(NAIROBI, KENYA) – Kenya’s budget deficit is expected to widen by KES 143 billion to KES 1.288 trillion in the current financial year, driven by higher interest payments on domestic debt and possible tax cuts ahead of the 2027 General Election.
A wider budget deficit points to increased borrowing because government spending has outpaced revenues by a larger margin than earlier planned. That is about $9.93 billion and £7.86 billion, compared with the previous projection.
New expenditure and revenue projections from the National Treasury show that the 2026/27 budget is expected to rise by KES 40.5 billion to KES 4.86 trillion, up from the KES 4.82 trillion approved in the June 2026 budget statement. The revised figure is about $37.5 billion and £29.7 billion.
At the same time, the government is cutting its projected revenue for the year by KES 101.9 billion to KES 3.529 trillion. That is about $27.2 billion and £21.5 billion.
Income taxes carry the biggest share of the revenue revision at KES 78.6 billion, bringing the total to KES 2.78 trillion. The Treasury expects lower collections from businesses and workers in an economy facing growth pressures from global geopolitical shocks and the expected El Niño rains. The income tax figure is about $21.4 billion and £16.9 billion.
Official targets remain as approved in the June budget. However, the Draft 2026 Budget Review and Outlook Paper shows the expected changes in the fiscal framework that are usually carried out through supplementary budgets.
Excise duty collections are being revised down by KES 17.4 billion to KES 364.8 billion. VAT collections are being cut by KES 18.3 billion to KES 810.3 billion. Non tax revenue is expected at KES 106.6 billion, compared with the June budget projection of KES 127.1 billion.
The state is however raising the import duty target from KES 186.2 billion to KES 220.8 billion.
The Budget Review and Outlook Paper says Kenya’s economic growth outlook for 2026 has been revised down to 5% from the earlier projection of 5.3%. It cites the adverse effects of the Middle East conflict on domestic economic activity.
Treasury Cabinet Secretary John Mbadi is expected to review Pay As You Earn tax bands, which would further reduce collections from workers. Ahead of the June budget, the minister said the proposed PAYE cuts would create a KES 35 billion hole in government revenue. That is about $270 million and £213 million.
The Treasury had already halved VAT on fuel to 8% in April after a price surge caused by the war in Iran. It then paused the payslip relief that Mr Mbadi and President William Ruto had been promising since February. In last month’s fuel price review, the lower VAT arrangement was extended to October.
While the National Treasury expects revenue pressures, higher interest charges on domestic debt are expected to force a KES 40.5 billion increase in expenditure. The Budget Review and Outlook Paper projects that interest charges on the government domestic debt of KES 7.3 trillion will reach KES 1.03 trillion this financial year, compared with the June budget estimate of KES 986.7 billion.
In the 2025/26 fiscal year, the government spent about KES 862.7 billion on domestic interest payments. It benefited from a decline in interest rates on Treasury bills and bonds through the year.
The war in Iran has led to a jump in inflation due to higher energy prices, putting upward pressure on interest rates.
To fund the higher budget deficit, the government is expected to borrow KES 1.04 trillion from the domestic market and KES 247.2 billion from external lenders. The June budget had set domestic borrowing at KES 898 billion, while external borrowing remains unchanged according to the Budget Review and Outlook Paper.