Effect Of Public Sector Wage Bill On Public Investment And Fiscal Deficit In Kenya

ABSTRACT

Public sector wage bill has been growing rapidly in Kenya. The wage bill as a proportion of recurrent expenditure averaged 63 per cent per year between 1993 and 2005 and 56 percent between 2006 and 2017. In addition, public sector wage bill as a percent of gross domestic product has been high averaging 11 per cent between 2006 and 2017. This is compared to seven per cent international benchmark and Kenya government’s target of eight per cent by 2017 and six per cent by 2020. The government has over time attempted to reduce public sector wage bill as a mechanism for promoting investments without success. This has led to a consequent need for borrowing, which has seen the government’s fiscal deficit widen from -0.05 per cent of gross domestic product in 2000 to -8.4 per cent of gross domestic product in 2017. Gross fixed capital formation as a percentage of gross domestic product has been slow, averaging 21 per cent between 1980 and 2017. This is far from Kenya Vision 2030 target of 30 per cent. Gross fixed capital formation as a percentage of gross domestic product maintained a slow but consistent rise averaging 19.46 between 2003 and 2012. The ratio, however, fell from 23 to 19 per cent of gross domestic product between 2014 and 2017, respectively. The growth of gross investments has been lower compared to that of public sector wage bill since 2010. Between 2010 and 2017, the growth rate of public sector wage bill averaged 11 per cent while the growth of gross investments averaged seven per cent. This study investigated the effect of public sector wage bill on investments in Kenya. Specifically, it aimed at finding out the effect of public sector wage bill on public investments in Kenya and determine the effect of public sector wage bill on fiscal deficit in Kenya. The study used annual time series data for the period 1980 to 2018. Autoregressive distributed lag model was used in addressing all objectives of the study. The results showed that the effect of public sector wage bill on public investment was positive and statistically significant. This was unexpected because a higher level of public sector wage bill is likely to reduce resources for public investment. The results of the study further indicated that the effect of public sector wage bill on fiscal deficit was positive but statistically insignificant. This could be attributed to weak pro-cyclical adjustment of public sector wage bill during recessions. The findings mean that public sector wage bill was not an important determinant of fiscal deficit in Kenya. However, this does not mean that fiscal prudence should not be observed as far as the spending towards public sector wage bill is concerned. This is because there is a positive relationship between public sector wage bill and fiscal deficit. This study recommends stabilization of expenditure on public sector wage bill, stimulation of longterm economic growth with the aim of reducing fiscal deficit in the long run and implementation of policies that promote private investments. This includes improving the ease of doing business.