Kenya’s fiscal year 2026-27 Budget presents both an opportunity and a warning. With total expenditure projected at Sh4.8 trillion against expected revenues of approximately Sh3.7 trillion from ordinary taxes, appropriations-in-aid, and grants, the government faces a fiscal deficit of about Sh1.15 trillion.
This gap will largely be financed through domestic and external borrowing, adding to an already substantial public debt stock estimated at Sh13 trillion.
While borrowing remains a legitimate fiscal tool, excessive reliance on debt financing raises concerns about long-term economic stability, debt servicing costs, and fiscal sovereignty. Kenya must embark on deliberate structural reforms that reduce dependence on debt while strengthening sustainable sources of economic growth.
The starting point is expanding the productive tax base rather than continuously increasing tax rates. Many Kenyan businesses are registered informally and as such, the government is unable to generate sufficient revenues.
The government should reduce taxes on compliant taxpayers rather than increasing taxes on those who are not. Small and medium enterprises can be encouraged to enter the formal economy through incentives such as simplified registration, low-cost credit, tax exemption for new businesses and easier access to public procurement services. The more businesses are formalised, the more tax base grows naturally and without adding to the tax burden.
Equally important is attracting both domestic and foreign investment. Kenya's investment environment must become more competitive through regulatory certainty, efficient public services, strong property rights, and reduced bureaucratic bottlenecks.
Investment generates jobs, increases productivity, expands incomes, and ultimately enhances tax collections. Sustainable fiscal health is achieved not through aggressive taxation but through a growing economy that continuously creates new taxpayers and productive enterprises.
However, more fundamentally, Kenya must rethink the structure of its economy. Agriculture has always been an important part of the economy for decades. While it will continue to play an important role, it cannot alone generate the level of wealth required to support a modern economy.
History demonstrates that countries such as China, Japan, and South Korea accelerated economic transformation through industrialisation. Kenya should, therefore, pursue a strategy of developing manufacturing, industrial parks, value-addition, and export-oriented production. Manufacturing creates higher productivity jobs, stimulates technological advancement, and accelerates capital accumulation, all of which strengthen government revenues over time.
Another critical pillar of fiscal sustainability is strengthening export competitiveness.
Kenya must deliberately increase the production and export of value-added goods and services to earn foreign exchange and reduce pressure on external borrowing.
A strong export sector improves the balance of payments, stabilises the currency, attracts investment, and creates a more resilient foundation for long-term economic growth.
Also, Kenya should find alternative sources of income other than taxation. Kenya has potential unexplored mineral resources such as gold, rare earth elements, titanium and other strategic minerals.
The mining industry with proper regulation has the potential to play a significant role in the nation’s economic development, foreign exchange earnings and employment. Likewise, areas of blue economy, renewable energy exports, carbon credit markets and digital services offer emerging opportunities that require increased policy focus.
Spending discipline is also needed for fiscal sustainability. If unnecessary recurrent expenditure can be cut down, this will have a significant impact on the reduction of the necessary borrowings.
More interest needs to be paid to administrative expenses, operations and maintenance spending, non-essential spending and foreign travel. All loans borrowed should be used in a productive manner, increasing future economic income, and not for recurrent consumption.
Last but not least, budgeting should be based on economic growth and national development and not political agendas.
The allocation of public resources must be linked to economic impact, productivity and long-term value creation measured by means of objective criteria.
The writer is an economist and a business consultant. [email protected]
Unlock a world of exclusive content today!Unlock a world of exclusive content today!
