Kenya’s Fiscal Path Still Outruns Its Capacity

Kenya’s 2026/2027 budget tells a familiar story, but one that is becoming increasingly difficult to ignore. The numbers themselves are stark: expenditure of about KSh 4.82 trillion against revenues of roughly KSh 3.63 trillion leaves a deficit of more than KSh 1.1 trillion, around 5.5 percent of GDP. What was once framed as a temporary imbalance has now hardened into a structural feature of Kenya’s fiscal landscape. The country is not simply running a deficit; it is living beyond the sustainable limits of its economic capacity.

Yet for most Kenyans, this is not about trillions or percentages. It is about the daily cost of living, the price of basic goods, the search for jobs, and the expectation that taxes paid should translate into real improvements in their lives. Public participation around the budget has made this clear: wananchi want an economy that works, places money in their pockets, one that reduces pressures on household income while expanding opportunities for business and employment. In this sense, the budget is not just a fiscal document; it is a test of credibility between the State and its citizens.

At the centre of this tension lies domestic revenue mobilization. Kenya’s tax system continues to lean heavily on a narrow base, with just about 3.1 million individuals contributing Pay As You Earn (PAYE) and an overall taxpayer base of roughly 7 million. The burden of financing Government expenditure therefore falls disproportionately on the formal sector, even as large segments of economic activity particularly within SMEs and the informal economy remain only partially captured. The result is predictable: revenue targets are routinely missed, not because effort is lacking, but because the system itself is structurally constrained.

The Government’s Medium-Term Revenue Strategy recognizes this reality. Its ambition to raise the tax-to-GDP ratio from about 14–15 percent to as high as 20-22 percent within a span of 3 years reflects a clear understanding that Kenya must mobilize more domestic revenue if it is to sustain its development agenda. Reforms built around digital tools, expanded VAT coverage, and improved compliance are steps in the right direction. However, they operate largely within the existing framework to enhance compliance through enforcement rather than fundamentally changing the size or composition of the tax net.

This is where the deeper challenge lies. Kenya’s economy has shown resilience, growing at an average of about 5 percent in recent years. But this growth has not largely translated into equivalent growth in tax revenue—a sign of weak tax buoyancy. Much of the expansion in the economy is occurring in sectors that are either informal, low productivity, or weakly captured by the tax system. In effect, the country is growing, but not in ways that generate increased domestic revenue.

On the spending side, flexibility is equally limited. A significant share of the budget is locked into recurrent obligations: wages, transfers to counties and debt servicing, which alone receive an allocation of over KSh 1.25 trillion. With recurrent expenditure absorbing most of the available resources, development spending is increasingly financed through borrowing and the newly established alternative financing models. At the same time, the Government continues to prioritize sectors that directly affect citizens including education, infrastructure and youth empowerment programs, reflecting both policy commitments and public pressure.

This creates a difficult balancing act. On one hand, there is a clear need to invest in livelihoods, reduce inequality, and create jobs. On the other, the fiscal space to sustain these investments is shrinking. The gap between what the Government must do and what it can realistically afford is increasingly being bridged by debt. Domestic borrowing alone is expected to exceed KSh 1 trillion this year, adding to a public debt burden that is already placing pressure on future budgets through rising debt service costs.

There are signs of a shift. Greater emphasis on Public-Private Partnerships (PPP) and alternative financing instruments including National Infrastructure Fund (NIF) points to an effort to move away from a purely debt-driven model. These are important steps, but they are not a substitute for deeper structural change. Financing reforms can ease pressure, but they cannot resolve the underlying mismatch between ambition and capacity.

Ultimately, Kenya’s fiscal challenge is not just about how much revenue can be collected or how efficiently it can be spent. It is about whether the economy itself can generate sufficient taxable value to sustain its aspirations. Without broader reforms including formalizing the informal sector, improving SME productivity, and expanding high-value industries through incentivizing the manufacturing sector and the digital economy, the tax base will remain narrow and revenue growth will continue to lag behind economic growth.

In the end, the question is not whether Kenya can keep raising revenue target within the current system, but whether it can build an economy that makes the realization of revenue target possible. Because without expanding the tax base, ambition will keep widening the budget deficit and  ultimately define the limits of Kenya’s economic growth progress.

Maxwel Ambiro is a tax consultant at Deloitte East Africa. The views presented are his own and not necessarily those of Deloitte. He can be reached at mambiro@deloitte.co.ke.