PETALING JAYA: While Budget 2027 strikes a pragmatic balance between easing cost-of-living pressures and supporting economic growth, the sustainability of government spending and the ability to translate measures into lasting economic gains remain key concerns.
The government has increased the allocation for Sumbangan Tunai Rahmah (STR) and Sumbangan Asas Rahmah (Sara) to RM16bil from RM15bil, while total subsidies, assistance and incentives are expected to exceed RM80bil, including RM40bil for fuel subsidies.
Although Putrajaya is targeting a narrower fiscal deficit of 3.3% of gross domestic product (GDP) in 2027, from an estimated 3.6% this year (above the original 3.5% target), the substantial subsidy bill and exposure to volatile global oil prices remain risks to its fiscal consolidation efforts.
At the same time, the budget is directing resources towards longer-term growth drivers, including RM83bil in development expenditure and investments in semiconductors, artificial intelligence (AI), infrastructure and renewable energy.
The question is whether these measures, alongside cash assistance and tax relief aimed at supporting domestic consumption, can translate into stronger private investment, productivity and corporate earnings, rather than providing mainly short-term support to the economy.
Sunway University economics professor Yeah Kim Leng said the expanded STR-Sara allocation and subsidy bill exceeding RM80bil were key announcements.
He pointed out these measures directly address household affordability but represent the government’s main fiscal vulnerability, particularly given the volatility of global oil prices.
While the spending priorities were appropriate in direction, Yeah said the focus is more short term.
“The RM16bil for STR-Sara is well-targeted, given that 77% of Malaysians struggle with rising living costs. Furthermore, the focus on digitalisation, semiconductors, AI and the ‘Made by Malaysia’ agenda aligns with structural reform goals.
“However, the RM40bil fuel subsidy could be reallocated to build a deeper social safety net, especially if the world oil price falls below the assumed level.
“The cash transfers and subsidies will provide immediate respite although they do not sustainably raise incomes, while the minimum wage increase will need to be accompanied by productivity gains so the businesses can absorb the higher cost without passing it onto consumers,” he told StarBiz.
The country’s minimum wage will rise from RM1,700 to RM2,000 a month effective June 2027. Micro, small and medium enterprises (MSMEs) with annual sales below RM50mil are exempted. Moreover, semi-skilled workers and graduates will have a new minimum-wage benchmark of RM2,500 a month.
The budget is also expanding support for SMEs through financing guarantees, tax relief and AI adoption. Financing guarantee facilities will increase to RM57bil from RM50bil, while RM30mil has been allocated through the Malaysia Digital Economy Corp to help 4,000 SMEs adopt AI and automation.
SME Malaysia national council member Anthony Dass welcomed the support measures but cautioned that businesses continued to face higher costs from wages, utilities, rentals, financing and regulatory compliance.
“The success of Budget 2027 must be measured not by how much is allocated, but by how many SMEs genuinely benefit and whether their productivity, cash flow and competitiveness improve,” he said.
On the minimum wage increase, Yeah said the exemption for smaller MSMEs means larger employers will face the full cost while their smaller competitors do not, giving rise to a distortion that could disadvantage compliant firms.
“Most businesses will need to make adjustments especially in raising efficiency and accelerating productivity to fully offset the cost. Businesses are likely to respond through some combination of reduced hiring, price increases, or delayed investment,” he said, adding the inflation forecast of 1.8% to 2.8% for 2027 suggests some cost pass-through is anticipated.
According to Yeah, in terms of productivity, Budget 2027 had expanded industry-led TVET, apprenticeships, and reskilling programmes, with employers more deeply involved in curricula and training equipment. This means that for businesses to absorb the wage increase without adverse effects, these productivity programmes would need to deliver “rapid, measurable gains”.
While the projected narrowing of the fiscal deficit to 3.3% of GDP in 2027, from 3.6% of GDP in 2026, is broadly anticipated, OCBC senior Asean economist Lavanya Venkateswaran said it “remains to be seen” whether such fiscal consolidation can be achieved, as economic risks in 2027 continue to mount, ranging from external volatility to intensifying domestic political pressures.
“The revenue measures appear to reorient the revenue base towards commodities rather than broaden it. Meanwhile, expenditure pressures remain elevated, reflecting a persistently large subsidy bill. This limits the scope for a credible narrowing of the fiscal deficit in 2027. As such, our baseline view remains that fiscal slippage could amount to 0.2% to 0.3% of GDP in 2027,” she says.
UOB senior economist Julia Goh viewed Budget 2027 as broadly supportive of growth, citing measures to cushion household spending and support business expansion, alongside investments in infrastructure, digital connectivity and human capital.
“Execution will be key to ensuring that the announced measures translate into stronger private investment, productivity gains and sustainable economic growth,” she said.
One reason the government is able to sustain spending while narrowing its fiscal deficit is due to its efforts in increasing revenue collection, particularly through indirect taxes and higher dividends from Petroliam Nasional Bhd or PETRONAS. For one, the sales and service tax (SST) collections are expected to exceed RM70bil next year.
In a way, Budget 2027 sought to strike a balance between maintaining fiscal discipline and ensuring that its measures benefited different segments of the economy, despite perceptions that it could be shaped by the prospect of a general election.
BIMB Securities director of research Mohd Redza Abdul Rahman said Budget 2027 had “successfully struck a delicate and pragmatic balance between fiscal discipline and growth support”, with spending directed towards longer-term structural investments.
“Putrajaya has successfully decoupled social aid from structural capital investments. Rather than leaning into austerity, the government is pressing forward with structural transformation while narrowing the fiscal deficit target further to 3.3% of GDP,” he said.
Mohd Redza said there was a “heavy emphasis” on high-value ecosystems – such as IC design, advanced packaging, sovereign AI infrastructure, and grid modernisation (like Tenaga Nasional Bhd
’s RM15bil commitment) – that directly targets long-term economic complexity and productivity. Other critical measures that stood out included higher development expenditure, alongside tax relief for homebuyers and middle-income households.
“Gross development expenditure is set to increase 2.5% to RM83bil, supporting continued investment in major infrastructure projects such as the Penang LRT Mutiara Line and Pan Borneo Highway. Meanwhile, stamp duty exemptions for first-time homebuyers and expanded tax relief, including an increase in basic relief to RM12,000 and tax cuts for middle-income earners, are aimed at easing cost-of-living pressures,” Mohd Redza noted.
Berjaya Research head of research Kenneth Leong said Budget 2027 could have a “slightly positive impact” on the local capital market, with tax incentives for syariah-compliant fund managers, PRISMA sukuk issuers, equity crowdfunding and angel investors potentially improving fundraising access.
However, the absence of new mega-infrastructure projects and external uncertainties could limit a broad-based market re-rating.
“We reckon the FBM KLCI could potentially mount a recovery after largely underperforming in the first nine months of 2026, barring any unforeseen circumstances,” he said.
Leong maintained his end-2026 FBM KLCI target at 1,700 points, based on a 14.8 times price-to-earnings multiple.
