A Path Beyond Austerity: Kenya Urged to Shift Fiscal Policy to Promote Jobs and Equity

According to the PFR, Kenya’s current debt-to-GDP ratio exceeds 70 percent, placing the country at high risk of debt distress.

In the face of mounting public debt, growing interest payments, and an economic slowdown, Kenya’s fiscal policy is at a critical crossroads. The World Bank’s latest Kenya Public Finance Review (PFR), titled Beyond the Budget: Fiscal Policy for Growth and Jobs, outlines a pragmatic, reform-oriented roadmap aimed at enhancing fiscal sustainability while promoting inclusive economic growth, job creation, and improved service delivery.

The report argues that Kenya’s economic transformation over the past 15 years—characterized by a growing services sector, expanding informal employment, and evolving governance dynamics—requires a recalibration of fiscal priorities. The authors contend that a narrow focus on austerity could prove both economically harmful and socially divisive, while bolder structural and governance reforms offer a more balanced and sustainable approach.

“Kenya is at high risk of debt distress and decisive reforms are urgently needed to keep debt sustainable while promoting growth and jobs,” said Qimiao Fan, World Bank Division Director for Kenya, Rwanda, Somalia, and Uganda.

Aiming for Debt Sustainability Without Sacrificing Development

According to the PFR, Kenya’s current debt-to-GDP ratio exceeds 70 percent, placing the country at high risk of debt distress. However, the World Bank estimates that a well-sequenced package of reforms could reduce this to 44 percent of GDP by 2035, bringing it back in line with early 2010s levels. This would allow the country to regain fiscal space while avoiding the economically and politically damaging effects of excessive austerity.

The proposed strategy moves “beyond the budget”, incorporating broader reforms in governance, structural transformation, and public sector efficiency. The report warns that neither unrestrained borrowing nor untempered fiscal cuts are viable options.

Revenue Policy: Broadening the Base, Ensuring Fairness

On the revenue front, the PFR recommends broadening the tax base and improving the equity and efficiency of Kenya’s tax system. Specific recommendations include:

• Rationalizing tax exemptions, many of which disproportionately benefit high-income earners or specific industries.

• Encouraging the formalization of informal enterprises, which dominate Kenya’s labor market but contribute little to tax revenue.

• Reforming property taxation to better reflect asset values and tap into a largely underutilized revenue stream.

• Strengthening tax compliance and improving digital tools for tax collection and monitoring.

Collectively, these reforms could boost annual tax revenues by approximately 4 percent of GDP, enabling the government to finance critical development priorities without excessive borrowing.

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Expenditure Policy: Targeting Efficiency and Social Impact

To complement revenue gains, the report emphasizes the need for expenditure reforms that enhance efficiency, transparency, and equity. Key proposals include:

• Improving public financial management through enhanced procurement practices and better oversight of public-private partnerships (PPPs).

• Restructuring state-owned enterprises (SOEs) and phasing out inefficient subsidies.

• Reforming the public wage bill, especially allowances, which often lack clear performance links.

• Shifting spending priorities toward social protection, healthcare, and education.

These reforms are projected to generate savings of around 1.7 percent of GDP, which can be reinvested in essential services to stimulate inclusive growth and safeguard vulnerable populations.

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Funding Gaps in Key Sectors: A Call for Increased Investment

Despite expected efficiency gains, the report acknowledges that additional resources are essential to meet growing demand for public services. The World Bank recommends:

• An additional 0.3 percent of GDP per year for social protection, particularly cash transfer programs and shock-responsive safety nets.

• A 3 percent increase in health spending to strengthen Kenya’s primary healthcare system, expand insurance coverage, and address health equity gaps.

• A 1 percent boost in education investment, crucial for building human capital and addressing demographic pressures.

These sectoral investments are seen as critical not only for immediate welfare improvements but also for long-term productivity and job creation.

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Strengthening Governance to Restore Public Trust

The review makes it clear that governance reforms are not optional. Persistent issues such as fiscal leakage, corruption, and administrative inefficiencies undermine public confidence and limit the impact of government spending. Key governance priorities include:

• Enhancing conflict-of-interest regulations across public institutions.

• Tightening anti-money laundering controls to prevent illicit financial flows.

• Digitizing services, including instant traffic fines and licensing regimes, to reduce corruption opportunities and improve convenience for citizens.

These measures are essential to strengthening the social contract—a necessary foundation for citizen support for reforms.

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Structural Reforms for Long-Term Growth

To unlock productivity and competitiveness, the report calls for bold structural changes, such as:

• Implementing the African Continental Free Trade Agreement (AfCFTA) to expand market access and boost trade-driven growth.

• Adopting competition-enhancing policies, particularly in sectors dominated by monopolies or politically connected firms.

• Privatizing or reforming non-performing SOEs, which continue to drain public resources.

• Reducing the cost of living, including interventions in housing, transport, and food markets.

• Investing in urban competitiveness, including infrastructure and skills development in Kenya’s rapidly growing cities.

A Balanced, Reform-Based Fiscal Strategy

As Marek Hanusch, the World Bank’s Lead Economist and Program Leader for Kenya, aptly noted:

“Pathways of continued fiscal slippages or severe austerity measures are economically and socially costly. There is another way that is more sustainable based on packages of reforms.”

Kenya stands at a pivotal moment. The decisions made now—about how to raise revenues, spend public funds, and engage citizens—will shape the country’s economic and social trajectory for decades to come. The World Bank’s Public Finance Review provides both a warning and a vision: that fiscal responsibility and social progress need not be mutually exclusive, and that with the right policies, Kenya can build a future of prosperity for all.