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Post Reply: Amboko H. Julians: Opinion on Kenya's Fiscal Dispatch: A Strategic Shift in Budget and Tax Policy

<blockquote><div class="quotetitle">Quote from <a class="profile-link highlight-moderator" href="https://lawguide.co.ke/understanding-law/legal-forum/profile/lawyer/">Lawyer</a> on April 29, 2025, 9:34 pm</div><div id="pl-5159"  class="panel-layout" ><div id="pg-5159-0"  class="panel-grid panel-no-style" ><div id="pgc-5159-0-0"  class="panel-grid-cell"  data-weight="1" ><div id="panel-5159-0-0-0" class="so-panel widget widget_sow-editor panel-first-child panel-last-child" data-index="0" data-style="{&quot;background_image_attachment&quot;:false,&quot;background_display&quot;:&quot;tile&quot;,&quot;background_image_size&quot;:&quot;full&quot;,&quot;background_image_opacity&quot;:&quot;100&quot;,&quot;border_thickness&quot;:&quot;1px&quot;}" ><div
			
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	<p dir="ltr" data-pm-slice="1 1 []">On April 29, 2025, the Kenyan Cabinet, chaired by President William Ruto at State House, Nairobi, unveiled a series of fiscal measures aimed at aligning the government’s spending with its policy of living within its means. <a href="https://www.linkedin.com/posts/amboko-h-julians-38231440_a-heavily-fiscal-despatch-coming-from-kenyas-ugcPost-7323006548593528832-FALh?utm_source=share&amp;utm_medium=member_desktop&amp;rcm=ACoAAFjpkoEBT6DgjILtMbxvvDq9p6nhqPUvE_E">Amboko H. Julians</a> provided a detailed opinion on the implications of these decisions, which signal significant adjustments in Kenya’s fiscal framework for the 2025/26 financial year. Below is an analysis of the key takeaways and their broader economic impact.</p>
<h3 dir="ltr"><em><strong>Budget Revisions: A Second Slash Before the Fiscal Year Begins</strong></em></h3>
<p dir="ltr">The Cabinet announced a further reduction in the budget estimates for the 2025/26 financial year, which were initially set at Kshs 4.263 trillion. While the exact figure of the reduction remains undisclosed, this marks the second downward revision even before the financial year starts. Previously, the budget had already been slashed by Kshs 66.2 billion, indicating a cautious approach to public spending.</p>
<p dir="ltr">This move underscores the government’s commitment to fiscal discipline, as highlighted by Julians. The repeated cuts suggest a proactive response to external pressures, likely influenced by Kenya’s recent engagements at the IMF/World Bank Spring Meetings and its application for a new IMF program. By trimming the budget, the government aims to reduce public debt vulnerabilities and create fiscal space for essential services, aligning with its medium-term goal of reducing the fiscal deficit to 2.7%.</p>
<h3 dir="ltr"><em><strong>Capping the Fiscal Deficit: A New Target in Sight</strong></em></h3>
<p dir="ltr">A key highlight of the dispatch is the decision to cap the fiscal deficit at 4.5% of GDP for the 2025/26 financial year, down from 5.3% in 2023/24 and 5.1% in 2024/25. Julians notes that this adjustment revises the earlier projected shortfall of KSh 831.0 billion, potentially bringing it down to around Kshs 600.0 billion.</p>
<p dir="ltr">This reduction in the deficit target is a clear signal of the government’s intent to tighten its fiscal belt. While the dispatch does not mention changes to the revenue side, the lowered deficit implies that the government might be anticipating improved revenue collection or further expenditure cuts. This aligns with broader austerity measures aimed at enhancing fiscal sustainability, a move likely to be welcomed by international financial institutions like the IMF.</p>
<h3 dir="ltr"><strong><em>Finance Bill 2025: Focus on Indirect Taxes and Administration</em></strong></h3>
<p dir="ltr">The Cabinet approved the Finance Bill, 2025, which focuses on closing tax loopholes and enhancing efficiency in tax administration. Julians points out that the Bill will likely emphasize indirect taxes, such as VAT and excise duties, alongside amendments to the Tax Procedures Act. There is also a mention of potential revisions to the Income Tax Act, with hopes pinned on adjustments to PAYE bands—a change that could provide relief to Kenyan workers.</p>
