The National Treasury has been forced to lower some of its revenue projections after weak tax collections and external shocks left the government short of its targets, even in the new financial year.
New figures in the Draft 2027 Budget Policy Statement show that the Kenya Revenue Authority collected Sh488.9 billion in the first two months of the 2026-27 financial year, up to August 2026. The target was Sh516.9 billion, which means the taxman fell short by Sh28.1 billion.
The problem did not start this year. In the financial year that ended in June 2026, the government collected about Sh3.2 trillion against an original target of Sh3.32 trillion, a gap of Sh122.9 billion.
Treasury blames the poor performance mostly on ordinary revenue, mainly income tax and Value Added Tax (VAT). Income tax came in Sh14.4 billion below target, while VAT missed its mark by Sh12.6 billion. Treasury Cabinet Secretary John Mbadi said in the document that most of the major revenue categories underperformed, with these two leading the pack.
Income tax is paid by individuals and businesses on what they earn, while VAT is charged when goods and services are bought. When both fall short, it can point to fewer jobs, smaller incomes or Kenyans spending less in the shops.
The picture got worse as the months went by. By the end of August, ordinary revenue was Sh37.8 billion below target. Higher collections by ministries and government agencies reduced the gap by Sh9.7 billion, which is why the overall shortfall stood at Sh28.1 billion. By the end of September, the ordinary revenue gap had grown to Sh58.2 billion, putting more pressure on the government to do better in the months ahead.
There was some good news. Import duty did better than expected, bringing in Sh31.7 billion against a target of Sh30.2 billion.
Because of these trends, Treasury has revised its expectations for the current financial year, which runs from July 2026 to June 2027. The total revenue target is Sh3.631 trillion, but ordinary revenue is now expected at Sh3.25 trillion, down from the earlier projection of Sh3.39 trillion. For 2027-28, total revenue is now projected at Sh4.004 trillion, lower than the Sh4.044 trillion estimated before.
The numbers show the government leaning more on money collected outside ordinary taxes, including what ministries and agencies raise directly. If tax collections do not improve, the government may struggle to pay for its spending plans. That could mean more borrowing or cuts to expenditure.
Treasury still believes total revenue will reach 18 per cent of the country's economic output by the 2029-30 financial year. But it admits this will depend on stronger tax collection and steady economic growth.
To raise more money, Treasury says it is reviewing tax exemptions and reliefs that reduce what the government collects. These are measured as tax expenditure, which is the revenue the government gives up through exemptions, deductions and other tax benefits. The latest estimates show tax expenditure fell to Sh262.6 billion in 2025 from Sh284.4 billion in 2024, a drop of Sh21.8 billion.
VAT exemptions and reliefs made up the biggest share, at Sh175.8 billion, or 66.9 per cent of all tax expenditure in 2025. The decline came after changes to reliefs on some goods and services that are either exempt from VAT or taxed at zero per cent.
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