Impact of Budget Deficits on Economic Growth: Evidence from Kenya
Fiscal policy encompasses government decisions on taxation, spending, and borrowing aimed at shaping a country’s economy. A pivotal component of fiscal policy is the national budget, which outlines government revenue and expenditure plans for a specified period (Nizamuddin, 2021). A budget deficit occurs when government spending exceeds its revenue during a fiscal year (Dick, 2022). This deficit has profound implications for economic stability and growth. Globally, the COVID-19 pandemic precipitated an expansion in budget deficits as governments implemented extensive fiscal measures to buoy economies during periods of lockdown and reduced economic activity (Haroutunian et al., 2021). According to the International Monetary Fund (IMF), the average global budget deficit as a percentage of GDP was approximately 3.8% in 2020. Kenya, an emerging economy in Africa, has witnessed substantial economic growth over recent decades, driven by sectors such as agriculture (21.2% of GDP), manufacturing (17.7%), and services (61.1%) (Kenya National Bureau of Statistics, 2023). However, persistent budget deficits, averaging 8% of GDP over the past five years, have necessitated increased borrowing to cover shortfalls (Njarara, A., 2017). These deficits raise concerns among policymakers, economists, and international financial institutions regarding their impact on economic stability and long-term growth prospects.
