Fiscal framework and economic growth of East African member countries

Abstract

This study examined the relationship between public debt and economic growth in EAC member states. Using a longitudinal research design and secondary data from Kenya, Uganda, Tanzania, Burundi, and Rwanda. The research uses data collected from 2014 to 2023 for countries that were members of the EAC block by the year 2023. The analysis applied the Arellano-Bover System Generalized Method of Moments (GMM) to address endogeneity and dynamic panel concerns. To ensure reliability, diagnostic tests such as the Breusch-Pagan test for heteroscedasticity, the Hausman test, and the Arellano-Bond test for serial correlation were conducted, with results evaluated at the 5% significance level. The findings show that government expenditure has a positive but statistically insignificant effect on economic growth, reflecting the limited impact of recurrent-heavy spending on productivity, tax revenue has a negative and significant effect, suggesting that high tax rates coupled with a narrow tax base reduce private investment and household consumption and also that public debt has mixed outcomes: domestic debt had a positive though insignificant effect on growth, while external debt negatively and significantly influenced growth due to high servicing costs and currency risks.