Empirical Investigation on the Relationship among Kenyan Public Debt, Tax Revenue and Government Expenditure
Empirical Investigation on the Relationship among Kenyan Public Debt, Tax Revenue and Government Expenditure

Summary/Abstract: Public debt and tax revenue are used in the financing of government expenditure programs with the ability of boosting social welfare. The contrast is that public debt is used to finance the budget deficit gap resulting from shortfall in tax revenue. This study sought to investigate the links between public debt, tax revenue and government expenditure over 1960 and 2011 using data obtained from economic surveys of the Kenya National Bureau of Statistics. A Vector error correction model, Cholesky forecast error variance decomposition, and dynamic forecasts are employed in the study. The results for the vector error correction model indicate that for the public debt and government expenditure equations, about 36 percent of deviations from the long run equilibrium is corrected in the next period compared to approximately eight per cent for the tax revenue equation. The short run model shows that the size of government expenditure has a debt increasing effect while the size of tax revenue has a debt decreasing effect. Using Cholesky forecast error variance decomposition, impulse response functions show that public debt responded positively to the innovations in both tax revenue and government expenditure in the long run. The forecasts pointed to continued growth in these variables.

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