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Treasury to amend budget for a third time on revenue shortfall
Treasury Cabinet Secretary John Mbadi responds to a question from members of the Bunge la Mwananchi and residents during a dialogue session at Swahilipot Hub on March 7, 2025.
The Treasury is set to present the third supplementary estimates for the 2024/25 budget, marking the first time the State's spending plan has been revised three times in a fiscal year since the Covid-19 pandemic.
The upcoming revision to the budget, disclosed by Treasury, has been brought by missed revenue targets.
The presentation of the third supplementary budget with only over a month to go until the close of the fiscal year on June 30 raises questions on the credibility of revenue reforms even as the exchequer maintains that it has not set over ambitious targets.
The third layer of adjustment to the 2024/25 budget has been attributed to revenue underperformance along with new expenditure pressures which when combined require additional borrowing from government to fund a wider budget hole.
Revenue collection through the first nine months to March is estimated to have fallen off the target by Sh161.9 billion mainly on account of shortfalls in ordinary revenue or taxes according to the National Treasury budget directorate.
The third quarter economic and budget review paper (QEBR) however shows a lower deviation in revenue at Sh132.6 billion.
The revenue shortfalls have been attributed to the prolonged impact of the social unrest that followed the rejection of last year’s Finance Bill and softer economic conditions.
“The revenue shortfalls have resulted from several factors. One is the social unrest that was witnessed between June and August which affected businesses. Second is the withdrawal of the Finance Bill, 2024 from which we expected to collect approximately Sh344.3 billion,” Albert Mwenda, the Director General, Budget, Fiscal and Economic Affairs at the National Treasury said during the first edition of the Nation Media Group 2025/26 Budget Summit.
“There has generally been a slowdown in economic activity. The economy grew by 4.7 percent down from 5.7 percent in the previous year. There also has been delayed disbursements and the accumulation of pending bills which reflects a delay in the release of working capital to businesses.”
The exchequer was forced to table its first supplementary budget early in the fiscal cycle after the withdrawal of the Finance Bill, 2024 which necessitated a recalibration of revenue estimates.
A second supplementary budget was meanwhile forced by the underwhelming performance of new tax measures under the Tax Laws (Amendment) Act, 2024, the Tax Procedures (Amendment) Act 2024 and the Business Laws (Amendment) Act, 2024 which were legislated at the end of December last year.
The three laws had been expected to yield in an additional revenue of Sh70 billion, but the exchequer said there has been a lag in collections.
The first supplementary budget trimmed total government spending from Sh3.99 trillion to Sh3.88 trillion but the second lifted expenditure and net lending to Sh4 trillion.
Revenue targets were meanwhile set down from an initial Sh3.34 trillion to Sh3.05 trillion but were later lifted to Sh3.06 trillion.
The incidence of expenditure pressures implies that planned spending to June 30 is likely to increase even as revenues likely fall, signalling a wider fiscal deficit and increased borrowing to cover the hole.
The fiscal deficit is currently estimated at 5.1 percent of GDP or Sh887.1 billion.
The National Treasury says new spending pressures have arisen from the new education funding model, collective bargain agreements entered with trade unions and the rollout of Universal Healthcare.
“We continue facing pressures on the expenditure side and we think that the deficit will edge up slightly. We are in the process of sending out a circular for Supplementary III and the idea is to be more realistic on our revenue targets,” added Mr Mwenda.
The government is struggling to raise revenues at a time when the citizenry, more so the youth or GenZs have forced it to tone down on aggressive raising measures with the proposed Finance Bill, 2025 only expected to raise between Sh25 billion and Sh30 billion in additional taxes.
Economists have begun doubting revenue as a key pillar of fiscal consolidation, suggesting a lower fiscal deficit is only achievable from slashing spending going forward.
“The idea that you can run the public sector only through raising revenues is about to hit its limit,” chief executive officer to the Institute of Economic Affairs (IEA) Kwame Owino said at the budget forum.
The Treasury has suggested that it can still achieve higher revenues by nabbing tax cheats and closing loopholes through digitization in the absence of aggressive tax measures.
Some tax experts have put the Finance Bill, 2025 under sharp scrutiny for emitting tax cuts set on easing pressure on taxpayers and encouraging compliance including a lower rate of corporate and income tax.
Recent tax measures have all been devoid of the tax cuts proposal despite the medium-term revenue strategy (MTRS) backing the move.
“The medium-term revenue strategy proposed to bring down the corporate, income tax and VAT rates but we have not seen this in the Finance Bill,” said the co-convener of the public finance committee at the Institute of Certified Public Accountants of Kenya (ICPAK) Edna Gitachu.
