Effects of Public Debt on Household Welfare in Kenya

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Effects of Public Debt on Household Welfare in Kenya

Public expenditure by government to offer services and social amenities and development programs is aimed at improving the overall welfare of the state. However, scarcity of resources results to government relying on borrowing publicly to augment the existing budget. From economic analysis, a unit increase in public expenditure by government increases the GDP of an economy by more than a unit. The economic phenomenon that creates this scenario is known as the multiplier effect. Therefore, governments borrow externally and/or internally to fund development programs and recurrent expenditure. Increased government funding to implement development programs has a positive effect to the economy in that it creates employment leading to a higher proportion of citizens earning income. In addition to employment creation that translate to increased income for a country, the government uses these resources to meet recurrent expenditure for the existing public servants in form of salaries. Whether through development or funding recurrent expenditure, the use of public debt results to a higher income for a country and the resultant effect is the improved household welfare through increase in per capita income.

Mannah (2018) posits that highly indebted households in Ghana experienced reduced expenditure that translated to credit Theconstraint. Further, due to lack of competition in the sector, micro finance institutions tend to charge high interest rates therefore keeping households in a captive market. The ability of citizens to borrow capital at a friendly rate and put it to good use should aid in uplifting a countrys income and the overall welfare of the household. For the period under review, the lending rates declined by approximately 5% from 19%. A country with efficient capital and money markets make it easier for borrowers to borrow competitively and cheaply division of a countrys income with its population yields the per-capita income. The rate of growth of a countrys population determines the levels of per-capita income. In the event a countrys income grows faster than the population, the country will witness a positive increase in the per- capita income, the reverse is true.. Cheap capital put to development purposes generates income over the long run and is beneficial to the household and the larger economy.

This increased borrowing resulting to increased expenditure should translate itself to a better GDP translating to improved household welfare in form of improved per capita income.

According to data retrieved from World Bank, from the period 2001 to 2017, Kenyas public debt has increased six and the GDP five times. From 1999 to 2017, Kenyas population grew at a slower rate compared to public debts and GDP at 34% .Over the same period, Per-capita income has increased approximately two and a half times, a pale comparison to the growth in public debt GDP. The growth rates of Per-capita income should mimic the growth of Public debt and the GDP should governments put the debt to proper use in terms of development translating to improved welfare.

Cecchetti et al (2011) studied the real effects of debt focusing on countries in the Organization for Economic Cooperation and Development. The study measured correlation of debt with annual per capita GDP with government borrowing having a positive correlation with annual per capita GDP growth.

Mutsonziwa et al (2019) focused on over-indebtedness and its welfare effect on households in Southern African countries.

From the study on “effects on domestic public debt in Kenya, Njoroge (2015) posits that while total debt has a negative effect on the economy, public domestic debt has positive effects on the GDP.

Although studies on the subject of debt, GDP and household welfare are available, they have not brought out the clear relationship between the variables in question particularly in the Kenyan context. In some instances, these studies are limited to private debt and its effect on household welfare in form of heavy indebtedness Mutsonziwa et al (2019).

The study will be valuable to policy makers and the government at large for policy targeting purposes. In addition, the study is useful in advancing general knowledge in the areas of public debt and household welfare to the public.

The geographical location of this study will be Kenya. The study shall concentrate on macroeconomic data from 2001 to 2017. The unit of analysis will be the household with specific focus on household welfare.

The proposal is structured in three chapters. Chapter 1 includes the background and highlights the relationship between the explanatory variables and the dependent variables. In this case, Public debt, GDP will be the explanatory variables while household welfare will be the dependent variable.

Chapter two contains the review of literature focusing on the theoretical framework and empirical literature. The theoretical framework will look review existing theories surrounding the variables. The empirical literature will review previously done studies relating to the topic. Strengths, weaknesses and gaps of these literatures will be highlighted.

Chapter three will focus on the methodology. In this chapter, the research design and the framework will be developed that will guide in the collection and analysis of the research.

