A petrol station employee checking a patron’s MyKad for eligibility, in view of the RON95 subsidy scheme for all Malaysian drivers. — AZHAR MAHFOF/The Star
Malaysia stands at a pivotal juncture in a complex economic landscape shaped by continued domestic reforms and priorities as well as global uncertainties inflicted by shifting trade policy, prolonged geopolitical conflicts and disruptive trends.
Against this backdrop, Budget 2026 is framed as a responsible budget for sustaining economic resilience, accelerating transformation to mitigate disruptive trends and empowering the people, aligning with the fundamental pillars of the Madani Economy Framework and the 13th Malaysia Plan (13MP) for 2026 to 2030.
Budget 2026, being the first budget for 13MP, has laid out strategies and initiatives to address immediate economic concerns for households and businesses, such as the cost of living and wage growth, while continuing to unlock new sources of growth, shifting the industrial base towards technology-driven and innovative models, and integrating sustainable practices and green technologies.
The measures, initiatives and development programmes under the budget are wide ranging, with the provision of targeted incentives, funds and soft loans for specific sectors.
The focus is on cultivating downstream ecosystems to support high-growth high-value sectors (such as semiconductor, green energy), prioritising technology adoption, innovation and artificial intelligence, developing and securing supply chain capability, skills and training development, particularly for technical and vocational education and training, accelerating regional development through the Johor-Singapore Special Economic Zone and the development of Special Tourism Investment Zones in Johor, Melaka, Negri Sembilan and Sarawak.
The overall budget stance remains mildly expansionary as the government balances fiscal sustainability and supports economic expansion.
The fiscal deficit to gross domestic product (GDP) ratio has been progressively dropping from 6.4% in 2021 to the budget’s target of 3.5% and a deficit of RM74.6bil next year from the estimated 3.8% of GDP for this year, marking the fifth consecutive year of deficit reduction.
This fiscal deficit reduction underscores commitment to fiscal discipline and rules as stipulated by the Public Finance and Fiscal Responsibility Act 2023.
The Finance Ministry (MoF) has made conservative revenue predictions, to build a buffer against uncertainty.
Federal revenue is projected to increase by 2.7% to RM343.1bil next year from an estimated 2.9% and RM334.1bil for this year.
Petroleum-related revenue is expected to be lower at RM43bil and 12.5% of total revenue next year versus RM56.8bil or 16.9% of total revenue this year due to lower petroleum income tax and PETRONAS dividend (RM20bil in 2026 versus RM32bil in 2025) amid forecast of lower crude oil prices (US$60 to US$65 per barrel versus US$70 this year).
The total expenditure allocation for the budget will amount to RM419.2bil or 19.7% of GDP, an increase of 1.7% from an estimated RM412.2bil for this year.
Of the total, RM338.2bil (80.7% of total expenditure) is for operating expenditure, a small increase of 1.8% from RM332.2bil this year.
Development expenditure is budgeted to increase marginally by 1.3% to RM81bil (19.3% of total) next year from a revised estimate of RM80bil this year from the original Budget 2025 allocation of RM86bil. Compared with Budget 2025, development expenditure has declined by 5.8% or RM5bil.
The government’s move to embark on subsidies rationalisation, especially for fuel and price reforms over the past two years, while politically unpopular, has provided some fiscal space.
The overall subsidy rationalisation implemented saves the nation about RM15.5bil annually.
After hitting a peak of RM71.9bil in 2023, subsidies and social assistance have been declining for three successive years from 2024 to 2026.
They will decline by 14.1% or RM8.1bil to RM49bil next year from RM57.1bil this year and RM67.4bil in 2024.
Total subsidies are budgeted at RM21.6bil next year compared with an estimated RM28.7bil for this year, RM41.9bil in 2024, RM49.2bil in 2023 and RM55.4bil in 2022.
The budget also allocates a total of RM15bil (RM13bil in 2025) targeted social assistance to provide immediate cost of living support for households.
This will help to sustain consumer spending for essential goods and services.
While cash transfers are effective short-term solutions, there has been concern about their fiscal sustainability, and hence, there is increasing debate about making these programmes more conditional to target-specific outcomes like improved health and education.
As next year is the first year of the 13MP, the RM81bil development allocation is for the implementation of approximately 2,300 newly approved programmes and projects.
These cover transportation, infrastructure, flood mitigation and the environment, trade and industry (industrial parks and tourism special investment zones), education and training as well as affordable public housing.
Carefully selected projects are important to optimise resource allocation, aligning with delivery of outcomes, increase the likelihood of success, and ultimately lead to better economic multipliers as public investment contributed an average of 4.7% of total GDP from 2022 to 2025.
