By CPA Peter Kibet Kitur
Can Kenya’s bold fiscal reforms outpace global headwinds? The 2025 budget stakes its claim—but the real work starts now.
The 2025/2026 budget has been introduced at a time when both the global and domestic economic outlooks remain subdued.
According to the latest World Economic Outlook, global growth is projected to slow to 2.8% in 2025, with only a modest recovery to 3.0% in 2026. Emerging and developing economies, including Sub-Saharan Africa, are also expected to face decelerated growth due to persistent geopolitical tensions and global economic uncertainty. Domestically, Kenya grapples with a tight fiscal environment, rising public debt, and constrained household incomes, which pose significant challenges to effective budgetary management. Against this backdrop, the Finance Bill 2025 and the accompanying Tax Laws (Amendment) Act 2024 seek to align fiscal policy with the objectives of the Medium-Term Revenue Strategy (MTRS), National Tax Policy, and the Bottom-up Economic Transformation Agenda (BETA).
As referenced above, the latest World Economic Outlook projects global economic growth to decelerate to 2.8% in 2025 before a modest rebound to 3.0% in 2026, following a 3.3% expansion in 2024. Similarly, emerging economies are expected to experience a slowdown, with growth projected at 3.7% in 2025, compared to 4.3% in the previous year. In Sub-Saharan Africa, the growth forecast has also been revised downward from 4.0% in 2024 to 3.8% in 2025. Heightened trade disputes and ongoing geopolitical tensions, such as the Russia-Ukraine war and conflicts in the Middle East, largely influence these global and regional projections. Domestically, Kenya is grappling with constrained fiscal space, rising levels of public debt, and declining household disposable income, all of which compound the economic pressures surrounding the implementation of the 2025 Finance Bill.
Kenya continues to face persistent challenges related to the sustainability and predictability of its budgeting process even in the wake of the National Tax Policy that came into force in 2024. Supplementary budgets, as witnessed in the financial year 2024/2025, often necessitated by changing revenue realities, highlight ongoing issues with budget credibility. The consistent deviation between projected and actual revenue collections also points to deeper concerns in revenue forecasting accuracy. These shortcomings undermine fiscal planning and limit the government’s ability to align spending with national priorities effectively.
The Finance Bill 2025 and the Tax Laws (Amendment) Act 2024 aim to address several Medium-Term Revenue Strategy (MTRS) objectives. In Value Added Tax (VAT), key reforms include rationalizing exempt and zero-rated supplies to align with global best practices and removing the threshold for input tax apportionment. However, critical policy concerns remain unresolved, including the potential review of VAT rates and proposals to introduce VAT on education and insurance services. On Income Tax, steps have been taken to expand the tax base through a review of exemptions and adjustments to personal income tax bands, though reducing the corporate income tax rate from 30% to 25% is still pending.
Excise duty reforms are also part of the tax strategy, introducing excise on coal and restructuring the taxation model for non-alcoholic beverages to consider sugar content. These were implemented under the Tax Laws (Amendment) Act 2024. In tax administration, efforts to modernize systems have seen the rollout of electronic Tax Invoice Management Systems (e-TIMs) and e-register of Imports and Transfers (e-RITs), alongside improved alignment of tariff codes with official tariff books. These initiatives are expected to enhance compliance and transparency in tax collection.
The broader objective of these reforms is to stimulate investment by eliminating market distortions and optimizing tax expenditures. Additionally, the government is targeting a significant improvement in revenue performance—raising the tax-to-GDP ratio from 13.5% in FY 2022/23 to 20% by FY 2026/27. Increasing tax compliance from 70% to 90% during the same period is also critical. These targets are crucial given the growing expenditure needs, with total government spending projected to rise from Kes 4.01 trillion in FY 2024/25 to Kes 4,291,9 billion in FY 2025/26. Major expenditure areas include interest payments, pensions and net lending (Kes 1,3373 billion), county transfers (Kes 405.1 billion), and ministerial recurrent expenditure (Kes 1,805.0 billion).
