By Paul Njenga
Researcher and Finance and Development Expert
Economic growth is only meaningful when it improves household welfare. Kenya must rethink persistent budget deficits, rising debt obligations and the cost of credit if it is to make decent housing, productive employment and essential services affordable to ordinary citizens.
Kenya’s economic debate often revolves around GDP growth, tax revenue, public debt and the number of development projects launched. These are important indicators of economic performance, but they do not tell the whole story.
The more fundamental question is whether economic progress is improving the lives of ordinary Kenyans.
A country can record economic growth while households struggle with the cost of food, rent, transport, healthcare and education. Workers can receive regular salaries yet find that their purchasing power has declined. Government can invest billions in development while citizens remain unable to afford decent housing.
This raises a fundamental question: what is the value of a growing economy if the majority of its citizens do not experience a corresponding improvement in their living standards?
Kenya needs to rethink how it defines economic success. Growth must remain an important objective, but the ultimate test of economic policy should be whether it improves people’s lives, expands opportunities and enables households to live with dignity.
Beyond GDP: Measuring What Matters
Gross domestic product measures the value of goods and services produced within an economy. It is an important indicator of economic activity, but it does not adequately capture how income is distributed, whether decent jobs are available or whether households can afford essential goods and services.
Economic growth can coexist with declining purchasing power, rising household indebtedness and widening inequalities. Consequently, GDP growth should be assessed alongside indicators that reveal how the economy is performing for ordinary citizens.
These indicators should include real household income, employment quality, the cost of living, poverty levels, access to healthcare and education, housing affordability and the quality of public services.
The distinction between nominal income and purchasing power is particularly important. A worker whose salary increases by five per cent may actually become poorer if the cost of essential goods rises by more than that amount.
Similarly, employment statistics should go beyond the number of jobs created. They should consider whether jobs provide reasonable earnings, stability and opportunities for productivity and advancement.
Government should also measure whether households can save, access credit on sustainable terms and withstand unexpected financial shocks.
The objective is not to abandon GDP as a measure of economic performance. It is to recognise that economic growth is a means to development, while improved human welfare is the ultimate objective.
Strong Institutions and the Rule of Law
Better living standards cannot be achieved through economic policy alone. They also depend on strong institutions, predictable laws, responsible public administration and prudent management of public resources.
Kenya’s Constitution provides a firm foundation for this approach. Article 10 establishes national values and principles of governance, including the rule of law, transparency and accountability. Article 201 sets out principles for the responsible management of public finances, while Article 232 establishes values and principles governing the public service.
These provisions have direct economic significance.
When procurement is transparent, budgets are realistic and public expenditure is properly monitored, resources are more likely to deliver value. Predictable laws and fair enforcement also create an environment in which businesses can invest, employ people and plan for the future.
Conversely, weak accountability, wasteful expenditure and uncertainty in the application of laws can increase the cost of doing business and divert resources from essential services.
The rule of law is therefore not merely a constitutional ideal. It is an economic necessity.
Government should be assessed not only by what it spends, but also by whether it complies with the law, manages public resources prudently and delivers measurable benefits to citizens.
Government Borrowing and the Cost of Living
The relationship between public borrowing and household welfare deserves greater attention in Kenya’s economic debate.
Whenever government expenditure exceeds revenue, the resulting deficit must be financed through borrowing, drawing down available balances or other financing arrangements. Borrowing can support productive investment, but persistent deficits create obligations that must eventually be met through future revenue, refinancing or other adjustments.
As public debt accumulates, debt-service payments can absorb an increasing share of government revenue. This reduces the resources available for healthcare, education, water, agricultural development, infrastructure and other essential services.
The burden is not confined to the present generation. Future taxpayers may be required to finance debt incurred today, including interest on borrowing whose benefits may not endure for as long as its obligations.
Article 201 of the Constitution requires the burdens and benefits of public borrowing to be shared equitably between present and future generations. This is an important reminder that borrowing decisions must be guided by intergenerational fairness and prudent financial management.
There is also a possible connection between government borrowing and the cost of private credit. When government competes heavily with businesses and households for domestic financing, it can place upward pressure on interest rates and reduce the availability of credit to the private sector. The actual effect depends on monetary conditions, financial market liquidity and other economic factors, but the risk is important.
Businesses facing expensive credit may postpone expansion or employ fewer people. Households may find mortgages and construction loans increasingly unaffordable. Small enterprises may struggle to obtain the financing needed to grow.
