Kenya’s fiscal stability faces fresh challenges after the Kenya Revenue Authority (KRA) fell Sh47.3 billion short of its tax collection target for the fiscal year ending June 30, 2025.
The shortfall, revealed in new National Treasury documents published in the Kenya Gazette, comes despite aggressive collection efforts by the taxman and threatens to derail President William Ruto’s economic reform agenda.
Official figures show the KRA collected Sh2.257 trillion in tax revenue against a revised target of Sh2.305 trillion. The Treasury initially hoped that KRA would collect Sh2.745 trillion but revised this downwards.
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This marks the third consecutive year of revenue underperformance, exacerbating pressure on a government already grappling with a public debt reaching a record Sh11.51 trillion by May 2025.
Between 2025 and 2027, the National Treasury must repay over Sh1.5 trillion to foreign creditors, data shows.
The missed targets’ timing is particularly problematic; just three weeks ago, President Ruto signed the controversial Finance Bill 2025 into law, introducing new tax measures intended to bolster state revenues.
With domestic revenues falling short, Kenya’s budget calculations are becoming increasingly precarious. This is because, if the trend continues, Treasury officials now face difficult choices: implementing deeper austerity measures, increasing borrowing, or risking the omission of critical budget allocations.
The financial year 2025/26 budget projects a total expenditure of Sh4.292 trillion, equivalent to 22.3 per cent of GDP. The resulting fiscal deficit, including grants, is projected at Sh923.2 billion (4.8 per cent of GDP), which is intended to be financed primarily by a mix of 60 per cent external borrowing and 40 per cent domestic debt.
National Treasury Cabinet Secretary John Mbadi acknowledged these constraints in his budget speech, highlighting “rising demands for public spending, public debt accumulation, and the challenge of mobilising higher tax revenues while maintaining a low cost of doing business.”
READ: State spending plan takes a hit as KRA misses tax target by Sh23b
While his proposed solutions include concessional loans, debt swaps, and diaspora bonds, these offer little immediate relief to the pressing financial challenges, analysts cautioned.
Yesterday, analysts said the perennial missed targets now raise critical policy questions on the impact of new taxes, especially after State officials publicly admitted that higher taxes do not necessarily result in more revenue.
A startling admission came from former National Treasury Cabinet Secretary Professor Njuguna Ndung’u, and a former Central Bank of Kenya governor, during an International Monetary Fund (IMF) virtual forum last year.
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Professor Ndung’u, who was eventually sacked from his job, had openly questioned the effectiveness of higher tax rates, referencing the Laffer Curve. This concept, often attributed to American economist Arthur Laffer, posits that beyond a certain optimal point, increasing tax rates can paradoxically lead to a decrease in total tax revenue.
This occurs because excessively high rates discourage economic activity, stifle investment, and incentivise tax evasion, driving transactions into the underground economy.
Ndung’u articulated this, stating, “High tax rates create incentives for evasion,” and observed, “We’re seeing this with our shrinking tax base.”
He further emphasised that a vibrant economy is essential for higher tax generation, stating, “We need economic recovery for us to generate even higher taxes because the current vibrancy, the current economic structure and the vibrancy of the economy is so low to support added tax.”
The comments by Professor Ndung’u at the time appeared to contradict the government’s public stance on aggressive taxation and echoed similar warnings from KRA Commissioner General Humphrey Wattanga about the difficulties in bringing Kenya’s vast informal economy into the tax net.
Appearing before the National Assembly Finance Committee, Mr Wattanga, a few months ago, also conceded difficulties in bringing the informal economy into the tax net, even as he warned of a decline in some specific taxes in other sectors.
Yesterday, the KRA announced a significant organisational restructuring and leadership changes within the tax agency to beef up tax collections.
In a press release, the KRA announced a “major recruitment drive” and a review of its organisational structure, framing it as a move to “enhance service delivery and organisational agility.”
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The KRA statement noted that the recruitment drive “covers a wide range of roles from leadership to operational positions” and explicitly mentioned the re-advertisement of “Deputy Commissioner positions as well as one Commissioner position” to “enhance inclusivity and broaden participation.”
The restructuring, according to KRA, aims to “address both current and future institutional needs by enhancing workforce flexibility, operational efficiency, and fostering a culture of continuous learning and innovation.”
The pressure now mounts on the KRA’s new and re-assigned leadership to demonstrate a tangible improvement in tax collection to support the government’s fiscal stability, analysts say.
Tax consultant Ian Njoroge yesterday warned that “Every new tax measure pushes more transactions underground,” trapping the government in a “vicious cycle” where it raises rates to cover gaps, only to drive more evasion and create new shortfalls.
Analysts say the Ruto administration is faced with a rock and hard place with limited options: either to intensify tax enforcement, risking further economic contraction; expand borrowing, potentially triggering credit downgrades; or revise spending, which would likely delay key development projects.
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