Relationship Between Budget Financing and Economic Growth in Kenya

Abstract

Financing is essential for the economy of any country. The paper seeks to assess the connection between budget financing and economic growth in Kenya. Precisely, it examined the relationship between taxation, internal borrowing, external borrowing, official development assistance and economic growth in Kenya. This study was founded on three theoretical foundations: Optimal Tax Theory, Modern Theory of Money, and Debt Overhang Theory. It adopted correlation research design. The study collected monthly data from July 1999 to December 2022. The study utilized time series data collection forms based on the study's objectives. Data analysis was carried out using E-views version 11 and vector error corrected model will be fitted. Figures and tables presented the findings. Results of the study indicated that taxation inversely affected economic growth in Kenya. Hence, increased levels of taxation deterred economic growth in Kenya. It was documented that internal borrowing has significant relationship with economic growth in Kenya. External borrowing has inverse relationship with economic growth in Kenya. Official development has statistically significant relationship with economic growth in Kenya. It can be deemed to be double edged where increased taxation was associated with changes in its administrative costs and spillage of revenue collected. There is need for evaluation of internal borrowing costs by the government since increased borrowing costs of treasury bills and treasury bonds whose risk of default is low compared to individual borrows may constrain access to private capital. There is need for consideration of borrowing costs and contractual currency since there are instances in which local currency may depreciate its value and it will impact repayment amount. It can be concluded that reliance on official development assistance has effect on economic growth in Kenya. It can be recommended that there is need for adoption of matching taxation policies that would escalate tax collection strategies and minimize spillage of resources. There is need for consideration of seeking internal debts via treasury bills and bonds though it ought to undertake it very cautiously since it may trigger skewed borrowing from the private sector. There is need for consideration of external borrowing that would be cheaper and available for a longer period of time. there is need for development of strategies that would guide in fund raising of grants for undertaking projects that will have social economic benefit.