Gathungu turns heat on Treasury as revenue falls

This is the highest shortfall in five years, with the audit office raising the red flag on inaccuracy of projections by the Treasury.

“This trend raises some concern on the accuracy of revenue projections in the budget, although the variations are below 10 per cent,” said Gathungu. This is contained in a report to the National Assembly Select Committee on Budget and Appropriations on the annual estimates of revenue and expenditures for the fiscal year 2025/2026.

Ordinary revenue

In 2019/20, there was a shortfall in ordinary revenue of Sh50.9 billion or three per cent, while in 2020/21 the deficit narrowed to Sh581.59 million or 0.04 per cent before jumping to a surplus of Sh101.49 billion or 5.5 per cent in 2021/22.

The surplus was, however, short-lived because collections dipped back to a shortfall of Sh99.34 billion in 2022/23, or an equivalent of 4.6 per cent.

Gathungu also raised concerns over the challenge of tax revenue collection, noting that the audited revenue accountability statement by the Kenya Revenue Authority (KRA) indicated tax revenue arrears of Sh2.33 trillion as at June 30, 2024.

The arrears arise as a result of KRA compliance reviews, tax audits, tax due from filing of annual returns, default assessments, and unremitted deductions.

The balance of Sh2.33 trillion was Sh1.33 trillion or 133.49 per cent higher than the Sh999.6 billion reported as at June 30, 2023.

The balance includes additions in arrears that were not collected for the financial year 2023/2024 of Sh 2.06 trillion. “The amount of Sh2.065 trillion relating to the financial year 2023/2024 is equivalent to 91.8 per cent of the total Treasury recurrent revenue collections of Sh2.250 trillion for the same period, an indication that the set targets for revenue by the authority are way below the possible tax yield,” Gathungu said.

“The annual revenue shortfalls and high tax arrears indicate a potential fiscal challenge, as revenue generation will most likely not meet initial expectations or budget projections. They are also indicators of inadequate revenue planning and forecasting,” she added.

The Auditor-General's office said that the 2022 Kenya Public Expenditure and Financial Accountability Assessment Report already indicated that Kenya’s fiscal discipline is weakened by the unreliability of aggregate revenue outturn, caused by overly optimistic targets.

 Expenditure projections

“If the trend continues, it will be difficult to meet the expenditure projections for 2025/2026 without resulting to additional borrowings,” Ms Gathungu said.

“We recommend that the National Treasury adopt a more cautious approach to revenue forecasting, taking into account historical trends and potential risks to economic growth. This will avoid overestimating revenue projections and ensure that expenditure commitments are aligned with realistic resource projections,” she added.

The Auditor General said that the government should also strengthen tax administration efforts to improve compliance and expand the tax base.

“This includes modernising tax collection systems, enhancing taxpayer services and addressing tax evasion and avoidance,” Ms Gathungu said.

The annual estimates for the fiscal year 2025/2026 project ordinary revenue at Sh2.757trillion (estimated at 14.3percent of GDP), up from Sh2.581 trillion (14.8percent of GDP) in 2024/2025.

This, however, falls short of the World Bank’s recommended minimum tax-to-GDP ratio of 15percent.

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