Kenya must put production before taxation

This story has significance for readers across Kenya and beyond.

The economic journey of a developing nation rarely follows a straight path. The Kenya Kwanza administration offers a clear case study in the tension between bold state ambition and immediate market realities.

When the government took office, it promised a radical bottom-up shift aimed at lifting the economic base — the hustler, agricultural smallholder and informal worker. It looked to the structural discipline of East Asia, particularly Singapore, using public investment to spark long-term prosperity. Judged against macroeconomic data and household experience, however, the sequencing of reforms has created severe structural friction.

Look first at the Kenyan payslip, now a primary site of fiscal consolidation. A middle-class professional faces a 1.5 per cent Affordable Housing Levy, a 2.75 per cent Social Health Insurance deduction and higher income tax bands. The National Treasury reported Sh73.2 billion collected from the housing levy in its first full financial year.

The intention was to build long-term social security and universal healthcare. The immediate effect, however, has been reduced disposable income. You cannot milk the cow dry today and expect a fat calf tomorrow. When formal-sector consumption contracts, the shock reaches the informal economy first — dukas, boda boda stages and small manufacturers dependent on consumer spending.

Financial inclusion

The mismatch extends to financial inclusion. The Hustler Fund was intended to democratise credit and bypass banking bottlenecks to reach millions of unbanked citizens. In principle, it was capital cast like seed. In practice, without adequate business training, market linkages and financial literacy, much of it has been absorbed by survival needs rather than enterprise. With defaults remaining high, the fund risks functioning more as an ad hoc safety net than a generator of new, taxable firms.

Housing presents a similar problem. The Affordable Housing Programme was intended to address the urban housing deficit while creating mass employment. In practice, jobs are largely localised and temporary, tied to individual construction sites. The units are not free social housing but market products requiring long-term commitments beyond the reach of many poor households. From a macroeconomic perspective, locking billions into fixed, non-tradable real estate can divert capital from export manufacturing and agro-processing. Because the programme is financed through mandatory levies on workers and employers, it also raises the cost of formal labour. In a weak economy, firms may respond by freezing hiring or shifting towards casual contracts, undermining the job creation the programme seeks to achieve.

Social infrastructure faces similar strain. Replacing NHIF with the Social Health Authority was intended to shield households from catastrophic medical costs. Yet the gap between claims submitted by hospitals and premiums collected by SHA has created financial pressure. Delayed reimbursements have left public and faith-based hospitals struggling to purchase medicines and supplies, with patients experiencing stock-outs and delayed care.

Financially distressed universities

Higher education faces parallel difficulties. The new funding model was intended to rescue financially distressed universities by linking support to student need. But complex banding and data verification have left some low-income students in higher-fee categories, saddling them with unexpected costs as they enter a saturated labour market. Meanwhile, external debt-service obligations, including Eurobond repayments and bilateral settlements, have contributed to pressure on public finances. Higher road maintenance charges have helped clear pending bills but also raised fuel costs, feeding into transport expenses and inflation.

If Singapore is the benchmark, the lesson is sequencing. Singapore first built export manufacturing, attracted foreign investment and created productive jobs before expanding social programmes, including housing. Kenya risks running that model in reverse — building capital-intensive social programmes before securing the industrial and agricultural base needed to sustain them. The corrective must be a shift from collection to production. First, flatten corporate tax rates and aggressively reduce industrial electricity costs for manufacturers and agro-processors. A broader formal tax base will emerge through business growth rather than squeezing existing taxpayers.

Second, agricultural policy must move beyond input subsidies to functioning value chains. Farmers need cold storage and regional processing facilities to reduce post-harvest losses, raise incomes and create rural industries. Third, social programmes should be streamlined into automated and transparent cash transfers targeted at verified vulnerable households. This would reduce bureaucracy and leakage while protecting those most exposed. Fourth, the state must curb domestic borrowing. Less government competition for credit would give banks greater room to reduce interest rates and lend to enterprises.

Digital learning

Investment must go beyond brick and mortar. Lasting development is built in classrooms and laboratories, not just houses and roads. Redirecting some social-relief spending to fully fund day secondary education would support roughly two million households. Covering tuition, learning materials and meals would strengthen human capital, keep children in school and free household savings for businesses and consumption.

Kenya must also modernise its human-capital pipeline through teacher training, digital learning, industry-aligned TVETs and applied research. Technical skills, apprenticeships and university research grants would deliver more lasting growth than isolated infrastructure projects. Housing addresses shelter. Health addresses risk. Education builds the capacity to earn, innovate and compete.

The question is not whether these goals are wrong. They are necessary. The question is their order.

Build productive jobs first, then tax them. Protect and grow the calf, then milk it. True economic resilience will not come from expanding how aggressively the state collects. It will come from unlocking how productively Kenyans can produce.

Dr Irungu Kang’ata is the Governor of Murang’a County and holds a PhD in law. He can be reached at [email protected].

Reporting originally appeared via Nation Africa. Read the full source for additional context.