The Relationship between Fiscal Deficits and Economic Growth in Kenya: An Empirical Investigation

The Kenyan government has been committed to a stable macroeconomic environment, characterized by low and stable inflation and sound fiscal policy. However, in the late 1970s to date, the government has continued to experience high, persistent and unsustainable deficits. Despite the fact that economic reform programs adopted in recent years have emphasized demand management through fiscal restraint, fiscal deficit has been phenomenal to Kenya’s economy coupled with a dwindling economic growth. The study therefore attempted to establish the extent to which fiscal deficits and economic growth are related and further investigated ways in which fiscal deficits (transmission mechanism) have effects on the growth and development of the Kenyan economy. The study used both exploratory and causal research designs and employed time series secondary data for a period of 38 years (1970-2007), purposively selected and was estimated using OLS method. The study also performed various econometric tests such as Dickey Fuller (DF) and Augmented Dickey Fuller (ADF) unit root test. Other diagnostic tests like multicollinearity were performed. The study found positive relationship between budget deficits and economic growth, in congruent with the Keynesians assertion and hence recommends prudent financial management and enhanced revenue collection by revenue authority so as not crowd-out private sector investment by borrowing domestically.