This creates a potential contradiction: government may borrow in the name of development while the resulting financing pressures make it more difficult for citizens to invest, build homes and create jobs.
Foreign-currency borrowing presents additional risks. Where the shilling depreciates, the domestic-currency cost of servicing foreign-denominated debt can rise, placing further pressure on public finances.
The central issue is not whether government should ever borrow. It is whether the benefits of borrowing justify its full cost and whether the country can sustainably meet the resulting obligations.
Why Kenya Should End Persistent Budget Deficits
Kenya should make the elimination of persistent budget deficits a central objective of fiscal policy.
This requires aligning government expenditure with realistic revenue projections, controlling waste, improving procurement, strengthening revenue administration and ensuring that public spending delivers measurable value.
Borrowing should not become the routine solution to the gap between government ambitions and available resources.
A persistent deficit creates a difficult cycle. Government borrows to meet expenditure; debt service increases; fiscal space narrows; and further borrowing may be required to finance existing obligations and new priorities.
Eventually, the country faces difficult choices involving higher taxes, reduced expenditure, additional borrowing or adjustments to its debt obligations. Each option can affect households and businesses.
A sustainable fiscal framework would reduce the likelihood that citizens repeatedly bear the consequences of expenditure decisions that fail to account for long-term affordability.
However, the argument for fiscal discipline must be economically sound. Not every deficit is necessarily irresponsible. Temporary deficits may be justified during severe economic downturns or emergencies, while borrowing to finance productive infrastructure may be appropriate where the expected economic and social benefits exceed the full cost.
The distinction is between borrowing that builds productive capacity and borrowing that sustains expenditure the country cannot afford.
Kenya should therefore pursue a credible path towards a balanced budget over the economic cycle, with a strong presumption against persistent deficits used to finance ordinary recurrent expenditure. Borrowing should be carefully justified, transparently reported and directed towards investments with credible economic or social returns.
This is not a call for indiscriminate spending cuts. Abrupt reductions in healthcare, education, social protection or productive investment can damage living standards and weaken future growth. Fiscal consolidation should instead begin with waste reduction, better expenditure controls, realistic project prioritisation and stronger accountability.
The objective is not simply a smaller budget. It is a more responsible budget.
The Dignity of the Payslip
The relationship between economic policy and household welfare is perhaps most visible in the debate about the dignity of the payslip.
A payslip represents a person’s labour, time and contribution to the economy. It is expected to provide for food, housing, transport, education, healthcare and, where possible, savings.
Yet a salary tells only part of the story. Its real value depends on what remains after statutory deductions and essential expenses.
If the cost of living rises faster than income, a worker may continue to receive a regular salary while experiencing declining living standards. If additional deductions reduce disposable income without delivering corresponding benefits, households may find it increasingly difficult to meet their obligations.
This concern is relevant to the Affordable Housing Programme and the Affordable Housing Levy. The objective of expanding access to decent housing is legitimate and consistent with the constitutional recognition of the right to accessible and adequate housing under Article 43.
However, the financing arrangements must be assessed alongside the benefits delivered and their implications for households and employers. Under the statutory levy framework, employee and employer contributions both have economic effects: the employee contribution affects take-home income, while the employer contribution adds to the cost of employment.
The central question is whether the programme makes housing genuinely affordable to the people it is intended to serve.
A housing programme cannot be considered fully successful merely because thousands of units have been constructed. Its success must also be measured by the prices charged, the terms of financing, the number of eligible households able to occupy the homes and whether those households can sustain repayments without sacrificing other essential needs.
The dignity of the payslip must ultimately be measured by the dignity of the life it can sustain.
Lower the Cost of Building, Not Just the Price of the House
One practical way to improve housing affordability is to reduce construction costs.
Government does not necessarily have to become the dominant producer of houses. It can instead create an environment in which private developers, cooperatives, SACCOs, local builders and individual households can construct decent homes at lower cost.
The price of cement, steel, roofing materials, timber, plumbing products and other construction inputs significantly influences the final cost of housing. Where these inputs are expensive, buyers and tenants ultimately bear much of the burden.
Government should examine opportunities to improve competition, facilitate efficient local manufacturing, reduce avoidable regulatory and logistical costs and invest in infrastructure that lowers the cost of production and distribution.
Targeted tax relief may also be considered where it is legally sound, fiscally affordable and likely to benefit the intended users rather than simply increase producers’ margins.
