Fiscal Policy and Public Debt in Kenya

Abstract

Fiscal policy in Kenya has been unstable. Fiscal balance to GDP ratio worsened from a surplus of 0.2 percent to a deficit of 7.6 percentwhile debt to GDP ratio rose from 25.4 to 56.2 percent between 1963 and 2015. This was against deficit target of 4.8 and debt ratio of 41.4 percent in 2015. The continued build up of debt implies debt stabilization is not a priority and high debt may lead to adverse effects to the economy. The paper estimated the optimal fiscal balance to GDP ratio needed to stabilize debt levels and establish how the government reacts to changes in debt levels using fiscal reaction function in order to establish if the government was concerned with debt stabilization. The government requires an average fiscal deficitratio of four percent between 2016 and 2030. Fiscal policy has not been responding adequately to changes in debt levels as the government pursued an expansionary fiscal policy. There is need for a fiscal law setting maximum fiscal deficit to GDP ratio and adherence to fiscal consolidation guidelines in order to determine the right response to changes in the debt levels to prevent the debt levels from taking an explosive path.