Developing countries need robust and sustainable budget financing options to facilitate public services, stimulate growth and reduce poverty. For Kenya, borrowing domestically and externally has emerged as a key tool to finance the aspirations contained in its development blueprint Vision 2030. However, while debt has enabled public spending in sectors like Health and Education, higher debt payments have increasingly constrained fiscal space, placing an obstacle to the adequate funding of these sectors.
This paper explores this double-edged relationship between Kenya’s public debt burden and social sector spending over a 30-year period. Through a mixed-method econometric analysis, it finds that public debt has a negative effect on individual and collective spending in Health, Education, and Social Protection. This is defined at the social cost of public debt. It also shows that this relationship can be moderated by improving the quality of Kenya’s governance, particularly, voice and accountability, rule of law, government effectiveness, and control of corruption – providing a framework for debt reforms for developing countries.
