Assessing Kenyas Inclusive Growth Outlook under the Finance Act 2025

On June 26, 2025, President William Ruto signed the Finance Bill into law, ushering in a new phase of budget implementation with full legal backing. The Finance Act 2025, which takes effect from July 1, introduces a set of tax reforms aimed at raising approximately KSh 70 billion in additional revenue through enhanced compliance, enforcement measures, and the repeal of selected exemptions (National Treasury, 2025). This shift from policy proposal to binding legislation marks a critical test of Kenya’s ability to align fiscal consolidation with inclusive economic growth.

The law comes at a time of considerable economic vulnerability. Public debt stands at 66 percent of GDP, inflationary pressures are re-emerging, and high unemployment continues to weigh on productivity and household resilience (KNBS, 2024). With a projected GDP growth target of 5.3 percent for FY 2025/26, the Finance Act is expected to function both as a stabilizing tool and a growth stimulus (National Treasury, 2025). However, a number of key questions remain. Can compliance-driven reforms foster long-term transformation, or might they constrain the very growth they seek to promote?

This commentary examines how the Finance Act may shape Kenya’s economic trajectory. It analyses the structural features of the law, its likely effects on growth and equity, and whether it offers a credible pathway toward a more resilient and inclusive fiscal future.

Key Issues
1. The Compliance Turn: Chasing Revenue without New Taxes

The Act marks a deliberate shift from introducing new tax rates to enhancing administrative efficiency. In response to the widespread public backlash that followed the 2024 proposals, the government embraced a compliance-driven model. Under this approach, the Kenya Revenue Authority (KRA) is expected to broaden enforcement by targeting digital transactions, tightening tax reliefs, and addressing undeclared income. Notably, a controversial clause that would have granted KRA unrestricted access to bank accounts was withdrawn by Parliament, reflecting growing concerns over data privacy and constitutional safeguards (Parliament of Kenya, 2025).

This recalibrated strategy is designed to expand the tax base without suppressing household consumption or investment flows. However, it places steep demands on KRA’s institutional capacity. With uneven digital infrastructure and limited reform momentum across counties (Chege & Wambua, 2023), it remains uncertain whether the agency can deliver on the ambitious revenue targets embedded in the Finance Act.

The Act contains sector-specific incentives to stimulate agriculture, health, housing, and technology, particularly through institutions such as the Nairobi International Financial Centre (NIFC Authority, 2025). However, the bulk of these incentives remain concentrated in Nairobi and a few high-capacity counties, reinforcing spatial inequalities.

Counties with weak infrastructure, limited industrial capacity, and lower fiscal absorption rates may continue to lag behind. This uneven distribution of benefits threatens national cohesion and undermines long-standing commitments to equitable development on Kenya’s regional development gaps and fiscal challenges (World Bank, 2025).

Although the Act avoids imposing new taxes on essential commodities, it repeals several exemptions and enforces stricter VAT rules on digital services, mobile transactions, and consumer platforms (KPMG Kenya, 2025). These measures are likely to increase the cost of living and erode household purchasing power, particularly in urban low-income areas.

The informal sector, which accounts for more than 80 percent of total employment in Kenya, plays a central role in sustaining livelihoods. For many of these enterprises, the increased compliance requirements introduced by the Finance Act may prove overwhelming. In the absence of targeted support measures, they face growing risks of reduced margins, business closure, or exclusion from formal regulatory systems (KNBS, 2024).

The Finance Act 2025 is part of the government’s effort to reduce the fiscal deficit to 4.5 percent of GDP by cutting spending on travel, procurement, and administrative operations (National Treasury, 2025). While this reflects a commitment to fiscal discipline, Kenya’s credibility depends on how effectively these measures are implemented.

Weaknesses in public financial management remain a major concern. The Office of the Auditor General has flagged repeated issues, including underutilized development budgets, irregular procurement, and poor reporting standards (Office of the Auditor General of Kenya, 2025). Without structural reforms, budget cuts may reduce access to essential services rather than improve efficiency.