Cooperatives and organised groups can benefit from bulk purchasing, while quality-certified alternative building technologies may offer further savings without compromising safety or durability.
Consider a hypothetical example. If building materials account for KSh 1 million of a house costing KSh 2 million, a 10 per cent reduction in material costs would save KSh 100,000. Assuming all other costs remain unchanged, the total construction cost would fall by five per cent.
The actual savings would depend on the type of house, location and construction method, but the example illustrates why material costs deserve serious attention.
Land, infrastructure, labour, professional fees and planning approvals must also be considered. Nevertheless, addressing these factors together could make housing more accessible without relying exclusively on direct government construction.
Government’s role should be to enable, regulate, provide essential infrastructure and protect consumers. Private enterprise and organised communities can contribute capital, expertise and capacity to deliver housing at scale.
The Cost of Borrowing: The Missing Link
Even when construction costs decline, housing may remain beyond the reach of many households if the cost of borrowing remains high.
The affordability of a home depends not only on its purchase price but also on the deposit required, the interest rate charged, the repayment period, associated fees and the stability of the borrower’s income.
Consider a hypothetical KSh 2 million loan repaid over 20 years through equal monthly instalments. At a fixed annual interest rate of 15 per cent, the monthly repayment would be approximately KSh 26,300. At 10 per cent, it would fall to about KSh 19,300, excluding fees and insurance.
The difference is roughly KSh 7,000 each month, or about KSh 84,000 annually. For a household with a modest income, such a reduction could determine whether home ownership is achievable.
This example demonstrates why housing policy must address the cost of credit alongside construction costs and household purchasing power.
Government should pursue policies that support macroeconomic stability, predictable inflation, sound public finances and a competitive financial sector. These conditions can help reduce financing pressures over time.
It can also consider carefully targeted credit guarantees, transparent interest support for eligible households and measures to strengthen SACCO and housing cooperative financing. Lenders can contribute by providing transparent pricing, appropriate repayment periods and products suited to different income patterns.
Incremental construction loans, rent-to-own arrangements and affordable rental housing can provide alternatives for households unable to qualify for conventional mortgages.
Such interventions must remain fiscally sustainable. The objective should not be to suppress interest rates artificially, but to remove avoidable barriers to responsible lending and expand access to affordable finance.
Affordable housing requires three things to work together: reasonable construction costs, affordable financing and household incomes sufficient to sustain repayments.
A Better Scorecard for Economic Leadership
Kenya needs a public scorecard that connects economic performance to the everyday experiences of citizens.
Such a framework should track real household income, purchasing power, decent employment, the cost of essential goods, housing affordability, access to credit, poverty reduction and the quality of public services.
It should also assess whether public resources are managed lawfully, whether projects deliver value and whether government commitments translate into measurable outcomes.
A completed project is an output; the improvement it brings to people’s lives is the outcome that matters.
A housing programme should be judged by whether eligible households can afford the homes. An employment initiative should be assessed by the sustainability and quality of the jobs created. Investments in healthcare and education should be measured by improvements in access, quality and affordability.
The same principle should apply to national and county governments. Citizens deserve to know not only how much public money has been spent, but also what that expenditure has achieved.
Growth Must Translate into Dignity
Kenya does not have to choose between economic growth and improved living standards. It needs growth that is productive, inclusive and supported by strong institutions and sustainable public finances.
A growing economy provides resources for development. Strong institutions and respect for the rule of law help ensure those resources are managed responsibly. Fiscal discipline protects the country’s capacity to invest in its future, while competitive markets and affordable credit help translate economic activity into opportunities for households and businesses.
The affordable housing debate illustrates this relationship. Building more houses is important, but construction costs, financing terms, household incomes and the sustainability of public financing determine whether those houses are genuinely affordable.
The same principle applies across the economy. More revenue is not an end in itself. More public expenditure is not necessarily progress. More projects do not automatically mean better living standards. And borrowing more does not necessarily mean investing better.
Government should therefore move away from persistent budget deficits that create unsustainable obligations, while preserving the flexibility to respond to exceptional circumstances and finance well-justified productive investments. Fiscal discipline should protect essential services and future opportunities, not become an excuse for indiscriminate cuts.
Ultimately, economic leadership should be judged by whether citizens can meet their essential needs, secure decent housing, access quality public services, find productive work and plan for the future with confidence.
The true measure of economic leadership is not how much government can spend or borrow, but how effectively it improves the lives of citizens without mortgaging the opportunities of future generations.
