Government to cut 2025-26 budget by Sh21bn as revenue shortfalls bite

The National Treasury plans to cut Sh21.1 billion in the current budget, an indicator of the first supplementary budget for the 2025-26 financial year.

According to the details in the Draft 2025 Budget Review and Outlook Paper, the exchequer has lowered its total expenditure target for the 2025-26 financial year to Sh4.269 trillion.

This is down from the Sh4.291 trillion set in the approved baseline budget, marking a Sh21.1 billion reduction.

The revision comes at a time when the treasury is struggling to balance spending plans against weaker-than-expected revenue performance.

This follows the spiral effects of the sustained Gen Z protests last year that saw the state fall back on its revenue targets.

For instance, official data by the taxman shows that, in July 2025, total collections stood at Sh212.6 billion, falling Sh20.1 billion short of the monthly target of Sh232.7 billion.

This underperformance follows a difficult 2024-25 financial year, when tax revenues were dented by the withdrawal of the Finance Bill 2024 and months of street protests that disrupted economic activity.

“This performance, coupled with the weak budget outturn in FY 2024-25, points to continued fiscal pressures and underscores the need for realistic revenue projections in preparing the FY 2026-27 budget,” said National Treasury Cabinet Secretary John Mbadi.

The cut, while modest in the context of a Sh4.2 trillion budget, treasury maintains that it is targeting to shrink the budget deficit to 4.7 percent of GDP in 2025-26, down from 5.8 per cent last year.

However, debt obligations remain a pain point for the country with the exchequer data showing that by the end of June 2025, Kenya’s total public debt stock was estimated at 64 per cent of GDP—above the 55 per cent threshold considered sustainable by the International Monetary Fund.

Debt service costs now absorb more than 60 per cent of government revenue, limiting fiscal space for development programs.

This essentially means that for every Sh100 that is collected by the government, Sh60 per cent is directed towards repaying debt.

“The financial year 2026-27 and medium-term budget are being developed against persistent fiscal challenges, including revenue shortfalls, rising public debt and debt servicing costs, accumulation of pending bills and increasing demands for priority funding,” added Mbadi.

“To address these challenges, the Government will continue implementing its fiscal consolidation strategy aimed at reducing the fiscal deficit and containing debt growth, while safeguarding essential service delivery through enhanced domestic revenue mobilization and prudent expenditure management.”

Despite proposed reforms to streamline the payment to suppliers, the exchequer admits that pending bills still remain a thorn in Treasury’s side.

As of June 2025, ministries, departments, and state corporations owed suppliers and contractors Sh525.9 billion, with treasury now warning that without expenditure rationalisation, the pile-up of arrears could worsen.

Despite the budget squeeze, treasury holds that priority programs under President William Ruto’s Bottom-Up Economic Transformation Agenda (BETA) will be protected.

Spending is expected to remain focused on agricultural transformation, support for small businesses, affordable housing, healthcare, and the digital economy.

The BROP notes that ministries and departments will be required to rigorously review their projects and eliminate low-impact spending.

“The zero-based budgeting approach—where every expenditure must be justified afresh is expected to guide allocations in both the supplementary and future budgets,” added Mbadi.

In previous years, budgetary adjustments have often shifted money away from development spending to recurrent obligations such as salaries, pensions and interest payments.

According to the report, the government will be looking to reform revenue measures, with a focus on rationalising tax expenditures, expanding the tax base, improving compliance and streamlining tax structures to stimulate investment.

“Simultaneously, public financial management will be strengthened through re-engineering of the pension management system, integrated human resource systems, expanded Public-Private Partnerships and governance reforms in State Corporations.”

The BROP sets the tone for the 2026 Budget Policy Statement, due early next year. In that medium-term framework, the government plans to raise Sh3.58 trillion in revenues in 2026-27, equivalent to 17.1 per cent of GDP, while spending is projected at Sh4.65 trillion.

That trajectory points to continued reliance on borrowing, though Treasury says it will prioritise concessional loans, expand the use of public-private partnerships and deepen domestic debt markets to ease refinancing risks.