Treasury warns KRA revenue misses may force more borrowing in Ruto's final budget before 2027 polls

The National Treasury has cast doubt on the Kenya Revenue Authority's ability to meet its collection targets, admitting in internal documents that ordinary revenue has missed official projections in nine of the past 11 years, a record that now threatens funding for President William Ruto's final budget before the August 2027 elections.

"The performance of Ordinary revenue over the period 2015/16 to 2025/26, has been below target except for FY 2021/22 when the target was surpassed," the Treasury states in the draft 2027 Budget Policy Statement, a rare admission that KRA's collection capacity, not just economic conditions, has been a persistent constraint.

That shortfall comes at a time the government already spends nearly half of its ordinary revenue servicing debt  and pensions, leaving little room for the development programmes the Ruto administration has promised to complete before voters go to the polls.

In the first two months of the current fiscal year, total revenue, including ministerial Appropriation-in-Aid, reached Sh488.9 billion against a target of Sh516.9 billion, a shortfall of Sh28.1 billion. Ordinary revenue missed by Sh37.8 billion.

"The ordinary revenue collection amounted to Sh383.9 billion against a target of Sh421.8 billion. The underperformance was recorded across most of the major revenue categories, particularly income tax and value added tax (VAT), which were below target by Sh14.4 billion and Sh12.6 billion, respectively," the Treasury says.

By end-September 2026, overall revenue collection was below target, with an ordinary revenue shortfall of Sh58.2 billion. The Treasury warns that "if this trend continues, it is bound to affect the projected ordinary revenue for FY 2027/28."

KRA has rolled out a series of reforms aimed at broadening the tax base and plugging leakages. The Treasury cites the National Tax Policy, the Medium-Term Revenue Strategy, e-Government Procurement, the Treasury Single Account, digitisation of pension and payroll administration and zero-based budgeting.

"Deepening tax administration reforms through sustained investment in technology to modernize the tax framework, improve compliance, broaden the tax base, strengthen customs valuation, and seal revenue leakages," the Treasury says, describing the government's approach.

Yet its own figures show those reforms have not been enough. Over the past four years, total revenue underperformed approved targets by an average of Sh152 billion annually, including Sh142 billion in ordinary revenue.

"Despite the relative accuracy of macroeconomic forecasts, budget execution continued to exhibit deviations from approved targets," the Treasury says, an admission that KRA's collection capacity remains a binding constraint.

The Treasury also acknowledges that tax expenditures, incentives and exemptions, remain substantial, reporting total tax expenditure of Sh262.6 billion (1.49 per cent of GDP) in 2025, down from Sh284.4 billion in 2024, with domestic VAT alone accounting for Sh175.8 billion.

"The decline in overall tax expenditure reflects progress in rationalising tax incentives and improving the efficiency of the tax system. Nevertheless, the varying trends across tax heads and the significant revenue forgone underscore the need for continued assessment of the costs, effectiveness and contribution of tax incentives to national development priorities."

The warning comes amid previous fears over the level of public debt, which the Treasury's own budget paper puts at 65.6 per cent of GDP in present-value terms, above its 55±5 per cent anchor.

"In FY 2024/25 and FY 2025/26 period, nearly half of ordinary revenue was used for CFS expenditures, significantly reducing fiscal space for development and other priority spending," the BPS states. "Under the CFS budget, interest payments take the lion share of ordinary revenues at 42 per cent in FY 2026/27 from 14.7 per cent in FY 2013/14."

The Treasury projects Consolidated Fund Services, mostly interest and pensions, at Sh1.72 trillion in 2027/28, or 7.5 per cent of GDP, and concedes the debt stock is above its own anchor. "Debt at Present Value is recorded at 65.6 percent of GDP against a of PV 55±5 percent anchor. This calls for continuous liability management and strong fiscal consolidation that can yield a primary surplus of at least 2.3 per cent of GDP each year."

