Effect Of Internal Budget Deficit Financing On Economic Growth In Kenya

Abstract

Economic growth is an increase of a country’s output of goods and services commonly financed by internal and external sources some of which comprise public borrowings. Internal borrowing by Kenyan government has been increasing while economic growth has shown fluctuating trend. Internal debt rose from 1.16 billion in 1970 to 1.08 trillion in 2014 while growth rate was 5.9% in the period 1978-1979 and dropped to 3.1% in the period 1979-2001 and later increased to 4.4% in the period 2002-2014. Despite the role of internal budget deficit financing to the government financing mechanisms, there are conflicting information about its effect on economic growth based on lack of consensus from empirical perspective. The purpose of this study was to determine the effect of internal budget deficit financing on economic growth in Kenya. The study used secondary time series data for the period 1970-2014 from Economic Survey published by Kenya National Bureau Statistics. The study was guided by neoclassical growth theory and adopted correlational research design. The models were estimated using Ordinary Least Squares method. The results indicated a positive and significant effect of internal budget deficit financing on economic growth (whereβ= 0.8302; p= 0.03). The study recommends that the government should find ways of enhancing its revenue generation capacity especially by broadening the tax base to reduce the deficit which is financed by internal borrowing.