To finance the 2025/26 budget, the government expects total revenues of Kes 3,321.7 billion and grants of Kes 46.9 billion. While revenue projections are improving, the fiscal gap remains notable, necessitating further tax policy, administration, and expenditure management reforms to ensure sustainable and inclusive economic growth. The budget deficit is Kes 923.2 billion, which is 4.8% of GDP. The deficit financing is expected to be Kes 287.7 billion for net foreign financing and Kes 635.5 billion for domestic net funding.
Alignment with the BETA
Under the Bottom-up Economic Transformation Agenda (BETA), the government allocated substantial resources to key thematic areas to accelerate inclusive development and economic growth. Agriculture and Food Security has been allocated Kes 47.6 billion to promote sustainable farming and food production. The Housing, Urban Development, and Public Works sector receives Kes 120.2 billion to address the housing deficit and improve urban infrastructure. Information, Communication, and Technology were allocated Kes 12.7 billion to enhance digital transformation. The Health Sector received Kes 133.4 billion to improve healthcare delivery, while Governance and Justice allocated Kes 47.7 billion to strengthen the rule of law and institutional capacity. Manufacturing and Industrialization will receive Kes 18.0 billion to boost local production and industrial competitiveness, and Enhancing National Security is prioritized with Kes 464.9 billion.
In addition, Kes 318.1 billion has been set aside for Investing in Critical Infrastructure to support roads, energy, and transport networks. Enhancing Access to Quality Education Outcomes receives the largest thematic allocation at Kes 658.4 billion, reinforcing the country’s commitment to human capital development. Environmental Protection, Water, and Natural Resources have been allocated Kes 103.8 billion to promote sustainability and resilience. Equity, Poverty Reduction, and Women and Youth Empowerment will benefit from Kes 105.6 billion, while Social Protection and Affirmative Action are supported by Kes 41.3 billion. To boost tourism, sports, and cultural heritage, Kes 29.7 billion has been allocated. Lastly, County Governments are set to receive Kes 405.1 billion as an Equitable Share to support devolved governance and service delivery at the grassroots.
The Finance Bill 2025 introduces key changes to Kenya’s tax framework, blending new incentives with notable repeals. A significant proposal is raising the tax-free per diem limit for private sector employees from KES 2,000 to KES 10,000, aligning it with the public sector to improve equity and boost take-home pay for work travel. The Digital Asset Tax is also halved from 3.0% to 1.5%, signalling a shift toward fostering digital economy growth and compliance. However, the Bill removes several investment-friendly provisions, including the 100% investment allowance for hotel buildings, manufacturing plants, and SEZ projects—replacing it with 50% in year one and 25% annually thereafter. It also scraps the 15% corporate tax for firms building 400 housing units yearly and for local motor vehicle assemblers. While these repeals may raise short-term revenue, they could weaken long-term investment and development goals.
Conclusion
The 2025/2026 Budget underscores the government’s commitment to fiscal consolidation and economic transformation through targeted tax reforms and expenditure management. The Finance Bill 2025 proposes a mix of policy shifts—some aimed at increasing disposable income and improving compliance. Others focused on phasing out tax incentives to widen the tax base. However, removing critical investment deductions and preferential tax rates may have long-term implications for industrial growth and investor confidence. As the government targets a rise in the tax-to-GDP ratio from 13.5% to 20% by FY 2026/2027, the success of the 2025/2026 Budget will depend on the practical implementation of these reforms, prudent fiscal management, and the ability to balance revenue needs with inclusive economic growth.
CPA Peter Kibet Kitur is a Tax consultant with Bon and Drew Associates, serves in the public sector, is the ICPAK Central Rift Region’s Branch Chairman and is a member of ICPAK’s Devolution subcommittee.
pkitur.cpa@gmail.com.
