PETALING JAYA: Balancing reduced government spending, sustaining economic growth and ensuring citizens’ wellbeing will be the main priority amid surging energy costs and an increasingly unsustainable fuel subsidy bill based on an average Brent crude price of US$65 a barrel.
While economists see the government’s move to achieve savings of up to RM10bil through a reduction in operating expenditure (opex) across the board announced on Wednesday as a timely measure to sustain the fuel subsidy, they urged caution and asked for clarity on the deficit reduction goals.
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid believes the move to cut the opex could be a form of budget recalibration as the government needs to reflect its spending with the current reality.
CGS International (CGSI) Securities economist Ahmad Nazmi Idrus said the question would be how the government balances these savings and ensures economic growth.
“That balance would be the key. It’s hard to say until we see the growth outcomes,” he added.
Bank Negara Malaysia (BNM) projected gross domestic product (GDP) growth of between 4% and 5% this year.
Advanced first-quarter 2026 (1Q26) GDP data showed the economy grew 5.3% year-on-year, moderating from 6.3% in 4Q25.
Fuel subsidies for RON95 petrol and diesel surged to RM7bil in April from RM700mil before the Middle East conflict began, with the government reviewing the proposed implementation of a more targeted diesel subsidy programme for Sabah and Sarawak similar to the Budi95 programme for RON95 petrol to replace the current diesel subsidy scheme.
At press time, the Brent crude futures contract briefly traded above US$125 a barrel as the market reacted to news of a prolonged blockade of the Strait of Hormuz and the implications for energy supply, indicating prices could trend higher.
Brent crude spot prices have also traded above US$110.
Socio-Economic Research Centre (SERC) executive director Lee Heng Guie said the current targeted and disciplined fiscal support over broad stimulus “is deemed appropriate during a supply-driven oil shock”.
He noted the government should resist “overspending” to shield consumers from high energy prices given the limited fiscal space.
“Fuel subsidies act as an implicit stimulus for consumption by keeping domestic fuel prices artificially low,” Lee added.
He warned added spending could worsen the supply crunch, drive up prices further, and risked worsening inflation without increasing output as it stimulates demand just when goods become scarce or when production gets disrupted through shortage of raw materials and higher prices.
“This risks creating stagflation, a combination of slower economic growth and high inflation,” Lee said.
SERC projects GDP growth of 4% to 4.5% for Malaysia this year, but forecasts 3.5% if the conflict lasts between three and six months and a contraction of 0.5% in a scenario where it lasts more than six to 12 months.
CGSI’s Nazmi said one option for the government to cushion the impact of spending cuts, including a further reduction of the fuel subsidy, would be to convert unused Budi95 quota into higher future quotas, or convert it to cash or vouchers for essential goods.
“This could discourage driving and at the same time help cushion inflation impact to consumers,” he said.
Mohd Afzanizam said the government could assist with guidance on its stance in dealing with the current high oil price environment and the impact on the deficit more clearly, which would help the markets as well as businesses and households.
“Perhaps, the fiscal deficit target of 3.5% of GDP for 2026 would need to be revised higher, possibly in the region of 4% to 4.5%,” he said.
HSBC Bank plc senior Asean economist Yun Liu said in a report that Malaysia’s hefty subsidy bill raises questions on what comes next for the RON95 policy, as it imposes pressures on the country’s fiscal coffers and its 2026 budget deficit forecast of 3.5% of GDP.
She remains neutral on the country’s outlook, as the hard data points to economic resilience, while the inflation trajectory would depend on fiscal adjustments to the RON95 policy.
“On growth, BNM is likely to maintain its cautious optimistic tone and continue acknowledging external challenges.
“Overall, we do not expect BNM to move in either direction in 2026 and 2027. We forecast it to hold its policy rate steady at 2.75%,” Liu said.
The Finance Ministry’s secretary-general Datuk Johan Mahmood Merican had on Wednesday issued a directive to all ministries and related agencies to review their remaining operational expenditures for the year in order to save costs.
The proposed budget cuts include RM3bil from the Health Ministry and RM2.4bil from the Higher Education Ministry, which the Finance Ministry clarified yesterday would involve only non-critical items.
Under Budget 2026, the Health Ministry received RM46.5bil, a 2.8% increase from RM45.3bil under Budget 2025.
The Higher Education Ministry received RM18.6bil under Budget 2026, a slight increase from the RM18bil under Budget 2025.
The directive ordered ministries and related agencies as well as statutory bodies to submit their proposed budget reviews by May 15 to the National Budget Office.
