Effect of Local Revenue Deficit on Gross County Product of Devolved Governments in Kenya

International Journal of Research and Innovation in Social Science (IJRISS) | Volume V, Issue II, February 2021 | ISSN 2454–6186

Effect of Local Revenue Deficit on Gross County Product of Devolved Governments in Kenya

 Habil O. Onyango¹, Evans O. Kiganda², Scholastica A. Odhiambo^1
1Department of Economics, Maseno University, Private Bag, Maseno, Kenya
²Department of Economics, Kaimosi Friends University, P.O. Box 385-50309, Kaimosi, Kenya

Abstract: The performance of any economy is determined by resources available to support its needs. Low resource base, which cannot adequately meet the needs of any economy, contribute to economic instability. This is a major concern for economists and policy makers in many countries. Since Kenya established devolved governments in 2013, there has been a worrying trend on how local revenue deficits and Gross County Product have been interacting. From 2013 to 2017 the average local revenue deficits decreased from 593.86 million shillings to 349.52 million shillings. Over the same period, despite the average Gross County Product increasing from 90.721 billion shillings to 163.259 billion shillings, the increase has not been as much in some devolved governments. Literature shows no consensus whether local revenue deficits have negative, positive or neutral effect on economic growth, with most studies being limited to use of national level data set. The objective of this study was to determine the effect of local revenue deficit on Gross County Product of devolved governments in Kenya. The study was modelled on Solow-Swan’s Neoclassical Economic Growth Theory and used secondary panel data set from 2013 to 2017 for all the 47 devolved governments. The data was sourced from Kenya National Bureau of Statistics and Controller of Budget Reports. Random Effects model was used to estimate and interpret results of autoregressive distributed lag (ARDL) model. Findings revealed that local revenue deficit had a coefficient of -0.45 with a p-value of 0.013, while its lagged value had the coefficient of -1.03 with a p-value of 0.003. This means that growth of local revenue deficit in the past as well as in the present period had a negative effect on Gross County Product. These findings led to the conclusion that growth of local revenue deficit both in the past and present period was detrimental to the economies of devolved governments in Kenya. As such, the study recommended for an improvement in local revenue collection to reduce local revenue deficit.

Keywords: Local revenue deficit, Gross County Product, Devolved governments, Autoregressive distributed lags model, Neoclassical Growth Theory

I. INTRODUCTION

Economic instability has become an issue of concern for many countries in the world, with budget deficit blamed as the main issue causing economic instability, (Osoro, 2016). Fischer (1993), Ramu, et.al (2016) and Eminer, (2015) emphasize that budget deficit is one of the most important variables that influence economic growth. In Kenya, since inception of the devolved governments in 2013, each government has been registering its contribution to the national Gross Domestic Product (GDP).

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