Revenue shortfalls, debt risks loom as Treasury warns of tight fiscal space

While the National Treasury projects continued economic growth and insists that fiscal consolidation remains on track, the policy document reveals a more constrained reality.

It foresees weaker-than-expected revenue collection, pressure for supplementary budgets and heightened vulnerability to debt and external shocks.

This is despite plans to increase the annual expenditure to about Sh4.65 trillion, an increase of about Sh380 billion from the 2025-26 budget.

By the end of September 2025, total revenue, including Appropriation-in-Aid, stood at Sh709.6 billion against a target of Sh793.2 billion, leaving a significant shortfall early in the financial year.

Ordinary revenue amounted to Sh573.5 billion, falling below projections and forcing the Treasury to signal the need for supplementary estimates.

The policy statement further notes that, based on the projected revenue and expenditure framework, the fiscal deficit, including grants, is expected to reach Sh1.1 trillion (5.3 per cent of GDP) in the 2026-27 financial year.

This is from the projected deficit of Sh901 billion (4.7 per cent of GDP) in the 2025-26 financial year.

“The FY 2026-27 fiscal deficit will be financed through net external borrowing amounting to Sh99.5 billion (0.5 per cent of GDP) and net domestic financing of Sh1,006.6 billion (4.8 per cent of GDP),” it says.

To fill the gap, Treasury says it will deepen tax policy and administrative reforms to expand the tax base, minimise tax expenditures, enhance compliance and leverage technology to modernise tax processes.

Concurrently, expenditure management will be strengthened through the full operationalisation of e-procurement, adoption of Zero-Based Budgeting principles [justifying all expenses], automation of public investment management, digitisation of pension and payroll systems and accelerated transition toward accrual accounting, it says.

Given the constrained fiscal space, Treasury says prioritisation of expenditure will remain essential. Ministries and agencies will be required to re-examine all existing and proposed programmes and eliminate low-impact activities.

They will also be required to ensure resource allocation focuses on high-priority, high-return interventions that drive inclusive growth, create jobs and increase exports.

The revenue gap comes at a time when the government is attempting to balance fiscal consolidation with the protection of priority programmes under the Bottom-Up Economic Transformation Agenda, the Kenya Kwanza economic blueprint.

But beyond immediate revenue challenges, the policy statement flags deeper structural risks that could destabilise public finances if left unaddressed.

Kenya’s ever-increasing debt remains a major concern.

Although Treasury maintains that public debt is sustainable, it acknowledges significant exposure to macroeconomic shocks, including exchange rate volatility, tighter global financial conditions and rising interest costs.

Global growth uncertainty, geopolitical tensions and elevated trade-policy risks are expected to hit emerging economies, raise borrowing costs and limit access to concessional financing.

With the government relying on domestic and external borrowing, this creates a fragile balancing act.

The policy statement warns that adverse changes in macroeconomic assumptions, such as slower growth, currency depreciation or higher interest rates, risk worsening debt dynamics, increasing debt-servicing costs and crowding out development spending.

Already, debt servicing remains one of the largest expenditure items in the budget, limiting the government’s ability to expand social spending without raising taxes or borrowing further.

Climate change is explicitly framed not just as an environmental threat but as a fiscal risk with direct implications for debt sustainability.

Treasury identifies climate-related shocks such as drought, which is already causing havoc in Northeastern region, floods and extreme weather events as potential drivers of unplanned expenditure, revenue losses and increased borrowing.

Agriculture, energy and infrastructure sectors are particularly vulnerable, exposing the budget to sudden financing pressures during climate emergencies.

The BPS further notes that these risks can crystallise into contingent liabilities for the government, adding that climate shocks may force the state to intervene through subsidies, reconstruction spending or emergency support, which is often outside the original budget.

Such pressures could further strain fiscal discipline and undermine consolidation efforts, especially if shocks coincide with periods of weak revenue performance.

The Treasury’s strategy hinges on improving revenue mobilisation, tightening expenditure controls and managing debt prudently, while scaling up public-private partnerships to reduce pressure on public finances.

Without outrightly saying it, Treasury is painting a delicate balancing act in efforts to raise more revenue without triggering economic or political backlash ahead of the 2027 polls.