John Mbadi proposes more taxes to finance Sh4.3tr maiden budget

Treasury Cabinet Secretary John Mbadi. Treasury is banking on tax reforms and an expanded tax base to grow tax revenues. [File, Standard] Kenyans should brace themselves for higher taxes in the next financial year with the government seeking to increase the revenue collection target, which is expected to finance an expanded budget. The National Treasury, in new budget documents, has set the target for the Kenya Revenue Authority (KRA) at Sh3.018 trillion over the 2025-26 financial year, which is 14.7 per cent higher than the Sh2.631 trillion that the taxman was expected to collect over the current financial year. Treasury said it would put in place a mix measures including tax reforms and expanded tax base to grow tax revenues, but in the past it has depended on hiking taxes for the existing pool of taxpayers to increase collections. Total revenue, which include revenues to ministries through levies and other fees, is expected to reach Sh3.516 trillion, which is 14.9 per cent higher that the Sh3.06 trillion projected total revenues over this financial year. The money that KRA and other government agencies will collect will enable the government to finance the 2025-26 budget, which has also grown by 11.5 per cent to Sh4.329 trillion from Sh3.88 trillion over the current financial year. In the draft 2025 Budget Policy Statement (BPS), which is a broad guide to government spending plans for the next financial year that starts July 1 this year, Treasury said the target for ordinary tax revenues will grow incrementally to reach Sh4.4 trillion by the 2028-29 financial year. The 2025-26 budget will be the first for Cabinet Secretary John Mbadi, who replaced Njuguna Ndung'u following last year's anti-government protests that saw President William Ruto reshuffle his Cabinet, bringing onboard opposition politicians. "Government will implement a mix of tax administrative and tax policy measures in order to boost revenue collection efforts by KRA to over Sh4 trillion in the medium term thereby supporting economic activity," said Treasury in the BPS. "In particular, the government will focus on domestic resource mobilization efforts that include implementation of the National Tax Policy and Medium-Term Revenue Strategy 2024/25-2026/27, strengthening tax administration for enhanced compliance through expansion of the tax base, minimising tax expenditures, leveraging on technology to revolutionise tax processes, sealing revenue loopholes and enhancing the efficiency of tax system; and focus on non-tax revenues that Ministries, Departments and Agencies can raise through the services they offer to the public." Other measures will include implementation of the tax administrative reforms to reduce tax expenditures and expanding the tax base and strengthening compliance. Treasury said measures outlined in the BPS "are expected to improve economy-wide efficiencies, create an enabling environment that supports growth in businesses and investment, reduce the cost of living as well as enhance the wellbeing of all Kenyans." "The tight fiscal stance is expected to reduce debt vulnerabilities through implementation of reforms to broaden the domestic tax base and improve tax compliance. "Expenditure rationalisation will continue to focus on enhanced efficiency of public investments, better targeting of subsidies and transfers, addressing weakness in state corporations, and digital delivery of public services. Social safety nets and fiscal risk management framework will be enhanced," the ministry said. The government has over time been accused of being unrealistic in its tax collection targets. Last year, National Assembly's select committee on Budget and Appropriations noted that Treasury has been unrealistic in its revenue collection targets. "The committee observed that the National Treasury continues to overestimate revenue, resulting in recurring deficits and necessitating increased borrowing to cover shortfalls," the Committee said. In a bid to meet the tax revenue target, the government ran into problems last year as it sought to grow tax revenues through high tax proposals that were contained in the controversial Finance Bill 2024. The proposals caused public uproar and spawned the Gen Z protests, forcing Ruto to withdraw the Bill despite it having sailed through Parliament. Implementation of projects is still reeling from the impact of the withdrawal of the bill. "Budget implementation in the first quarter of the FY2024/25 was impeded by... protests that led to a slowdown of economic activities; the withdrawal of Finance Bill 2024 that was expected to raise an additional revenue amounting to Sh344.3 billion," said Treasury. Of the Sh4.329 trillion that the government plans to spend over the next financial year, Sh3.077 will be recurrent expenditure which is more than Sh2,826 trillion that will be spent for recurrent purposes this year. Another Sh804.7 billion will be development spending, which is significantly higher than the Sh599.5 billion that it plans to spend on development projects this year. County transfers will amount to Sh442.7 billion, which will be Sh8.4 billion lower than the Sh451.1 billion that the devolved functions will receive over the current financial year. The Sh3.516 trillion that Treasury expects to raise through ordinary tax revenue and Ministerial Appropriations in Aid will still be inadequate to meet its Sh4.329 trillion spending plan. It expects that the revenues in addition to grants of Sh53.2 billion, it will be left with a Sh759.4 billion deficit that it expects will be filled through borrowing. The deficit will be plugged by borrowing Sh213.7 billion from foreign lenders, which is lower than the Sh355.5 billion over the current financial year. It will borrow another Sh545.8 billion from domestic lenders. Domestic borrowing will increase substantially from the Sh413.1 billion the government plans to borrow from local lenders this year through such instruments as Treasury Bonds. "The domestic debt market remains one of fundamental funding sources as it has contributed to more than half of the total funding requirements over the years and mitigates against shocks in the external debt markets. "The government is committed to continuous implementation of reforms aimed at improving efficiency in the domestic market and diversify the investor base," said Treasury, adding that it is considering the issuance of the mobile phones-based M-Akiba bond aimed at ushering in retail investors to the bond market. The government said it would prioritise concessional loans when borrowing from foreign lenders and only go for non-concessional and commercial external borrowing for projects that cannot secure concessional financing and are in line with the government development agenda. "The government will also explore other sources of financing including green and climate change financing options, if the macro-economic conditions improve. "In addition, the government may explore new markets through issuing Panda and Samurai Bonds as part of instruments diversification and deficit financing options," said Treasury. "To moderate debt accumulation and reduce debt service over the medium-term, the Government will sustain fiscal consolidation efforts over the medium term to restore fiscal space."

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