Kenya is preparing to give taxpayers a break at a time when the government is struggling to balance its books. That raises a bigger question: who ultimately pays for the relief?
Treasury is signaling Sh78.6 billion in income tax cuts as part of revisions to the 2026/27 fiscal framework, even as the projected budget deficit widens by Sh143 billion to Sh1.288 trillion. The combination presents a difficult fiscal equation: lower taxes could ease pressure on households and businesses, but they also risk widening the gap between what the government collects and what it spends.
The revised projections put government expenditure at Sh4.86 trillion, up from the Sh4.82 trillion approved in the June budget. At the same time, projected revenue has been reduced by Sh101.9 billion to Sh3.529 trillion.
That means Treasury is expecting to spend more while collecting less.
The biggest reduction is in income tax, whose projected collections have been revised down by Sh78.6 billion to Sh2.78 trillion. This could provide some breathing room for workers and businesses, particularly if the proposed PAYE changes materialize. Treasury is expected to review PAYE bands, with the earlier proposal estimated to create a Sh35 billion revenue gap.
But tax relief becomes complicated when the government is already facing rising financing needs.
Treasury expects interest payments on domestic debt to reach Sh1.03 trillion during the financial year, up from the June estimate of Sh986.7 billion. Higher interest costs are being driven partly by inflationary pressures following the war in Iran, which has pushed up energy prices and complicated the economic outlook.
To finance the larger deficit, the government plans to borrow Sh1.04 trillion domestically and Sh247.2 billion from external lenders.
This is where the economic implications become more significant. A larger reliance on domestic borrowing could put pressure on available credit and potentially crowd out private-sector borrowers. Businesses may find financing more expensive or less accessible if banks continue allocating a significant share of their portfolios to government securities.
At the same time, cutting taxes could support disposable incomes and business activity. If households spend more and companies invest more, stronger economic growth could eventually broaden the tax base and partly compensate for the initial revenue loss.
The risk, however, is timing.
Kenya is attempting fiscal consolidation while simultaneously providing tax relief, increasing expenditure and facing higher debt-servicing costs. The strategy will only work if economic growth generates enough additional revenue to close the gap.
The revised budget therefore presents a fundamental policy choice: should Kenya prioritise immediate tax relief or faster deficit reduction?
For taxpayers, the proposed cuts could offer welcome relief. For Treasury, however, the real test will be whether that relief can be delivered without simply transferring today’s tax burden into tomorrow’s borrowing bill.
