The Kenyan government is set to face a significant fiscal challenge in the 2027/28 financial year, with the Treasury forecasting a budget deficit of Ksh1.321 trillion, equivalent to 5.7% of the country’s GDP.
This shortfall will be funded through a combination of Ksh1.085 trillion in domestic borrowing and Ksh235.9 billion in external loans, according to the 2026 Budget Review and Outlook Paper. The large deficit underscores the government's struggle to balance financing public services, reducing fiscal pressures, and fostering economic growth.
Revenue Collection Pressures
To bridge the gap, the Treasury plans to intensify revenue collection efforts, projecting total revenues of Ksh3.943 trillion in 2027/28, up from Ksh3.199 trillion in 2025/26. Ordinary revenue is expected to rise to Ksh3.208 trillion, supported by ongoing tax reforms and enhanced administration.
However, this approach may increase the tax burden on households and businesses. Tax compliance and revenue mobilisation will remain key government priorities, potentially leading to heightened scrutiny of businesses and increased costs passed on to consumers.
The government’s revenue targets face challenges, as seen in the 2025/26 fiscal year when total revenue missed the target by Ksh60.2 billion. Corporate income tax collections were particularly affected by operational difficulties in the private sector, including business restructuring and closures.
Impact of Borrowing on Credit
Heavy domestic borrowing of Ksh1.085 trillion could strain financial markets by competing with private sector borrowers for funds. This competition may push up borrowing costs, affecting business expansion, investment decisions, and household access to credit such as mortgages and personal loans.
The Treasury aims to mitigate these risks by extending debt maturities, developing domestic debt markets, and balancing concessional with commercial borrowing.
Government Spending Under Constraint
Public expenditure will also face tighter controls, with total spending projected at Ksh5.323 trillion. This includes Ksh3.887 trillion in recurrent costs, Ksh958 billion for development projects, and Ksh472.8 billion in county transfers.
The government plans to apply zero-based budgeting, requiring ministries to justify all spending proposals to ensure resources are directed towards growth, employment, and private-sector development. This may lead to cuts in lower-priority programs, potentially impacting some government projects and contractors.
The fiscal strategy emphasizes enhancing domestic revenue, prudent expenditure management, and focusing limited funds on national priorities.
In summary, Kenya’s 2027 budget will navigate a complex balancing act: raising sufficient revenue without overburdening households and businesses, and borrowing to cover the deficit without stifling private investment.
