Government expenditure and sectoral output in Kenya: an assessment of sectoral elasticities and the moderating role of fiscal policy efficiency

Abstract

This study examined the relationship between government expenditure and sectoral output in Kenya over the period 2004 to 2024, with three objectives: to estimate short-run and long-run output elasticities of government expenditure across productive sectors, to determine the differential effects of capital and recurrent expenditure on sectoral output, and to assess whether fiscal policy efficiency moderates the expenditure-output relationship. Grounded in Keynesian Theory, the Theory of Public Sector Productivity and Allocative Efficiency, and Endogenous Growth Theory, the study adopted a positivist philosophy and a quantitative causal design. Six productive sectors; agriculture, manufacturing, construction, energy, ICT, and tourism; were analysed using annual time-series data sourced from the Kenya National Bureau of Statistics, National Treasury, Central Bank of Kenya, and World Bank. Six separate sector-level Autoregressive Distributed Lag (ARDL) models were estimated, with fiscal policy efficiency proxied by lagged sector-specific budget absorption rates and supplemented by a KPI-based descriptive index. Cointegration could not be confirmed for any sector given the small sample, and all long-run elasticity estimates are therefore treated as indicative. Findings revealed substantial variation in sectoral responsiveness: energy and agriculture showed the strongest indicative long-run output responses, while manufacturing exhibited a negative association reflecting persistent structural constraints. Capital expenditure generated stronger and more sustained output effects than recurrent expenditure, particularly in agriculture and energy. Moderation analysis produced interaction coefficients in the theoretically expected positive direction for agriculture, ICT, and manufacturing, but these did not reach conventional statistical significance and are reported as directional rather than conclusive, consistent with the study's limited sample power. The study concludes that the impact of government expenditure on sectoral output depends on the sector, expenditure composition, and fiscal management efficiency, and recommends prioritising capital expenditure in high-responsiveness sectors, strengthening budget absorption and public financial management systems, and institutionalising performance-based budgeting to maximise the developmental impact of public spending in Kenya.

Keywords: government expenditure, sectoral output, fiscal policy efficiency, sectoral elasticity, ARDL bounds testing, budget absorption, Kenya