<p dir="ltr">These measures aim to address historical inefficiencies, such as inflated tax refund claims that have siphoned funds from public coffers. By streamlining tax processes and sealing legal gaps, the government seeks to boost revenue collection without necessarily increasing tax rates, a strategy that could mitigate the burden on taxpayers while improving fiscal health.</p>
<h3 dir="ltr"><em><strong>Tax Refunds and PAYE Reforms: Front-Loading Reliefs</strong></em></h3>
<p dir="ltr">A notable reform in the Finance Bill, 2025, is the emphasis on tax refunds and PAYE computation. Employers will now be required to automatically apply all eligible tax reliefs and exemptions when calculating PAYE, a change aimed at reducing the need for employees to seek refunds from the Kenya Revenue Authority (KRA). Julians highlights this as a significant step toward front-loading reliefs, ensuring that workers benefit from tax breaks in real-time rather than through delayed refunds.</p>
<p dir="ltr">This reform aligns with the Bottom-Up Economic Transformation Agenda (BETA), which prioritizes inclusive economic growth. By simplifying tax processes for employees, the government aims to enhance disposable income for Kenyan workers, potentially stimulating consumer spending and economic activity.</p>
<h3 dir="ltr"><em><strong>Capital Markets Reform: Removing Shareholder Limits</strong></em></h3>
<p dir="ltr">In a move to deepen financial markets, the Cabinet approved amendments to the Capital Markets Act, removing shareholder limits in regulated institutions. However, the Capital Markets Authority retains the discretion to impose limits on specific license categories if necessary. Julians describes this as an “interesting development,” noting that while it may not directly impact government revenue, it signals a push toward greater flexibility in the financial sector.</p>
<p dir="ltr">This reform could attract more investment by reducing barriers for shareholders, potentially boosting market activity. However, the discretionary power retained by the regulator ensures that the government can maintain oversight, balancing market liberalization with financial stability.</p>
<h3 dir="ltr"><em><strong>Broader Implications and Context</strong></em></h3>
<p dir="ltr">The fiscal dispatch comes on the heels of Kenya’s formal application for a new IMF program, a context that Julians emphasizes. The adjustments in budget estimates, deficit targets, and tax policies reflect a strategic alignment with IMF expectations, which often prioritize fiscal consolidation and structural reforms. By demonstrating a commitment to fiscal discipline, Kenya aims to secure favorable terms in its negotiations with the IMF, potentially unlocking critical financial support.</p>
<p dir="ltr">Moreover, these measures are part of a broader set of reforms approved by the Cabinet, including the Public Finance Management (Amendment) Bill, 2024, to enhance emergency preparedness, and the Pest Control Products Bill, 2024, to modernize agricultural regulations. The government’s focus on inclusivity is further evident in its approval of the Judges Retirement Benefits Bill, 2025, which ensures dignified retirement for judicial officers, and tax exemptions for retirees’ gratuity payments under the BETA framework.</p>
<p dir="ltr">The Cabinet’s decisions on April 29, 2025, mark a pivotal moment in Kenya’s fiscal policy landscape. As Amboko H. Julians observes, the government’s focus on budget cuts, deficit reduction, and tax reforms reflects a strategic shift toward fiscal sustainability and economic inclusivity. While challenges remain—particularly in balancing austerity with growth—these measures position Kenya to navigate a complex economic environment with greater resilience. As the Finance Bill, 2025, moves to Parliament, all eyes will be on how these policies translate into tangible outcomes for Kenyans.</p>
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