 2016.

Unit root tests, Johansen cointegration analysis, a dynamic vector error correction model, and a multivariate Toda-Yamamoto Granger-causality representation are all used in the study.

The primary budget deficit, gross fixed capital creation, real interest rate, terms of trade, inflation growth, and financial innovation all have substantial effects on GDP per capita growth in Kenya, according to the research. In both the short and long run, the primary budget deficit has a major impact on GDP per capita growth. The results showed that the main budget deficit had a favourable influence on economic growth in the short term, but that this effect turned negative in the long run. From the primary budget deficit to economic growth, there was a one-way causality.

Conclusion: The primary budget deficit has strong and significant causal effects on economic growth in Kenya, both in the short and long run, according to the study. The data emphasises the necessity for Kenyan authorities to decrease significant primary budget deficits, interest payments, and domestic borrowings, as well as adhere to the golden rule of public finance, in order to promote long-term inclusive growth.

Author(S) Details

Patrick Mugendi Mugo
School of Economics, University of Nairobi, Kenya.

Wafula Masai
School of Economics, University of Nairobi, Kenya.

Kennedy Osoro
School of Economics, University of Nairobi, Kenya.

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