KUALA LUMPUR: The government must restructure personal tax brackets and raise individual reliefs in Budget 2027 to address a widening middle-income squeeze and preserve consumer resilience, says the Socio-Economic Research Centre (SERC).
Highlighting a growing divide in the domestic economy, SERC executive director Lee Heng Guie stressed that policymakers must evaluate Malaysia’s economic health through disaggregated data rather than relying solely on headline gross domestic product growth.
“Middle-income earners have borne the brunt of a decade-long income squeeze made worse by an increasingly uneven K-shaped economic expansion,” Lee said during a briefing on economic conditions and Budget 2027 priorities yesterday.
A K-shaped economy describes a recovery or economic trend where different groups experience sharply different outcomes after a shock (such as a recession or pandemic).
Instead of everyone recovering together, the economy “splits” into two paths that resemble the letter K.
While Malaysia’s economy is performing better than expected, averaging 5.6% year-on-year growth in the first half of financial year 2026 (1H26) before moderating to an estimated 4.5% to 5% in 2H26, Lee cautioned against complacency, noting that the economy continues to endure elements of a “K-shaped” recovery.
Under this uneven structure, the upper arm has high-tech manufacturing, electrical and electronics, information technology, artificial intelligence (AI), semiconductors, and financial services that continue to thrive on robust global demand. Moreover, the lower arm consists of traditional retail, hospitality, small businesses and semi-skilled workers that continue to lag or struggle under elevated living costs.
Adding to the pressure on households, Lee explained that skill-related underemployment is weakening the link between education, productivity, and wage growth.
“As of the first quarter of financial year 2026, 39.7% of tertiary-educated workers aged 25 to 34 are in jobs below their skill level, leaving middle-class wages lagging behind persistent cost-of-living increase.”
To rebuild domestic consumption buffers, Lee urged the government to update personal tax reliefs, as many of which have remained unchanged since 2010, and smooth out marginal tax bands.
“SERC recommends flattening tax rates for those earning between RM70,000 and RM200,000 annually to eliminate steep progression jumps, which currently hit 25% for earnings above RM100,000.”
The flattening tax rates include personal relief (to be raised from RM9,000 to RM10,000 to RM12,000), spouse and dependent relief (raised to RM6,000 and RM3,000 to RM4,000, respectively), as well as Employees Provident Fund (EPF) and insurance reliefs (to raise EPF to RM5,000, and life/medical insurance to RM4,000 to RM5,000).
Beyond income tax, Lee suggested shifting general Sumbangan Tunai Rahmah cash transfers into targeted consumption support via the Sumbangan Asas Rahmah programme.
“Expanding digital QR code payments for essential groceries, fuel, and utilities will ensure aid directly targets households in need,” he added.
To support this rollout and buffer against climate-driven food security risks, SERC recommended slashing merchant transaction fees from 1% to 0.5% for participating retailers, while expanding the Madani Rahmah Sales across 30,000 locations nationwide.
On the business front, Lee called for urgent action to reverse lagging domestic investment momentum.
“While foreign direct investment remains robust, approved domestic manufacturing investment fell 2.8% in 2025, as mid-tier firms and small and medium enterprises (SMEs) face severe hurdles scaling up due to limited reinvestment capacity.”
To address this, Lee recommended extending the Accelerated Capital Allowance until 2030, and strengthening the Reinvestment Allowance and Investment Tax Allowance by raising both the qualifying capital expenditure rate and statutory income set-off to 80%.
He underscored the 2013 SME definition “updating” so growing mid-tier companies are no longer locked out of official support grants and tax incentives while remaining too small to compete with global multi-nationals.
Lee also highlighted the issues of Malaysia’s high food import dependency and chronic food deficit.
He said the heavy reliance on imported food (reaching RM92.8bil in 2025) and low Self Sufficiency Rates for certain food items such as beef, ginger and round cabbage (ranging between 8.5% and 41.7%) expose the nation to global supply shocks and a widening food deficit averaging RM34.1bil per year in 2022 to 2025.
“We recommend that the government release 100,000 to 200,000 hectares annually for agrofood cultivation, specifically targeting commodities with high import dependency.
“Strengthen public research and development in seed development and post-harvest technology (for example, cold chains) to ensure outputs are scalable for SMEs.”
Looking ahead, Lee noted that K-shaped growth is likely to persist due to lingering external and domestic headwinds, including prolonged global monetary tightening, US trade frictions, AI valuation corrections, and ongoing geopolitical conflicts.
Domestic performance could also face disruptions from severe weather events, he added.
“Malaysia is currently experiencing erratic weather at a time when the monsoon starts, despite the El Nino onset.
“All this will impact our data centres in Johor and our agro-food production,” Lee cautioned, projecting cautious consumer and business spending through the remainder of the year.
