Treasury slashes revenue targets, signals higher borrowing ahead
Tax collections alone were Sh76 billion short, with income tax contributing the largest deficit of Sh32.1 billion. Treasury also cited the withdrawal of the Finance Bill, 2024, and street protests as factors that hampered revenue mobilisation.
Kenya’s fiscal outlook is under pressure as the National Treasury lowers tax collection targets and braces for higher borrowing.
The government has cut its revenue target for the 2027 fiscal year by Sh178.2 billion, following underperformance in the 2024/25 cycle and a slow start in 2025/26.
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The shortfall threatens the planned fiscal consolidation, with borrowing now projected to rise sharply to cover gaps in revenue.
According to the draft 2025 Budget Review and Outlook Paper, total tax collections are now expected to reach Sh2.99 trillion by June 2027, down from Sh3.17 trillion previously projected.
Weak inflows in most tax categories, particularly income tax, are driving the adjustment. PAYE and corporation tax fell short of targets, affected by private sector non-payment of annual bonuses, offsetting of current liabilities with tax refunds by large taxpayers, and allowable deductions for the Social Health Insurance Fund and Affordable Housing Levy.
“The implementation of the FY 2025/26 budget remains on track. Total revenue amounted to Sh212.6 billion in July 2025 against a target of Sh232.7 billion, recording a shortfall of Sh20.1 billion,” Treasury said.
Treasury said the weak performance, coupled with the poor budget outcome in 2024/25, underscores the need for realistic revenue projections for the FY 2026/27 budget.
Total revenue, including ministerial appropriations-in-aid for the fiscal year ended June 30, stood at Sh2.92 trillion, Sh62 billion below target.
Tax collections alone were Sh76 billion short, with income tax contributing the largest deficit of Sh32.1 billion. Treasury also cited the withdrawal of the Finance Bill, 2024, and street protests as factors that hampered revenue mobilisation.
Looking ahead, Treasury has also reduced revenue forecasts for 2027/28 and 2028/29 to Sh4.04 trillion and Sh4.36 trillion from Sh4.2 trillion and Sh4.71 trillion.
To balance the budget, expenditure and net lending will be moderated. The 2026/27 budget will rise modestly to Sh4.64 trillion from an earlier estimate of Sh4.57 trillion, while spending for 2027/28 and 2028/29 has been revised down to Sh4.96 trillion and Sh5.3 trillion, respectively.
The revenue shortfalls have significant borrowing implications. Total financing for 2026/27 is projected at Sh1.01 trillion, up Sh265.9 billion from the previous estimate of Sh751.7 billion.
The fiscal deficit is now expected to widen to 4.9 per cent of GDP, though it is projected to gradually ease to 3.8 per cent, 3.5 per cent, and 3 per cent in the following cycles.
Total revenue as a share of GDP is expected to remain below 18 per cent until at least 2030, highlighting the ongoing challenge of mobilising adequate revenue to meet government spending needs.
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