Effect Of Fiscal Policy On The Cost Of Living In Kenya

Abstract

The study aimed at determine the effect of fiscal policies on the cost of living in Kenya where it was construed around the facets of government expenditure, government revenue and public debt. Specifically, the study was seeking to answer the following research objectives: To find out the effect of government expenditure on the cost of living in Kenya, to determine the effect of government revenue on the cost of living in Kenya as well as to evaluate the effect of public debt on the cost of living in Kenya. It unveiled the literature brought forth by Renown scholars in matters of the economy. The theories included the Keynesian theory, Dual Gap Theory, Debt Overhang theory and Distribution theory. Majority of previous studies proved to have much focus on the effect of fiscal policies on the economic growth of the country and therefore leaving the area under focus with scanty information that can be used in further research. The study adopted descriptive research design which enhanced quantification of the desired research questions. The target was the Kenyan economy whose secondary data was gathered from the World Bank database. The scope of the research was macro data between 1963 and 2017. The results of the study showed that Government expenditure influences positively cost of living is when the government increases money in circulation in the economy thus lowering the cost of doing business which automatically have an impact on the prices of goods. Government expenditure have however attracted attention from various scholars who in their undertaking found contradicting results regarding the relationship between government expenditure and the cost of living. Government revenue is directly proportional to the standards of living if prudently utilized. In this case, the government policies and the understanding of economics plays a critical role in the management of the cost of living. The need for tax revenue is undisputable due to the global significance it has attracted on the economic development irrespective of the national differences. This means that when the dependable variables increases the cost of living will decrease while the public debt has positive relationship with cost of living. This means that when the debt levels are increased within the economy over long-run, the cost of living will be high. It was evident that the variance decomposition of CPI at time period 10 was the most influential on government debt by 10.07% than the government revenue and government expenditure by 3.87% and 8.55% respectively. The main cause attributed to the findings is that the debt component comes with obligations to settle which drains the cash flows in the economy. Due to this reason, the country ought to increase prices of goods and services to cater for the interest expense payment. As per the findings, the study recommends that the government through the finance ministry should embark on the reconstruction of stringent measures that stipulates the usage of the available resources in the various government entities, these measures should then be adopted in the budget policy statement so that every person is responsible on the way they use public resources. In this regard, even coin from the public coffers will be put into use and the spilling effect will eventually lower the cost of living of the general citizens.