The Kenyan Treasury has projected a significant increase in the budget deficit for the 2026/27 fiscal year, expanding by Sh143 billion to reach Sh1.288 trillion. This rise is attributed to higher interest payments on domestic debt combined with anticipated tax relief measures ahead of the 2027 General Election.

The total expenditure for the year is expected to climb by Sh40.5 billion, reaching Sh4.86 trillion, while projected revenue has been revised downward by Sh101.9 billion to Sh3.529 trillion. The largest revenue adjustment comes from income taxes, which are expected to decline by Sh78.6 billion to Sh2.78 trillion, reflecting the Treasury's anticipation of reduced collections from businesses and employees amid economic challenges.

Key Revenue Adjustments

  • Excise duty collections are set to fall by Sh17.4 billion to Sh364.8 billion.
  • Value Added Tax (VAT) revenues will decrease by Sh18.3 billion to Sh810.3 billion.
  • Non-tax revenue is also expected to drop to Sh106.6 billion from the previous estimate of Sh127.1 billion.
  • Conversely, import duty collections are projected to increase from Sh186.2 billion to Sh220.8 billion.

Economic growth forecasts have been lowered from 5.3% to 5%, influenced by the ongoing Middle East conflict and its impact on domestic economic activity. Treasury Cabinet Secretary John Mbadi is anticipated to revise the Pay-As-You-Earn (PAYE) tax bands, which could further reduce revenue from workers. Earlier proposals suggested PAYE cuts could reduce government revenue by Sh35 billion.

Despite earlier reductions in VAT on fuel to cushion consumers from price shocks, the Treasury has extended this relief only until October. The rising cost of servicing domestic debt is another pressure point, with interest payments expected to increase by Sh40.5 billion to Sh1.03 trillion, driven by a domestic debt stock of Sh7.3 trillion and inflationary pressures from global energy price hikes.

Borrowing Plans

To bridge the financing gap, the government plans to borrow Sh1.04 trillion domestically, up from the June budget estimate of Sh898 billion, while external borrowing remains steady at Sh247.2 billion.