From lagging incomes to soaring debts, Ruto's Sh4.73tr budget hits harsh reality

The National Treasury has unveiled a record Sh4.73 trillion budget proposal for the 2026/27 financial year, but the ambitious spending plan is colliding with stubborn reality. 

State coffers are empty, taxpayers are exhausted, and an International Monetary Fund team arriving later this month is expected to deliver a blunt verdict on President William Ruto’s fiscal credibility, putting to test the government’s economic blueprint ahead of next years General Elections. 

Treasury Cabinet Secretary John Mbadi defended the penultimate budget of Ruto’s first term seen as a delicate balancing act aimed at reviving a battered economy while securing the president’s political future. But with 18 months to go before the 2027 general election, time is running out.

The numbers tell the story of an administration caught between campaign promises and arithmetic. Revenue fell short by Sh136.1 billion in the first half of this financial year alone. Tax collections are wilting despite an aggressive digital dragnet. Debt service consumes nearly 40 per cent of ordinary revenue. And an IMF team is scheduled to arrive in Nairobi later this month for talks that will test whether the government can credibly defend its fiscal path. 

The draft 2026 Budget Policy Statement outlines expenditure of Sh4.73 trillion, a 9.9 per cent increase from the current year. Mbadi defended the expansion at a press conference with journalists in his office as routine. “This is a normal budgetary increase,” he said in Nairobi. “There is inflation, there are adjustments to people’s salaries, and costs.”

But the spending plan rests on revenue assumptions that have repeatedly proven optimistic. Treasury projects it will collect Sh3.53 trillion in the 2026/27 fiscal year, leaving a deficit of Sh1.1 trillion to be financed through borrowing. To hit that target, the Kenya Revenue Authority must dramatically outperform its recent track record.

Instead, performance is heading in the opposite direction, analysts caution. “The revenue projections are unrealistic,” said Ian Njoroge, an independent macroeconomist who has reviewed successive government forecasts. “We are seeing a persistent gap between what Treasury says it will collect and what KRA actually delivers. That gap is now structural.” Half-year data presented to Parliament shows ordinary revenue undershot by Sh115.3 billion, while non-tax revenues fell short by Sh20.8 billion. The Treasury’s own presentation to lawmakers blamed “compliance gaps, administration challenges, and revenue-reducing measures introduced by the National Assembly.”

Behind the bureaucratic language lies a more fundamental problem experts say. The formal economy is shrinking relative to the shadow economy, and each new tax measure pushes more activity underground.

“We may be hitting the Laffer Curve limit,” Njoroge said, referring to the economic theory that beyond a certain point, higher tax rates reduce total revenue by discouraging taxable activity. “The state is squeezing the formal sector to exhaustion. Small businesses are making rational choices to operate off the books.” 

The timing could hardly be more awkward. An IMF mission is expected in Nairobi later this month for a fresh review of Kenya’s stalled lending programme. The fund has repeatedly stressed the importance of credible revenue targets and fiscal consolidation.

But credibility of Ruto’s budget plan is precisely what is now in question. The Parliamentary Budget Office, an independent watchdog, has labelled the government’s revenue forecasts “over-optimistic” and warned that “historical KRA shortfalls threaten budget credibility.” The office noted earlier in a report that a persistent mismatch between economic growth projections and actual tax collections, underscoring “the persistent challenge of broadening the tax base and integrating the informal sector.”

The IMF team will scrutinize the same numbers. Kenya is seeking continued access to fund facilities while signalling to markets that it has stabilised its finances. Rating agencies Moody’s and S&P have recently upgraded Kenya’s outlook, citing improved external liquidity. But both agencies also flagged domestic revenue mobilisation as a critical vulnerability.

“Recurring tax shortfalls remain a critical vulnerability,” S&P noted in its January assessment. The half-year revenue miss, coming just weeks after that upgrade, underscores the fragility of the recovery narrative.

While Treasury officials project growth of 5.3 per cent and inflation cooling to 4.6 per cent, the reality for ordinary Kenyans bears little resemblance to the spreadsheets.

Private sector credit growth remains modest at 6.3 per cent, suggesting businesses are not expanding or hiring. The Stanbic Bank Kenya Purchasing Managers’ Index dropped to 51.9 in January from 53.7 in December—still in expansion territory but at a four-month low. Consumers remain under pressure, with fuel prices, school fees, and household goods consuming disposable income that might otherwise flow to taxable consumption.

Mbadi is offering a targeted sweetener. The government plans to raise the zero-tax threshold for Pay As You Earn from Sh24,000 to Sh30,000 per month, a reform expected to benefit over 1.5 million low-income workers. “We want to put more money in the pockets of those at the bottom of the pyramid,” Mbadi said. 

But tax experts note the relief is modest and may be offset by more aggressive enforcement elsewhere. KRA is deploying artificial intelligence, drones, and mandatory electronic invoicing to hunt for cheats. Yet collections continue to lag, suggesting the authority is chasing a diminishing pool of formal taxpayers.

“The administration is caught in a trap,” said a former Treasury official who requested anonymity to speak candidly. “You cannot keep extracting more from the same taxpayers indefinitely. Eventually, they either stop paying or stop transacting formally. We are seeing both.”

The revenue shortfall has forced the government deeper into domestic debt markets. Net domestic borrowing is projected at Sh643.3 billion for the coming fiscal year—money that must be raised from Kenyan commercial banks and institutional investors.

The Parliamentary Budget Office warned this will “exert upward pressure on interest rates, crowd out private sector credit, and heighten refinancing risks.” When the state competes with businesses for local capital, interest rates for loans and working capital remain elevated, suppressing the very job creation Ruto has promised. 

The administration is attempting an end-run around traditional borrowing experts say. Mbadi has securitised the Sh7 road maintenance levy, raising Sh175 billion and clearing contractor arrears up to December 2025. A further securitisation of a Sh5 levy is planned, potentially adding Sh125 billion.

“If you can securitise and raise another 125 billion with normal budgetary support of 50 billion per year, you can successfully pay road contractors for not less than two financial years,” Mbadi said.

On railway development, the CS ruled out new Chinese loans for the Naivasha-to-Kisumu extension, estimated at Sh3.3 trillion. Instead, the government aims to leverage the railway development levy for about Sh2 trillion plus contractor financing.

Experts say securitisation does not create new money—it front-loads future revenue streams. The underlying cash flows must still materialise.

President Ruto rode to power on a promise to uplift the “hustler” class of small traders, farmers, and informal workers.

With 18 months until the election, that improvement remains elusive. The cost-of-living crisis has not abated. Jobs remain scarce. And while inflation has moderated, prices have not fallen back to pre-crisis levels—they have simply stopped rising as fast.

Mbadi’s intervention in Nairobi County infrastructure yesterday signals political sensitivity to urban discontent. “The economic mainstay of this country is Nairobi,” he said. “If Nairobi is in a state that does not support economic activity, the whole economy suffers.” 

As the IMF team prepares to land, Mbadi’s money men are walking a corridor that gets narrower by the week.
The Sh4.73 trillion budget attempts to reconcile these contradictions. It promises tax relief for workers, infrastructure investment, debt payments, and deficit reduction—all at once. 

“President Ruto is shifting from stabilisation to a growth phase,” Njoroge said. “But the success of this shift depends entirely on KRA’s ability to find money that, so far, hasn’t shown up in the books.”