It is critical for the government to proactively manage its debt and liabilities in ensuring adequate fiscal space and strengthen resilience against external shocks.
Debt-service charges continue to limit fiscal space, taking an increasing share of revenue to 17% in Budget 2026 from 16.3% last year, higher than the limit of 15%.
The government must continue to maintain prudent spending to reduce the budget deficit as well as limit new borrowings.
The federal government’s debt stood at RM1.3 trillion or 64.7% of GDP as of the end of June, compared with RM1.25 trillion or 64.6% of GDP at the end of 2024.
It remains above the statutory threshold of 60% of GDP under the Public Finance and Fiscal Responsibility Act 2023.
With estimated net borrowings of RM77.2bil this year, the government’s total debt is projected to reach RM1.32 trillion or 65.7% of GDP by the end of this year.
Under the baseline scenario, the ratio is expected to stand at 65.8% this year, before gradually easing to 60% by 2030, in line with the target set under 13MP.
The combined debt and liabilities exposure stood at RM1.69 trillion or 84.1% of GDP as of June, underscoring the importance of proactive fiscal risk and liability management
To achieve this, the government must either decrease total debt or increase GDP, or both.
Decreasing debt involves strategies like prudent spending, revenue enhancement through tax reforms and broadening the tax base to improve primary budget balance, zero-based budgeting for efficiency, and proactive long-term financial forecasting to ensure a stable debt-to-GDP ratio. The government must stimulate GDP growth with nominal growth of at least 6% annually through policies that encourage investment, innovation, and productivity.
We concur with MoF’s cautious assessment of economic growth for next year on continued weak exports while domestic demand will continue anchoring domestic growth.
Real GDP is forecast to increase at a slower pace between 4% and 4.5% this year compared with an estimated 4% to 4.8% next year. Our estimates are 4% for this year and next year.
Consumer spending (61.5% of GDP next year) is largely holding up so far.
The MOF’s estimate of 5% growth this year and 5.1% next year versus the Socio-Economic Research Centre’s 4.9% this year and 4.8% next year is underpinned by a strong labour market conditions (unemployment of 3% this year and next year), continued income growth (wage growth of 3.4% in the second quarter of this year, continued cash assistance of RM15bil, the second phase of the Public Service Remuneration System, which includes a 7% salary increment for civil servants in Grade 15 and below, and higher tourists spending during Visit Malaysia 2026 with a target of 47 million foreign visitors versus 43 million this year.
Amid investor caution on the back of global uncertainty, the upturn in private investment (18% of total GDP in 2026) will continue, supported by increased capital spending on structures and machinery and equipment in technology-intensive manufacturing and services sectors.
High levels of approved investment in the manufacturing, services, and primary sectors averaging RM291.3bil per year from 2022 to 2024, and RM190.3bil in the first half of this year will sustain investment activity in the years ahead.
The realisation rate of approved manufacturing projects was 85.1% from 2021 to June this year.
MoF expects private investment to increase by 10% this year and 7.8% next year. Our estimates are at 10% this year and 8.1% next year.
Major economic sectors are expected to grow next year, with the services sector, being the largest share of GDP at 60.3%, sustaining 5.2% growth (5.1% this year) on increased tourism activity, expansion in land, air and water transportation as well as technology- related services.
This will be followed by the construction sector (6.1% next year versus 10.1% this year), and manufacturing (3% next year versus 3.8% this year).
Exports are a major uncertainty for next year because of weakening global demand, ongoing tariff uncertainties, and geopolitical tensions that could further impact trade dynamics.
MoF projects exports to slow to 2.8% next year from an estimated 3.3% this year. Our estimate is 3% this year and 2.5% next year.
Slower global economic growth and the performance of our major trading partners like China and the United Stats could weigh on our exports, exerting negative spillover on domestic economic growth.
Reduced foreign demand or increased trade barriers could cause a slowdown in exports, which then negatively impacts domestic consumption, investment, and overall economic activity.
Malaysia’s exports vulnerability to the United States remains high due to the impact of tariffs, especially for the electronics and electrical products.
A 1% drop in US GDP growth could cause about a one percentage point reduction in Malaysia’s GDP growth.
A 1% decline in China’s GDP growth could potentially shave 0.5 percentage point off Malaysia’s economic growth.
With the headline inflation expected to remain manageable at about 1.3% to 2% next year versus 1% to 2% this year, we expect Bank Negara Malaysia to keep the overnight policy rate at 2.75% for now.
If the economy slows below the government-set “tolerable” level of 4%, a rate cut would be considered.
Hence, the central bank will continue to determine the appropriate monetary policy stance next year by following a data-dependent and meeting-to-meeting approach.
Lee Heng Guie is the executive director of the Socio-Economic Research Centre. The views expressed here are the writer’s own.