This chapter shall cover a review of previously done theories and studies that will offer better insight around the subject. This theoretical literature will be reviewed first then the empirical literature shall follow thereafter. Finally, the summary of the literature review will capture the highlights of chapter two.

This sub chapter shall review studies done previously to understand their objectives, variables considered and the findings that can help the researcher better refine the study. In addition, strengths and weaknesses of the studies shall be highlighted alongside similarities and contrasts.

According to Kobey 2016, public debt has a negative effect on economic growth in that a unit increase in public debt decreases economic growth by 1.26 units. The variables of interest to the researcher were public debt (exogenous) and economic growth (endogenous) regressed through a linear model. Other independent variables considered were inflation and unemployment rate. The findings further indicates that economic growth is inversely related to inflation and unemployment such that the increase of either inflation and or unemployment reduces economic growth rate. From the study, it is possible to establish the causal relationship of public debt on economic growth. The presentation of the findings are elaborate and simple to understand. However, the regression model was statistically insignificant. The proposed study has similarities in terms of the variables considered; however, the dependent variable in this case shall be per capita income. In addition, the proposed study will include lending rate as an additional explanatory variable.

A faster increase in public debt such that the debt to GDP ratio increases implies higher future taxes that can adversely affect growth (Dar and Sal, 2014). In their study, the authors focused on the impact of public debt in OECD countries from 1996 to 2007. The variables considered by the authors were debt to GDP ratio, employment levels, investment and export growth rate. The variables considered were regressed using random generalized least squares (RGLS). From the findings, there is a preferred threshold of debt to GDP. Should countries maintain their debt levels below this threshold, the impact on economic growth is either positive or neutral. The study is limited to developed OECD countries unlike Kenya that is considered a developing economy, thus, the findings could vary. However, the study offers insight on what variables to consider in undertaking this study.

According to Mutsonziwa & Ashenafi (2019), credit plays an important role in modern society by helping people in consumption smoothing and hence in maintaining a lifestyle when earnings fall short of expenditure. The increased availability of credit is partly responsible for higher levels of debt burden and household over-indebtedness. The authors analyzed the determinants of over-indebtedness and its links with poverty employing a binary logistic regression model using data on 51,359 individuals from 11 economies in the Southern Africa Development Community (SADC). The authors focused preferred primary data obtaining information on multiple variables among them income, credit literacy, age, gender amongst others.

The results suggest that over-indebtedness is driven by, among others, lack of credit literacy, cross-borrowing and income. The results also suggest that over-indebtedness is likely to impoverish the indebted. The study focuses mostly on micro economic data per country helping the mentioned economies customize policies to address the issue of over indebtedness. In addition, the study sheds light on various causes of over indebtedness. However, the study is limited to the area of micro finance credit specifically in Southern African countries. The intended study shall deviate from the study above by focusing on public debt, per capita income as a measure of household welfare in Kenya.

From the literature reviewed, there are numerous studies centered on the causal relationship of debt; public, domestic or a combination of both on economic growth. Few African based studies have narrowed down to the relationship between debt and household welfare in form of per capita income.

The main objective of this research is to understand the effect of public debt on household welfare. The objectives of the study dictate the application of a exploratory design on the study. The exploratory design is preferred since it allows the researcher to show the causal relationship of the variables over a period. The study shall adopt a causal research design. According to Zikmund, 2000, the main goal of causal research is to identify cause and effect relationships between variables. According to Cooper and Schindler (2006) a causal study is designed to establish the influence of one variable(s) on another variable(s) which depicts causation the relationship between public debt and per capita income.

For this case, secondary data of macroeconomic nature shall be used in the analysis. Data shall be obtained from The World Bank and The Central Bank of Kenya from the period 2001 to 2017.

Since this study takes a macroeconomic approach, it is limited to the confines of Kenyan border. Data on public debt shall be obtained from The Central Bank of Kenya. Data on Lending rates, inflation rates, unemployment and the per capita income shall be obtained from World Bank. An excel data collection template shall be developed and data cleansed.

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