Impact of Development Budget Deficit on Gross County Product of Counties in Kenya

International Journal of Research and Scientific Innovation (IJRSI) | Volume VIII, Issue II, February 2021 | ISSN 2321–2705

Impact of Development Budget Deficit on Gross County Product of Counties in Kenya

 Habil O. Onyango¹, Scholastica A. Odhiambo², Evans O. Kiganda^3
1,2Department of Economics, Maseno University, Private Bag, Maseno, Kenya
³Department of Economics, Kaimosi Friends University, Kaimosi, Kenya

Abstract: Globally, the performance of any economy is guided by the proportion of productive resources dedicated towards supporting its needs. Whenever their availability is low and cannot support adequately the economic needs, contribute to economic instability and this an issue of concern for many countries. Kenya established county governments in 2013 and since then, worrying trends in growth of development budget deficit (DBD) and Gross County Product (GCP) have been registered. Between 2013 and 2017 the average development budget deficit increased from 1036.19 million shillings to 1467.94 million shillings, while the average Gross County Product increased from 90.721 billion shillings to 163.259 billion shillings. However, some county governments have not realized the increase in their GCP as much, which becomes a worrying trend. Literature has given great focus on the aggregate budget deficit, while majorly considering data at the national level. The available studies also show no consensus whether these deficits have negative, positive or neutral effect on growth of an economy. The purpose of this study was to establish the impact of development budget deficit on Gross County Product of counties in Kenya. The study used panel data from 2013 to 2017 for all the 47 counties in Kenya, sourced from Kenya National Bureau of Statistics and Controller of Budget reports. A correlational research design was used, with the study modelled on Solow Swan’s neoclassical economic growth theory. The panel estimation method of Random Effects as preferred by the Hausman test was used to estimate and interpret results of autoregressive distributed lag (ARDL) model. The results showed that development budget deficit had a coefficient of 0.21 with p-value of 0.056 while the coefficient of its lagged value was 0.06 with a p-value of 0.001. This implied that development budget deficit of the past had a positive impact on Gross County Product. Based on these findings, the study concluded that past increase in development budget deficit increases growth of Gross County. Based on these findings, the study recommended for spending this deficit on projects that help create capital stock, caution when spending these deficits in a way that can spur growth even in the current year, and finally for policies that helps in higher absorption rate of development budget allocations.

Keywords: Development budget deficit, Gross County Product, Neoclassical theory, ARDL, Counties.

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