The Parliamentary Budget Office (PBO) has directed the National Treasury to overhaul its revenue and expenditure frameworks, warning that “overly ambitious” tax projections are fueling a persistent fiscal crisis. In its latest Budget Watch report for the 2025/26 financial year, the technical advisory body cautioned that the government’s strategy of high taxation has reached a breaking point, actively encouraging tax evasion and undermining economic stability.
A Sh342 Billion Revenue Gap
According to the PBO findings presented to Parliament, the government has missed its revenue collection targets by a staggering Sh342 billion over the last two financial years. The report attributes this shortfall directly to unrealistic tax measures that failed to account for taxpayer behavior and economic realities.
The fiscal pressure has been exacerbated by a series of underperforming legislative interventions:
- Finance Act 2023: Targeted Sh211 billion in new revenue but fell short by Sh205 billion.
- Finance Bill 2024: Projected to raise Sh346 billion before being derailed by historic public protests and the subsequent storming of Parliament on June 25.
- Tax Laws (Amendment) Act 2024: Targeted a more modest Sh79 billion but still recorded a Sh137 billion deficit, forcing the State to ramp up both domestic and foreign borrowing.
Strategy Shift: Efficiency Over Burden
For the upcoming 2025/26 financial year, the PBO notes a strategic pivot in the Finance Act 2025. Moving away from the “new tax burdens” of previous years, the government is now targeting a total of Sh3.3 trillion through administrative reforms rather than higher rates.
“The taxation strategy must be reconsidered to balance revenue generation with investment incentives,” the PBO report states. “Poor revenue collection and widespread public dissatisfaction have resulted from the introduction of new tax proposals.”
To bridge the gap without further alienating the public, the budget office is advocating for a “digital-first” ecosystem. Key priorities include:
- eTIMS Integration: Universal deployment of the Electronic Tax Invoice Management System to secure real-time compliance.
- Data Analytics: Using advanced profiling to identify and curb tax evasion.
- ICT Infrastructure: Upgrading systems to streamline tax procedures and improve transparency.
Recommendations for Fiscal Recovery
The PBO emphasized that curbing evasion remains the highest priority for the Kenya Revenue Authority (KRA). The office called for enhanced audit capabilities and better inter-agency collaboration to ensure accurate taxpayer profiling.
“These measures will create a more transparent, responsive, and efficient tax ecosystem that aligns with the evolving needs of Kenya’s economy,” the report concluded, adding that failure to reform tax administration would leave the country trapped in a cycle of mounting debt.
