Cabinet backs austerity measures, approves Finance Bill

The Cabinet Tuesday, resolved to realign the budget to cap the fiscal deficit at a maximum of 4.5% of GDP in the 2025/26 financial year, a reduction from previous years, with a medium-term target of 2.7%.

This will involve substantial revisions to the initial budget estimates of KSh4.3 trillion and broader austerity measures.

The Cabinet meeting that was chaired by President William Ruto approved the Finance Bill, 2025, which focuses on closing loopholes and enhancing efficiency.

According to a statement from the cabinet, the bill aims to streamline tax refund processes, reduce tax disputes, and amend key tax laws, including the Income Tax Act, VAT Act, Excise Duty Act, and Tax Procedures Act.

“Importantly, the Bill seeks to minimise tax-raising measures. Instead, it aims to enhance tax administration efficiency through a new legislative framework.” Read the statement.

The Bill proposes critical changes to support small businesses, allowing them to fully deduct the cost of everyday tools and equipment in the year of purchase, thereby eliminating unnecessary delays in accessing tax relief.

In addition, retirees will benefit significantly as all gratuity payments, whether in public or private pension schemes, will now be fully tax-exempt, ensuring dignity for Kenya’s senior citizens after retirement.

Employers will also be required to automatically apply all eligible tax reliefs and exemptions when calculating Pay As You Earn (PAYE) taxes for employees.

Currently, many employers omit these reliefs, forcing employees to seek refunds from the Kenya Revenue Authority.

Similarly, the Cabinet also gave nod to the Public Finance Management (Amendment) Bill, 2024 which mandates, rather than merely encouraging, all county governments to establish County Emergency Funds.

“In a move to ensure predictability and strengthen emergency preparedness, the Cabinet also gave nod to the Public Finance Management (Amendment) Bill, 2024. This Bill mandates, rather than merely encouraging, all county governments to establish County Emergency Funds.” The statement read.

According to the Cabinet, the decision follows the serious gaps exposed by the 2023 El Nino rains and stems from extensive consultations and a directive issued at the 24th Ordinary Session of the Intergovernmental Budget and Economic Council (IBEC) in August 2024.

The Bill further dedicates pension and retirement benefits framework for judges of the superior courts was endorsed, aiming to ensure their financial security and protect judicial independence.

“Serving judges will be under a Defined Benefit system, while new appointees will be under a Defined Contribution system. The bill also provides enhanced retirement benefits, including medical coverage and diplomatic privileges.” Cabinet resolved.

The Cabinet also approved the construction of two Level VI teaching and referral hospitals in Bungoma and Kericho counties in partnership with the African Development Bank to improve access to quality healthcare.

Capital Markets Act Amendments were approved by Cabinet, the amendments are meant to remove shareholder limits in regulated institutions to stimulate investment and deepen financial markets.

Additionally, the Cabinet approved the Draft Pest Control Products Bill, 2024 which modernizes the regulation of pest control products, establishes the Pest Control Products Authority, and aims to enhance safety and standards in the sector.

The Cabinet approved the establishment of a Consulate General in Port-au-Prince, Haiti noting that the consulate will provide strategic support to Kenya’s leadership role in restoring law and order in Haiti.