A worker lays a fiber optic cable in Nyeri town on August 18, 2020.
In this article, we continue to interrogate the National Budget 2026, and try to decipher its philosophy and broad goals and objectives.
It has been argued that the huge tax burdens currently choking Kenyans is a result of a narrow tax base, which itself is a reflection of our collective taxpaying behaviour. About 45 per cent of the Kenyan economy is informal, making traceability of taxable financial transactions a nightmare for the tax authorities.
At the same time, the government has previously given only lip service to investments in the productive sectors, undermining the productivity and revenue generation capacity of the economy. Consequently, the Kenya Revenue Authority inordinately targets employees and registered companies through the Pay As You Earn and corporate taxes, respectively, because they are easier to nab.
Tax revenues from these categories of taxpayers are hardly enough to underwrite the government's ambitious transformation agenda. Hence, the need to redirect resources to specific productive sectors to boost the nation's Gross Domestic Product (GDP). Productive sectors are specific areas of the economy that directly generate tangible goods, create physical and digital wealth, and drive primary economic output.
Raw material conversion
Unlike sectors that purely facilitate trade or consumption, productive sectors focus heavily on value addition, raw material conversion, and the physical expansion of a nation's wealth. In the context of the Kenyan economy, the core productive sectors comprise: agriculture, forestry and fishery; manufacturing and industrialisation; mining and quarrying; blue economy; and digital superhighway and creative economy.
In the period 2013-2022, there were policy missteps that tended to prioritise consumption subsidies over the supply sector of the economy. During the period under review, subsidies heavily targeted consumption (eg by direct subsidies or retail maize flour and fuel) other than production. This approach negatively affected long-term investments in the productive sectors, with heavy consequences, the most conspicuous of which was the crowding out of capital.
Massive budgetary allocations toward subsidising the final prices of items drained tax revenues that could have been utilised to fund critical capital investments like small-scale irrigation and farm mechanisation to boost food production.
With tax revenues being directed toward subsidising consumption, the country found itself with less resources to meet its cost of governance and offshore debt obligations, occasioning unsustainable debt accumulation. Financing short-term consumption required heavy borrowing, which restricted the government's ability to maintain critical infrastructure for farming and manufacturing.
Besides, there were evident market distortions. Fixed price caps — way below prices determined by market forces — discouraged private millers and processors from expanding local production facilities due to unpredictable profit margins. To make it worse, the subsidised products hardly ever reached ordinary citizens even as cartels laughed all the way to the bank, extracting private benefits as Kenyans choked under the weight of taxes.
The National Budget 2026 prioritises revamping of the productive sectors through the BETA framework, using specific supply-side shifts, key among them being the shift to production subsidies. This approach eliminates retail price supports, replacing them with input subsidies like cheaper fertilisers and certified seeds to boost yields at the source. Besides, the government has introduced value chain clustering, grouping high-yield agricultural items like dairy, tea, sugarcane, and coffee into value chains. This facilitates access to cold rooms, modern markets and agro-processing plants.
By rolling out a national fibre-optic network and establishing ICT hubs, the government aims to expand tech-driven jobs, automate agricultural extension and enhance digital market access. This initiative will particularly benefit tech-savvy youth by exposing them to global opportunities and igniting their interests in agriculture. Recognising the importance of prioritising investments in the productive sectors, the government, through the National Budget 2026/2027, outlines direct financial investments in these sectors.
Transform agriculture
Notwithstanding the fact that the bulk of activities in agriculture are devolved to counties, the national government has allocated Ksh64 billion to transform agriculture into a modern commercial job creator that can change the mindsets of youth to embrace farming. An additional Ksh 18 billion will be utilised on fertiliser subsidy to lower direct production costs to the farmer.
Besides, there is Ksh 2 billion to be spent on maize seed subsidy targeted at boosting farmers' climate resilience and enhancing national food security. Additional Ksh 5.4 billion is allocated for food systems resilience, while Ksh 4.6 billion will be spent on strengthening maritime infrastructure and local aquaculture value chains.
Regarding livestock and pastoralist programmes, a total of Sh1.3 billion is budgeted for de-risking pastoral economies and boosting livestock commercialisation. Priority will be given to supporting pastoralists through a fund to be used for de-stocking during dry seasons and re-stocking when there is enough pasture to support increased herds.
The government's efforts to re-allocate resources toward input productivity are buoyed by the experience of the last three fiscal years, during which measurable economic outcomes have been recorded. The annual inflation has been driven down from a peak of 9.6 per cent recorded in October 2022 to the current figure of approximately 3.5 per cent, largely attributed to dropping food production costs.
Currently, there are increased local food stocks due to elevated yields per acre in staple crops like maize, reducing the country's desperate reliance on costly food imports. It is noteworthy that investments in the productive sectors have continued to enhance the resilience of the Kenyan economy.
In the period 2022-2025, the economy registered a steady average growth rate of about 5.0 per cent, consistently outperforming sub-Saharan Africa, which recorded 3.6-3.9 per cent (depending on the exact metrics of interest).
Kenya has also seen its foreign exchange reserves expand to about USD 13.2 billion, enough to cover 5.6 months of imports. This has been made possible by a stronger agricultural performance, coupled with agricultural value chains. There are very positive signals on the horizon as agro-processing and localised digital technology platforms such as "Ajira" begin to absorb the youth into the formal and informal labour force.
In a nutshell, Kenya seems to be making the right decisions as far as investments in the productive sectors and expansion of GDP are concerned. With an expanded GDP, there are higher incomes and potentially more tax revenues, which should go a long way in giving traction to the country's fiscal consolidation efforts.
It would be a monumental mistake for the government to yield to the demands of citizens to subsidise the prices of essential commodities. Any money that is used in consumption subsidies undermines investments in the productive sectors.
A country that ignores its productive sectors will pay for it in the long run through dependency on other countries to feed its own people. Dependency undermines sovereignty and national pride.
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Professor Ongore is a Public Finance and Corporate Governance Scholar based at the Technical University of Kenya. [email protected] <mailto:[email protected]>