In addition, Kenya’s fiscal reputation was weakened in 2024 by delayed debt repayments and policy shifts. Although the Finance Act offers legal clarity and a more stable revenue framework, investor confidence will depend on transparent execution, consistent enforcement, and public trust.

The Finance Act 2025 represents an important milestone in Kenya’s ongoing efforts to strengthen fiscal sustainability. It reflects a policy shift focused on compliance, expenditure control, and administrative efficiency. However, the broader impact of the Act will depend on how its provisions are implemented within the country’s complex economic and institutional environment.

As outlined in this commentary, the Act introduces reforms that carry significant consequences for household welfare, informal sector resilience, regional equity, and public financial management. While the intention to stabilize the economy is evident, concerns remain around uneven enforcement, spatial concentration of incentives, and persistent gaps in budget execution. These factors could limit the law’s ability to deliver inclusive and sustained growth.

Going forward, priority should be on translating fiscal reform into real improvements in service delivery, private sector confidence, and regional development. A more accountable, transparent, and balanced implementation process will be essential. If these conditions are met, the Act may contribute meaningfully to building a more resilient and equitable economic future.

1. Strengthen KRA’s Institutional Capacity for Equitable Enforcement. The Kenya Revenue Authority (KRA), in collaboration with the National Treasury and the Council of Governors, should invest in digital infrastructure, staff capacity building, and county-level technical support. A differentiated enforcement model should be adopted to reflect disparities in reform readiness and infrastructure across regions.

2. Design Regional Incentives to Address Spatial Inequality. The National Treasury, in partnership with the Kenya Investment Authority (KenInvest) and county governments, should develop location-specific fiscal incentives. These should target sectors such as agro-processing, renewable energy, and eco-tourism to attract investment and support inclusive regional development.
3. Ease Informal Sector Transition through Tailored Compliance Support. The Ministry of Trade, Investment and Industry, working with KRA, should roll out phased compliance strategies for informal enterprises. This includes tax literacy programs, digital support tools, and simplified registration processes to promote formalization without disrupting livelihoods.
4. Improve Budget Execution and Restore Fiscal Credibility. The National Treasury and the Office of the Auditor General should strengthen budget execution by publishing quarterly performance reports and enforcing audit recommendations. Reforms to the Public Investment Management framework will help improve project delivery, reduce inefficiencies, and rebuild investor and public trust.

Office of the Auditor-General of Kenya. (2025, March 14). Summary report on national government ministries, departments and agencies: Financial year ended 30 June 2024 [PDF]. Office of the Auditor-General. https://www.oagkenya.go.ke/wp-content/uploads/2025/06/Auditor-Generals-Popular-Report-on-National-Government-2023-2024.pdf/Kenya National Bureau of Statistics. (2024). Economic survey 2024. Government of Kenya. https://www.knbs.or.ke

KPMG Kenya. (2025). Budget highlights 2025/26: A review of the Finance Bill. KPMG Advisory Services. https://home.kpmg/ke/en/home/insights/2025/06/2025-budget-highlights.html

National Treasury. (2025). Budget policy statement for the fiscal year 2025/26. Government of Kenya. https://www.treasury.go.ke/

Nairobi International Financial Centre Authority. (2025). Investment guidelines and tax incentive framework. Government of Kenya. https://www.nifc.go.ke/

Parliament of Kenya. (2025). Report of the Finance Committee on the Finance Bill 2025. National Assembly of Kenya. https://www.parliament.go.ke/

World Bank. (2025, May 27). Despite improvements, Kenya’s fiscal path is fragile amid high debt vulnerabilities and weak revenue growth [Press release].

Chege, M., & Wambua, J. (2023). Cracking the code: Revenue digitalization and illicit financial flow in ASAL counties, Kenya. African Journal of Public Finance, 8(1), 52–68.