Revue internationale des sciences économiques et de gestion

The Nexus between Tax Revenue and Government Expenditure in Kenya

Abstract

Felix Kimtai Kiminyei

In lieu of rising budget deficits in many countries across the world, driven by tax revenue insufficiency in financing government expenditure, many governments continue to accumulate public debt due to the financing of budget deficits. In the long run, however, persistent budget deficits as well as debt accumulation are unsustainable and pose several problems to the economy including inflationary spirals, depressed growth, higher associated poverty levels and consequently fiscal crisis. To offer any policy prognosis towards controlling and consequently reducing budget deficit requires an understanding of the nexus between tax revenue and government expenditure. This study examined this nexus in Kenya, for 1960-2011. Data was collected from Kenya economic surveys from 1960-2012. Because data was available in fiscal years, it was converted to calendar years by splicing. Augmented Dickey Fuller and Philips Perron unit root tests were employed to establish the stationary properties of the series while the Johansen and Juselius co-integration techniques were used to determine presence of linear long run economic relationships in the series. The study established that budgetary authorities follow the spend-revenue hypothesis. The study recommends resort to fiscal discipline, especially by cutting down on nonproductive expenditure.