Treasury signals income tax relief with Sh78bn cuts

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The Treasury expects Kenya’s budget deficit to grow by Sh143 billion to Sh1.288 trillion, driven by higher interest payments on domestic debt and potential tax cuts in the run-up to the 2027 General Election.

A wider budget deficit signals increased borrowing because government spending has surpassed revenues by a larger margin than previously planned.

New expenditure and revenue projections by the Treasury show that the 2026/27 budget is expected to increase by Sh40.5 billion to Sh4.86 trillion, up from the Sh4.82 trillion approved in the June 2026 budget statement.

At the same time, the government is cutting its projected revenue for the year by Sh101.9 billion to Sh3.529 trillion.

Income taxes shoulder the biggest share of the revenue revision at Sh78.6 billion to Sh2.78 trillion, indicating that Treasury anticipates lower collections from businesses and workers in an economy facing growth headwinds due to global geopolitical shocks and the expected El Niño rains.

While official targets remain as approved in the June budget, the Draft 2026 Budget Review and Outlook Paper (BROP) indicates the expected changes in the fiscal framework that are usually implemented through supplementary budgets.

Excise duty and VAT collections are being revised downwards by Sh17.4 billion and Sh18.3 billion to Sh364.8 billion and Sh810.3 billion respectively, while non-tax revenue is expected at Sh106.6 billion, compared to the projection ofSh127.1 billion in the June budget.

However, the state is raising the import duty target from Sh186.2 billion to Sh220.8 billion.

“Kenya’s economic growth outlook for 2026 has been revised downward to five percent from the earlier projection of 5.3 percent, reflecting the adverse effects of the Middle East conflict on domestic economic activity,” the BROP says.

Treasury Cabinet Secretary John Mbadi is expected to review Pay-As-You-Earn (PAYE) tax bands, further denting collections from workers.

Ahead of the June budget, the minister said the proposed PAYE cuts would blow a Sh35 billion hole in government revenue.

Having already halved VAT on fuel to eight percent in April after a price surge caused by the war in Iran, the Treasury paused the payslip relief 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.

Even as the National Treasury anticipates revenue headwinds, higher interest charges on domestic debt are expected to force a Sh40.5 billion increase in expenditure.

The BROP projects that interest charges on the government domestic debt of Sh7.3 trillion will hit Sh1.03 trillion this financial year, compared to the June budget estimate of Sh986.7 billion.

In the 2025/26 fiscal year, the government spent about Sh862.7 billion on domestic interest payments, benefiting from a decline in interest rates in 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 Sh1.04 trillion from the domestic market, and Sh247.2 billion from external lenders.

The June budget had pegged the domestic borrowing at Sh898 billion, while external borrowing remains unchanged as per the projections of the BROP.

Reporting originally appeared via Business Daily. Read the full source for additional context.