There is another way: Reducing debt while creating jobs in Kenya

The Public Finance Review for Kenya highlights that the country’s fiscal challenges are deeply tied to its broader development goals. Rising debt and shrinking budgets are symptoms of a larger problem: how Kenya mobilizes, allocates, and transforms resources into jobs, productivity, and inclusive growth. It will be difficult to maintain the current path of rising debt and fiscal slippage—but there is another way.

As economists who have worked closely on Kenya’s fiscal and development trajectory, we are convinced that restoring stability does not have to come at the cost of opportunity. Kenya can realign its public finances while laying the groundwork for more jobs and higher productivity. In our view, fiscal policy should be seen not only as a tool for balancing budgets, but as an instrument for building a fairer, more resilient economy that creates tangible benefits for all citizens.

Mounting fiscal pressures

Kenya’s public debt has risen to nearly 68% of GDP, with debt servicing its interests now consuming over a third of government revenue, crowding out critical development spending. Meanwhile, tax collections have fallen from 16.2% of GDP in FY2016/17 to just above 14%, even as about 800,000 new workers join the labor force each year.

This shrinking fiscal space limits investment in infrastructure, education, and health, the very foundations of productivity growth and job creation. Despite large public investments, total productivity growth was stagnant between 2011 and 2019, and job creation has remained concentrated in low-productivity informal sectors. Real wages have dropped by more than 13% since 2019. Fiscal reforms must therefore promote not only stabilization but also growth and jobs.

Real average annual wages per employee in Kenya (2023 Kenyan shillings), 2008-2023

Source: Kenya Economic Survey, 2005-2023. Kenya National Bureau of Statistics.

The case for rebalancing fiscal policy - Five reform priorities

Addressing these challenges requires embarking on comprehensive and holistic reforms. Kenya’s fiscal structure remains constrained by a heavy wage bill, inefficient transfers to state-owned enterprises (SOEs), and high interest costs—leaving little room for productive investment and social spending. On the revenue side, numerous tax exemptions, compliance gaps, and uneven incentives have eroded the tax base and weakened competitiveness.

Rebalancing fiscal policy requires redirecting spending from consumption to investment, from generalized subsidies to targeted support, and from public dominance to private sector dynamism. It also means building credible institutions that inspire trust. A stronger social contract is central to this process. Citizens’ willingness to pay taxes depends on seeing revenues used transparently and equitably. Trust improves compliance, reduces enforcement costs, and creates room for sustainable fiscal consolidation.

From our work, five packages of fiscal policy reform stand out as particularly important for Kenya:

1. Strengthening governance and reducing leakages. Improving procurement, addressing conflicts of interest, and curbing corruption could lower the debt-to-GDP ratio by more than 15 percentage points over time, while boosting productivity and wage growth.
2. Creating a more competitive private sector. Kenya’s complex corporate tax structure, with uneven incentives and potential distortions, risks deterring investment. Simplifying corporate taxation, strengthening dividend taxation, and leveraging opportunities under the African Continental Free Trade Area (AfCFTA) would attract investment, raise productivity, and expand formal employment.
3. Reducing fiscal risks from SOEs. SOEs absorb large amounts of fiscal resources without consistently delivering value. In competitive sectors, divestiture can free space for private investment; in strategic ones, stronger governance and transparency are key. Reducing contingent liabilities enhances both fiscal stability and service delivery.
4. Retargeting subsidies and exemptions. Agricultural subsidies disproportionately benefit higher-income farmers, while large numbers of tax exemptions reduce revenues without clear developmental benefits. Rationalizing agricultural subsidies and tax exemptions can free resources for better-targeted social protection and clearing pending bills to improve liquidity in the private sector.
5. Transforming urban fiscal policy. Kenya’s cities hold significant untapped potential to drive industrialization and innovation. Expanding property and land taxation, combined with better urban infrastructure, can unlock the potential of Kenya’s cities as engines of productive employment and innovation.

Sequencing and institutionalization of reforms

Reform success depends on sequencing and institutionalization. In the short term, Kenya should restore fiscal credibility by tightening procurement, reducing discretionary expenditures, and phasing out regressive exemptions. Medium-term reforms should broaden the tax base, restructure SOEs, and contain the wage bill. Long-term sustainability hinges on embedding reforms in institutions that can withstand political cycles and protect fiscal discipline.

If these measures are implemented, Kenya’s debt-to-GDP ratio could fall to about 44% by 2035, compared to a continued rise under current trends. Growth would accelerate, driven by private investment and productivity gains, and real wages would recover as workers shift into higher-productivity sectors. Most importantly, better jobs would allow Kenya to harness its demographic dividend and strengthen social cohesion.

A narrowing window

Kenya stands at a pivotal moment. In June 2024, thousands of young Kenyans took to the streets to reject the 2024 Finance Bill. Their call went beyond tax policy—it was a demand for accountability and public resources to be used transparently, fairly, and to create more opportunities. Without reform, Kenya risks deepening its debt and alienating a generation. With it, the nation can chart a more inclusive and hopeful path.

As economists, we share that conviction, that fiscal reform can also be about creating space for Kenya’s people, especially its youth, to thrive.

Public debt to Gross Domestic Product ratio under different scenarios (% of GDP)

Source: Kenya Public Finance Review (2025).