The Treasury has cut its tax target for the next financial year by Sh334 billion and cut spending in changes that signal the government’s reluctance to raise taxes amid public anger.
Budget review and forecast papers show the treasury expects to raise Sh2.96 trillion in the year starting next July from an initial target of Sh3.294 trillion set before deadly protests forced the government to withdraw the Finance Bill 2024 – which planned tax increases.
The lowering of the tax collection target has reduced spending by Sh396 billion for the new year to Sh4.157 trillion.
The forecast papers offer a glimpse into the 2025 Finance Bill, which comes at a time when the country remains concerned about public outcry and the threat of protests if it pushes for new taxes.
President William Ruto cancelled tax increases worth more than Sh346 billion in June after protests left more than 50 people dead.
The move has left the debt-ridden government with a bigger budget deficit this fiscal year, a backlog of outstanding bills and a delay in funding from the International Monetary Fund – whose staff is visiting Kenya on a fact-finding trip.
“As we embark on the preparation of the 2025/26 budget and the medium-term budget, I recognize the challenges we currently face as a country. These include less than ideal revenue performance, rising public debt and debt servicing, expenditure carryover and backlog of outstanding bills, as well as increased funding requirements for priority interventions,” said Treasury Secretary John Mbadi.
Of the Sh334 billion revenue collection cuts, income tax recorded the largest decline of Sh172.3 billion to Sh1.327 trillion.
VAT forecast was lowered by Sh100.1 billion to Sh826.1 billion while customs duties were revised down by Sh33 billion to Sh196.7 billion.
Strict crackdown
The state is betting on launching a tough campaign against tax evaders and expanding the tax net to benefit from the growing informal sector to reduce reliance on increases targeting the formal sector to increase revenue collection.
This comes as part of the need to calm the nerves of residents who have expressed their desire to protest against tax increases.
Mr Mbadi initially said he would work to revive some of the tax increases in the abandoned finance bill.
He later indicated that the government would consider tax cuts in the medium term, including cutting the value-added tax on goods and services to 14% from 16%, and cutting the corporate income tax from 30% to 25%.
Kenya needs billions of shillings to continue servicing its debt, which is above the optimal level recommended by the World Bank and the International Monetary Fund, after years of borrowing fuelled by infrastructure construction.
The IMF’s fact-finding trip is part of efforts to forge a way forward in the wake of deadly protests that prompted the withdrawal of planned tax increases.
Kenya agreed a four-year loan with the IMF in 2021, and signed an additional loan to support climate action measures in May 2023, bringing its total IMF borrowing to $3.6 billion (Sh464 billion).
The IMF requires regular reviews of reforms – in Kenya’s case every six months – before it disburses financing.
Kenya reached a staff-level agreement with the IMF in June on the seventh review of its programme, but protests and the subsequent withdrawal of the finance bill have held up the IMF’s Executive Board signing, and subsequent payment.
In the new financial year, spending on development projects such as roads, bridges and power plants is expected to fall by Sh405.5 billion to Sh663.2 billion, while recurrent spending on items such as civil service salaries will rise by Sh30 billion to Sh3.056 trillion.
Cuts in development budgets will mean the government spends less on projects such as infrastructure and social services even as the Treasury highlights the use of public-private partnerships as a means of compensation.
Project spending is essential to modernizing infrastructure that is attractive to foreign investors, and helps put money in the pockets of workers and supplies through salaries and the purchase of raw materials such as cement, steel products and timber – boosting cash flow for companies that deal in these products.
This increases job opportunities in an economy suffering from a growing youth unemployment crisis.
“In order to reduce development spending, the government will expand the use of the Public-Private Partnerships (PPP) framework for commercially viable projects, taking into account the contingent liabilities that fall under this framework, and review the project portfolio, including those financed externally, with a view to restructuring and realigning them with the Bottom-Up Economic Transformation Agenda (BETA),” the Treasury said.
Kenya is turning to public-private partnerships to finance the construction of highways and other infrastructure after public debt ballooned.
Public debt has risen after five years of increased borrowing to finance the construction of roads, railways and power plants.
Under public-private partnership deals, private financiers build roads and recoup their investment through methods such as tolls.
This is the arrangement that attracted India’s Adani Group to build high-voltage power lines and manage Jomo Kenyatta International Airport (JKIA).
Key spending areas
Key spending areas facing cuts in the new fiscal plan include free primary and secondary education and the imposition of full quotas on junior high schools.
The allocation for free secondary education is set to fall in the financial year starting July 1, 2025 from Sh110.1 billion to Sh73.1 billion, while the allocation for free primary education is set to fall to Sh12.4 billion from Sh23.4 billion.
County governments are also expected to feel the pinch from the spending rationalisation, with transfers set to fall to Sh432.7 billion from an earlier estimate of Sh452.9 billion.
The equitable share of revenue to counties from the national government in FY 2025/26 will be lower than the current Sh410.8 billion (FY 24/25) at Sh400.1 billion.