The Kenya Revenue Authority (KRA) recorded a Sh58.2 billion revenue shortfall in the first quarter of the current 2026/27 financial year, even as ordinary revenue growth accelerated from the same stage last year.
Ordinary revenue receipts, which cover both tax and non-tax revenues, were recorded at Sh655.8 billion, 14.4 percent for the three months to September, higher than the Sh573.5 billion collected in a similar period in 2025, according to data from the National Treasury.
In contrast, domestic revenue collection significantly recovered compared to the previous year when ordinary revenue receipts contracted by 2.9 percent.
The revenue underperformance in the open quarter signals unrealistic tax targets, as the taxman persistently misses the mark despite mostly recording growth in receipts. Collections from all major tax heads, except import duty, were below target despite growth.
‘By the end of September 2026, revenue collection was below target by Sh40.4 billion mainly on account of shortfalls in ordinary revenues of Sh58.2 billion while ministerial appropriations in aid (A-i-A) surpassed target by Sh17.8 billion,’ the National Treasury said in a presentation.
‘Revenues grew by 15.9 percent by the end of September 2026 compared with a growth of 1.4 percent at the end of September 2025. Ordinary revenues grew by 14.4 percent compared to a contraction of 2.9 percent over the same period.’
Income tax recorded the largest shortfall at Sh25.4 billion, with receipts at Sh297.9 billion against a target of Sh323.3 billion, while excise duty receipts were off the mark by Sh16.3 billion.
The recorded revenue shortfalls are expected to widen the budget deficit, forcing the National Treasury to borrow more to fund government spending.
The underperformance in revenue collection has been exacerbated by expenditure pressure as the government surpasses spending limits.
By the end of September 2026, expenditure had surpassed the target by Sh116.9 billion, largely on account of above-target absorption of recurrent expenditure by Sh59.3 billion and development expenditure by Sh34.7 billion. Transfers of equitable share revenues to county governments were above target by Sh22.9 billion.
The fiscal deficit including grants reached Sh329.1 billion in the first three months or 1.6 percent of gross domestic product (GDP), surpassing the target of Sh174.8 billion or 0.8 percent of GDP.
The National Treasury has identified revenue erosion, debt and rising spending needs as fiscal pressures on the budget.
The exchequer expects cost rationalisation and revenue base expansion to remain the key reforms to improve domestic revenue, which has seen an erosion, falling from 18.1 percent of GDP in the 2013/14 fiscal cycle to 13.9 percent of GDP as projected in the current 2026/27 fiscal year.
‘The strategy aims to progressively strengthen tax revenue mobilisation by simplifying and harmonising tax laws, rationalising and targeting tax expenditures and creating a simple, predictable and fair tax system,’ the National Treasury said.
The Treasury is also betting on scaling up non-tax revenues by enhancing the capacity of ministries and State departments (MDAs) to effectively generate income from public services and strengthen their operational systems to improve service-based revenue performance.
On the spending front, the Treasury expects some of the heavy capex development projects to be shifted from the national budget as the National Infrastructure Fund (NIF) takes shape, serving to reduce budgeted expenditures.
The NIF, which was established in March 2026, was capitalised with Sh310.6 billion from Kenya Pipeline Company (KPC) and divestiture proceeds from Safaricom Plc.
The reforms are expected to strengthen the fiscal position and reduce the fiscal deficit from 6.8 percent of GDP in the 2025/26 fiscal year to 5.5 percent in the current fiscal year.