PETALING JAYA: Budget 2027 may be the toughest yet for Prime Minister Datuk Seri Anwar Ibrahim, as he confronts a difficult trade-off between critical fiscal reforms and election goodies to prop up his popularity, ahead of the 16th General Election.
As the economy grapples with rising costs, economists suggested Budget 2027 should prioritise measures that provide immediate relief while laying the groundwork for stronger wage growth, productivity and long-term economic resilience.
Achieving this, however, will require careful calibration to address these pressures without compromising structural incentives or pushing the fiscal deficit beyond a manageable level.
Interestingly, economist Yeah Kim Leng said the key issue may not be the government’s fiscal headroom for election goodies, but how much fiscal slippage it is willing to tolerate.
To this end, Yeah suggested that the government hold off on new taxes or rate increases, and instead reallocate spending towards households and businesses typically targeted by “election goodies” while keeping fiscal consolidation on track.
This is crucial as higher taxes could further strain households and businesses recovering from the fallout of geopolitical shocks.
“As long as the deviation from the fiscal deficit target of 3.5% in 2026 remains the same or shows a slight increase of 0.1-0.2 percentage points, it would not raise alarm bells on the country’s fiscal health given the above-expectations gross domestic product (GDP) growth in 2026 and 2027,” he told StarBiz.
Budget 2027 is scheduled to be tabled in the Dewan Rakyat on Oct 9.
Households and businesses this year particularly are struggling from rising living and operating costs, exacerbated by the global energy crisis, Yeah said.
Previous reports have also indicated a slowdown in investment among local manufacturers, with many small and medium-sized enterprises (SMEs) struggling to expand.
This is placing greater pressure on middle-income households, many of whom are finding it increasingly difficult to get ahead.
Yeah said the government should promote market-led wage growth in line with rising worker productivity, while expanding upskilling and reskilling programmes linked to the recent investment surge to strengthen the economy’s long-term growth potential.
He added that targeted tax relief on business costs, upgrading and reskilling grants, subsidies and soft loans for expansion could provide a much-needed boost to businesses while allowing the government to maintain fiscal discipline.
“Other non-financial measures to lower the regulatory burden and enhance the business operating environment could also be stepped up to win over the ‘hearts’ of businesses,” he noted.
In contrast, economist Doris Liew said the government should avoid allowing short-term electoral pressures to crowd out its development expenditure with longer-lasting returns, highlighting priority should be directed towards measures that can produce a visible near-term impact while also contributing to longer-term economic outcomes.
“Business support, for example, should be concentrated on interventions with a clear investment or productivity payoff, such as accelerated capital allowances, financing support and targeted incentives for productive investment,” she said.
In addition, she pointed out that policy certainty is equally important as a stable tax and regulatory environment may do more to support sustained private investment compared to broad-based incentives.
At the same time, she said that the underlying principle applies to household support.
“Budget 2027 will almost certainly need to be visibly responsive to persistent cost-of-living pressures, making some form of immediate relief politically necessary,” she agreed.
Nevertheless, she highlighted the challenge is to structure such measures so that they do more than temporarily raise disposable income.
“Cash or targeted assistance could, where appropriate, be linked to priority development areas such as employment, training, childcare, preventive healthcare or children’s education,” she indicated.
Liew underscored sectors that directly support human capital and productivity growth as key to building a more resilient economy over the longer term.
“Continued investment in healthcare, schools, public transport and infrastructure maintenance can generate visible improvements in service delivery while also strengthening productivity, human capital and economic resilience beyond the election cycle,” she told StarBiz.
Similarly, HEYA Inc chief executive officer Ooi Tze Howe urged the government to exercise greater spending discipline.
He pointed to longer-term fiscal reforms, including the reintroduction of the goods and services tax (GST) and a carbon tax, as avenues to strengthen government revenue.
Ooi also called for stronger measures to support SMEs amid global uncertainty.
This includes greater access to government procurement opportunities and tighter regulation of cheap imports to shield local businesses from excessive competition.
He suggested that GST could initially be reintroduced at a lower rate of 4%, while a carbon tax could first be imposed on listed companies to broaden the revenue base without placing undue pressure on SMEs during the transition.
That said, Yeah provided clearance that the government still has some fiscal room, with additional revenue potentially supporting election-related spending while keeping longer-term reforms on track.
“Based on the last three years’ performance, the economy’s 4-5% growth will generate government revenue increase of around 3%, suggesting that up to RM10bil additional revenue is available to support an increase in election year spending,” he explained.
On the other hand, Liew said a substantial increase in fiscal spending would make the government’s consolidation path more difficult to sustain with the fiscal deficit intended to narrow from 3.5% of GDP in 2026 towards 3.2% in 2027.
“Debt-service charges, salaries and pensions already absorb a large share of expenditure, leaving relatively limited room for new commitments,” she highlighted.
She highlighted therefore that an additional election-related spending is likely to be financed through higher borrowing and reprioritisation within existing expenditure, as major new taxes or politically difficult reforms are unlikely this close to an election.
Separately, Liew said the risk of exhausting quick revenue wins will depend on how Budget 2027 is structured and the cost of additional measures.
“In particular, any handouts or election-related support should be designed as temporary and one-off measures.
“The government will also need to be selective in introducing new programmes and avoid locking in spending that is difficult to unwind later.
“This would allow Budget 2027 to provide near-term support without allowing temporary electoral spending to translate into a structurally higher fiscal burden over the medium to long term,” she explained.
