Treasury signals income tax relief with Sh78bn cuts

National Treasury expects the budget deficit in Kenya to increase by Sh143 billion, bringing the overall total to Sh1.288 trillion. Slower economic growth forced officials to lower the tax collection target for the Kenya Revenue Authority (KRA) by Sh81.4 billion, settling at Sh2.777 trillion down from the earlier Sh2.859 trillion outline.

Lower revenue targets follow lower projections for economic expansion in 2026, which dropped to 5.0 percent from an earlier estimate of 5.3 percent. Internal fiscal documents indicate that income tax collections account for the largest reduction, dropping Sh78.6 billion from the initial projection of Sh1.384 trillion down to Sh1.305 trillion.

Corporate income tax performance faced headwinds from elevated operating costs, business financial distress, corporate restructuring, downsizing, and workplace redundancies. These operational challenges directly affected revenue streams from company profits and worker salaries.

The draft 2026 Budget Review and Outlook Paper (BROP) outlines that higher interest payments on domestic borrowing alongside prospective tax relief measures ahead of the 2027 general election contribute to the rising budget gap. Total expenditure targets are rising as public spending obligations expand across multiple government programmes.

To cover the shortfall, net domestic borrowing remains a principal financing channel for state spending. Heavy domestic market debt issuance allows the exchequer to meet immediate obligations, though large government borrowing demands can impact local liquidity conditions and financial market operations.

The National Treasury plan relies on zero-based budgeting principles, requiring state agencies to justify spending proposals to manage limited national resources effectively. Official projections anticipate a slight economic recovery in 2027, provided domestic weather conditions and international macroeconomic factors remain stable.