The Nexus between Government Expenditure and Taxation Controlled by Government Revenue Composition in Kenya

Fiscal policy is critical to achieving a county’s macroeconomic balance. For instance, in Kenya, the aspect of macroeconomic imbalance and the risk associated with this imbalance is as a result of the increase in the amount of public expenditure and the country’s fiscal deficits in relation to the country’s Gross Domestic Product (GDP). However, such imbalance has existed and has been expanding despite the fact that the country’s transition has significantly improved its fiscal and tax systems in recent years hence, creating a legal and institutional basis for sound fiscal policies. Putting in place fiscal policies that have implications on government spending and taxation as well as other variables that have implications on the country activities at the macro level is important for influencing the country’s economic growth as well as the country’s economic development. The objective of this study was to establish the nexus between government expenditure and taxation and additionally to establish the control effect of government revenue composition on the relationship between government expenditure and taxation. The study employed longitudinal research design and collected secondary data for a period of sixteen years ranging from 2002 to 2017. Data was analyzed by use of descriptive and inferential statistics where test of association was performed by use of Pearson correlation and test of effects between variables through use of regression analysis. The study found out that government spending alone does not have a significant effect on taxation. However, when controlled by government revenue composition, government expenditure and government revenue composition were jointly found to have a significant effect on taxation in Kenya. It can therefore be suggested that, in addition to spending more to increase economic activities that generate tax revenue for the government, the government should also implement policies that increase tax revenue relative to total government revenue to have a significant impact on the country’s taxation stance.