This study aimed at examining the relationship between public spending and economic growth and how the composition of government expenditure affects economic growth in Kenya using time series data from 1980 to 2014. To achieve the objectives, modified Granger causality and Autoregressive Distributed Lag model (ARDL) were used. The results revealed both short term and long term causality from economic growth to government expenditure but only short run causality from government expenditure to economic growth. Based on the economic classification, the long run ARDL regression results showed development expenditure promotes economic growth while government purchases have no significant effect on GDP. Other control variables such as inflation and unemployment had negative effect on economic growth. In terms of functional classification, the regression results showed that expenditure on education and infrastructure are important drivers of economic growth. The positive effect of health expenditure was not significant.  Further, the regression results indicated that domestic savings and trade openness had significant positive effect on economic growth. Based on the empirical findings this study therefore recommends resources to be directed towards financing public infrastructure investment to improve economic performance. The study also recommends increasing resource allocation in the education sector to improve efficiency and support skills and human capital development that are important in promoting economic growth through increases in labor productivity. The study also recommends policymakers to enhance domestic resource mobilization and pursue favorable trade policies aimed at fostering robust economic growth.

Public investment largely influences the socio-economic development of a country despite inefficiency concerns. A strong private sector is poised to cause GDP growth due to the efficient management of the resources compared to an economy dominated by the public sector. Nevertheless, public spending pattern influences socio-economic economic activities and welfare dynamics of a country. However, high levels of government activities could crowd-out private investment due to the competition for the scarce financial resources in the economy. This paper sought to analyze the effect of public investment on private investment in Kenya using a vector error correction model. The findings showed a strong positive impact of public investment on private investment in Kenya.

This study aims at analyzing the effect of tax and debt-financed government expenditure on economic growth in Kenya using time series data from 1980-2014. Vector Error Correction Model (VECM) was used to analyze the data. The empirical findings showed that public investment expenditure financed by issuing debt has positive effect on economic growth. The results also indicated that financing government consumption expenditure using debt has negative effect on economic growth. With regards to tax revenue, the results indicated that tax financed public consumption spending affects economic growth negatively. Moreover, the results showed financing government investment expenditure using tax revenue promotes economic growth. Based on the findings, this study therefore recommends fiscal authorities in to use borrowing to finance investment expenditure as opposed financing consumption spending. Additionally, given the adverse effects of debt-accumulation on growth performance, policy makers should focus more on domestic revenue mobilization to finance government expenditures.

It is widely agreed that investment is important because it raises economy's productive capacity by accelerating advancement in technology and adoption of new techniques that enhances industrial growth (Ahmad et al, 2009). According to Dornbush (1999) investment depends on number of factors and is therefore volatile thus a major cause of fluctuations of GDP during business cycle. The classical economists, Smith and Ricardo argued that national prosperity and growth can be achieved through market mechanisms without government intervention which was seen as unnecessary in regulating the economy. Keynes (1936), on the other hand advocated for government intervention to regulate savings and investment behavior of the society. Development investments such as provision of infrastructure may positively affect private investment through reduction in cost of production. In addition, government consumption expenditure positively affects private investment through increased aggregate demand channel but may also have negative effect on investment due to increased budget deficits and future taxes caused by lack of complementary effects on private investment (Alfred and Sagales, 2001). The above position notwithstanding, literature on public investment stimulating or crowding-out private investment has taken a center stage in policy debate especially in developing countries (Ismihan et al., 2005; Rashid and Ahmad, 2005).Public investment plays important role in the socioeconomic development of a country even though these investments are generally considered to be less efficient compared to private investment (Agyie, 2017). Consequently, policy-makers generally assert that effective public investment will result in high relative return in the private sector. However, one view suggests that high levels of government borrowing from domestic market to finance public spending acts as substitute to private investment (Hermes and Lensink, 2003). Further, literature alludes that economic agents are rational and therefore when government spending is increased private saving also goes up in equal measure which results in no first-order effect on private investment (Barro, 1974). These divergent views have given rise to several studies assessing the relationship between public and private investment albeit mixed results (Laopodis, 2001b).While the argument about the effect of public investment in the economy mainly seems to validate crowding-in effect in developing countries and the opposite in developed economies, evidence of such findings remain inconclusive across countries and regions (Munthali, 2012). Several studies have looked into the effect of public investment on output growth (for example, Ahmed, 2009; Erden and Holcombe, 2006; Ahmed and Qayyum, 2007; Bucci and Del 2012). Other studies have analyzed the factors influencing private investment (for example, Martinez-lopez, 2006; Kamrul and Ruhul, 2011). However, the findings vary from one study to another with some of the studies having found private capital to be more productiv...