When revenue falls short, the government does not simply cut spending, it plugs the gap by borrowing more. The Treasury warns that revenue underperformance "may widen the fiscal deficit and increase the Government's borrowing requirements," raising "public debt and future debt service obligations."

The 2027/28 fiscal deficit is projected at Sh1.35 trillion, or 5.9 per cent of GDP, financed by Sh423.8 billion in net external borrowing and Sh929.1 billion in net domestic borrowing. Any further miss pushes that financing requirement higher.

"Based on these proposed allocations, the National Government would face a financing gap of Sh291.6 billion. This shortfall would constrain the implementation of National Government functions and necessitate additional borrowing, thereby  exerting further pressure on the fiscal framework."

Under its statement of specific fiscal risks, the Treasury lists revenue underperformance as a debt risk. "Underperformance of revenues relative to targeted levels may widen the fiscal deficit and increase the Government's borrowing requirements. Higher borrowing requirements would, in turn, increase public debt and future debt service obligations."

Total revenue is projected at Sh4.0 trillion in FY 2027/28, "with a 95 per cent confidence interval ranging from Sh3.616 trillion to Sh4.392 trillion, corresponding to a standard deviation of Sh198 billion" a range of nearly Sh800 billion.

Development expenditure is projected at Sh915.8 billion (4.0 per cent of GDP) in FY 2027/28 barely above the 3.6 per cent recorded in FY 2026/27 as the government pursues "growth-supportive fiscal consolidation efforts by restraining expenditures and strengthening revenue mobilization." County pending bills stood at Sh156.8 billion as at March 31, 2026 about 25 per cent of the aggregate FY 2025/26 county budget while Sh155.3 billion in verified national pending bills remains unpaid.

The BPS puts the revenue ambition at Sh3.25 trillion in ordinary revenue for FY 2027/28. The actual FY 2025/26 outturn was Sh2.59 trillion in ordinary revenue, with tax revenue of Sh2.47 trillion. Total revenue including A-I-A was Sh3.2 trillion in FY 2025/26, up from Sh2.2 trillion in FY 2021/22.

The Treasury projects tax revenue rising to Sh3.14 trillion in 2027/28 a jump of roughly 27 per cent over the 2025/26 outturn in two years. Given KRA's record, analysts say that is optimistic.

The Treasury's doubts echo warnings from former officials, including a former Treasury Cabinet Secretary and a former KRA Commissioner General, both since relieved of their duties, that the government's tax approach may be self-defeating.

Former Treasury Cabinet Secretary Professor Njuguna Ndung'u, a former Central Bank of Kenya governor, said higher taxes do not necessarily lead to higher collections, alluding to the Laffer Curve principle that  lower rates can stimulate growth and yield more revenue.

"We have realised that the high tax rates cannot generate high tax revenue," Ndung'u said during an IMF African Fiscal Forum. "High tax rates will also always create an incentive to escape taxes when you can. And so we have seen that high tax rates go hand in hand with a lower tax base or lower compliance."

He added that "we cannot raise adequate revenues beyond 14.1 per cent of GDP, even if we get a vibrant economy," and that "we need economic recovery for us to generate even higher taxes."

Earlier, then KRA Commissioner General Humphrey Wattanga, who has since left the tax authority, told the National Assembly Finance Committee that bringing the informal economy into the tax net was proving difficult, warning of declines in some specific taxes.

The admissions underline the revenue-raising challenges facing the cash-strapped Kenya Kwanza government, which has introduced contentious measures.

A spot check by The Standard earlier revealed that some traders have resorted to abandoning electronic payment methods to avoid increased tax compliance.

For Ruto's administration, the numbers point to a familiar squeeze, a tax agency that consistently misses targets, a budget that assumes it will not, and an election deadline that removes the usual room for manoeuvre.

The draft BPS will be submitted to Parliament by November 16, with the budget process due to conclude by March 2027. Whether KRA can deliver the Sh3.25 trillion the Treasury is counting on, or whether another downward revision is coming, is the question that will define Ruto's last budget before Kenyans vote.