1 © 2017 Conscientia Beam. All Rights Reserved. PUBLIC SECTOR SIZE AND GDP GROWTH NEXUS: PANEL DATA ESTIMATION Naftaly Gisore Mose 1 1 Department of Economics, Technical University of Kenya, Nairobi, Kenya ABSTRACT Article History Received: 4 April 2017 Revised: 18 July 2017 Accepted: 27 July 2017 Published: 7 August 2017 Keywords Public sector size Government spending GDP growth East Africa Panel data. The rationale of this study was to examine empirically how components of public sector size relates to GDP growth in East Africa from 1985-2015. Using balanced panel fixed or random effect model, public sector expenditure was disaggregated to scrutinize its effect of growth. The research tested for panel unit root and found that only two variables, that is, real GDP growth and capital spending - are stationary at level. The finding confirms the conventional view that relative capital spending - advances economic growth while consumption expenditure retards it. Finally, human capital allocation was insignificant. This study suggests that for these countries, the policy of increasing public sector size on investment budget to promote GDP growth will be appropriate, but fewer funds should be directed towards other governmental programs. Contribution/Originality: This study contributes in the existing literature in the field of public sector economics. This study uses panel estimation methodology. This study originates new formula of estimating public sector size. 1. INTRODUCTION Fiscal policy plays a vital function in governmental efforts to boost growth and development in an economy, through the variation of its income and disbursement profiles. It is the main government policy that influences economic behavior by raising the revenue through taxation and control of the level of spending (Anyanwu, 1993). Public sector size was typically categorized into consumption and capital expenditures. The former, corresponded to government’s acquisition of current goods and services, while the latter would ideally include not merely investments in infrastructure (roads, Education) but also all other spending that might add to GDP growth. In other words, while the consumption allocation refers to financial outlays necessary for running of government, the investment allocation refers to capital outlets that increase the assets of the state. These classifications, nonetheless, were not mutually exclusive but were indeed inter-linked. For instance, while capital spending gave rise to consumption expenditure in most cases through the operational and repairs costs of completed capital projects, the amount available for investment was a function of not only the size of revenue but also the amount that goes annually into the administration of public sector (Kalio, 2000; Gisore et al., 2014). The association between public Sector size and economic growth has continued to generate a string of controversies. Most studies conclude that the relationship between public sector on economic growth is negative and insignificant (Romer, 1990; Akpan, 2005; Gisore et al., 2014) others indicate that the effect is positive and Quarterly Journal of Econometrics Research 2017 Vol. 3, No. 1, pp. 1-11 ISSN(e): 2411-0523 ISSN(p): 2518-2536 DOI: 10.18488/journal.88.2017.31.1.11 © 2017 Conscientia Beam. All Rights Reserved.