IMF acid test for Mbadi's plan to cut taxes in the next budget

National Treasury CS John Mbadi during his vetting as the CS. [Elvis Ogina, Standard]

In a surprising announcement, the government has unveiled a new proposal to reduce controversial taxes, a move that could provide much-needed relief to citizens but raises concern about the government's ability to manage public debt.

Newly appointed Cabinet Secretary John Mbadi revealed plans to cut the value-added tax (VAT) from 16 per cent to 14 per cent, decrease corporation tax from 30 per cent to 25 per cent, and lower pay-as-you-earn (PAYE) rates, although specific details on the latter tax remain unspecified.

The proposal is part of the Treasury's medium-term revenue strategy, which aims to improve tax administration, enhance compliance, and expand the tax base.

During the unveiling of the 2025-26 Budget preparation process in Nairobi on Monday, Mr Mbadi said: "I will surprise you; in the medium term, we want to reduce tax rates. We are not looking at increasing taxes."

While this plan is likely to resonate with Kenyans burdened by rising costs of living, experts said it places the CS in a challenging position.

The new tax strategy could be a significant test for him, as it must balance immediate economic relief with the long-term sustainability of government finances, they said.

Some experts believe that reducing taxes could spur growth and increase compliance among hard-pressed taxpayers who may feel more incentivised to contribute.

"A lower tax burden could encourage spending and investment, which might ultimately lead to higher tax revenues in the long run," noted business leader Samuel Karanja.

However, Kenya is currently navigating an International Monetary Fund (IMF) programme designed to stabilise the economy and address soaring public debt.

The IMF stresses the importance of fiscal discipline and revenue generation to ensure economic stability.

As the government enters the budgetary process, the challenge will be to implement these tax cuts while adhering to the fiscal targets outlined in the IMF programme, experts said.

Treasury will need to outline a clear strategy for maintaining revenue levels despite the proposed reductions, experts say.

Some experts, however, argued that the proposed tax cuts could undermine the government's ability to raise adequate funds to service its debt.

"This could be a double-edged sword," said economic analyst Jane Mwangi. "While tax relief is essential for stimulating the economy, especially in these challenging times, it is crucial that the government finds a balance to ensure that it does not compromise its financial obligations."

As Kenyans await further details, the announcement has ignited a conversation about the delicate balance between tax policy and debt management, with the potential for significant implications for the country's economic future.

Analysts say the path ahead for CS Mbadi is fraught with challenges as he navigates these competing priorities.