Public Debt and It’s Implication on Kenya’s Future Economic Growth

International Journal of Research and Innovation in Social Science (IJRISS) | Volume IV, Issue VIII, August 2020 | ISSN 2454–6186

Public Debt and It’s Implication on Kenya’s Future Economic Growth

Pollyne Mbithe Mutunga
Machakos University, Machakos, Kenya

Abstract: An upsurge of Kenya’s public debt has elicited public debate on whether these crises could affect the future generation. Thus, the study adopted VAR model using data from 1980 to 2019 to investigate the effect of public debt on the future generation. To do this, the study utilized the historical data for GDP (dependent) and Public debt (independent variable) to estimate GDP for the years 2020, 2021, and 2022. Results reveal that public debt could slow down Kenya’s economic growth for the next three years. It was recommended that the country need debt restructuring to free up some financial resources and enhance investment in productive sectors as a mitigation measure.

Key Words: Public Debt, VAR, GDP, External Debt, Internal Debt.

I. INTRODUCTION

While borrowing is normal, poor debt management can plunge the economy into crisis. William, Davis, and Kopf (1960) in their seminal paper titled, “The Public Debt: A Burden on Future Generations?” cite that the usual economic theory textbooks hold that the real burden of the public investments financed by private entities cannot be shifted to the next generation because, expenditure by the government must drain real resources from the community at the time when the project is being carried out with an assumption of full employment regardless of the source of financing. This argument resonates well with the definition of a real burden as the amount of consumption by private individuals given up by the society at the point of spending the borrowed money (William, Davis, & Kopf, 1960). In this view, the cost of public project must be borne by the present generation when borrowing happens. However, real burden has also been described as the total consumption of private goods given up during life-time of the generation as a consequence of public borrowing and attendant public spending. This captures the benefits that accrue from public spending, and refers to “gross burden,” meaning that both the current and the next generation bears debt burden.
The aim of borrowing is to channel resources to productive use in order to transform lives of the citizens through improved living standards (KENDRED, 2009). However, sometimes government use borrowed resources to finance recurrent expenditures as opposed to investment and production. High debt ratio to an economy implies that most of the revenues collected are channeled to payment of interest accruing from the public debt.

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