PETALING JAYA: The government is prioritising gradual fiscal consolidation over aggressive spending cuts as it seeks to rein in the national deficit without undermining economic growth and investor confidence amid heightened global uncertainties.
Finance Ministry secretary-general of treasury Tan Sri Johan Mahmood Merican said the government was mindful of the need to balance fiscal discipline with sufficient public spending to sustain economic momentum.
“Budget preparation is always a balancing act, involving difficult choices and trade-offs.
“We do not want to sacrifice investor confidence, particularly given the progress made in strengthening Malaysia’s credibility and policy consistency.
“At the same time, we have opted for a slightly expansionary budget to ensure sufficient government expenditure to support economic growth.
“This is reflected in the increase in allocations from RM419bil in 2026 to almost RM460bil,” he said during a panel discussion at Deloitte Malaysia’s TaxMax seminar: The 52nd Series, themed Leading Through Change, yesterday.
Budget 2027’s total federal expenditure of almost RM460bil comprises 82% in operating expenditure and 18% in development expenditure.
Major operating expenditure components include emoluments, subsidies and social assistance, debt service charges, supplies and services, and retirement charges.
Johan said rather than sharply reducing the fiscal deficit following the pandemic, the government adopted a gradual consolidation approach, supported by the Fiscal Responsibility Act, which targets a deficit of 3% of gross domestic product (GDP) in the medium term.
Measures such as subsidy rationalisation for electricity, petrol and gas are also intended to gradually strengthen the government’s fiscal position.
“We remain on track to achieve our 3% fiscal deficit target by 2028, with the deficit projected to narrow to 3.6% this year and 3.3% next year,” he said.
However, external uncertainties, particularly the Middle East conflict, remain a key consideration for the government’s economic outlook.
While the International Monetary Fund projects global growth of about 3.4% in 2027, Johan said disruptions to supply chains, particularly for businesses dependent on petrochemical products, could pose risks.
He said the government was also mindful of earlier concerns among international investors and credit rating agencies over Malaysia’s fiscal position, with government debt exceeding RM1 trillion and debt and liabilities surpassing 80% of GDP when the administration took office in late 2022.
On revenue mobilisation, Johan said the government was focused on broadening the tax base and improving compliance rather than continually increasing the burden on existing taxpayers.
He noted that Malaysia’s tax-to-GDP ratio stood at about 12% in 2023, which is among the lowest in the region, highlighting the need to strengthen revenue collection.
Through the e-invoicing implementation, the government identified about 70,000 individuals in 2026 who made significant purchases but had no corresponding tax returns.
“Rather than continually increasing the tax burden on compliant taxpayers, we want to bring more people into the tax system and ensure everyone contributes their fair share,” he said, adding that compliance efforts had generated about RM1.6bil in additional revenue.
At the same time, he added that the latest budget introduced personal tax relief and rate reductions costing the government about RM2bil, providing some relief after several years of tax reforms and subsidy rationalisation.
Meanwhile, the effectiveness of the existing sales and service tax (SST) framework remains a point of debate.
Socio-Economic Research Centre (SERC) executive director Lee Heng Guie said one weakness of the SST was it fails to establish a continuous input-output tax credit chain, particularly for businesses dealing with mixed-use or non-taxable inputs.
He said a significant of the centre’s surveyed members supported reintroducing the goods and services tax (GST), which he also viewed as a more comprehensive and transparent consumption tax system.
Lee said a GST regime could eventually create room to lower direct taxes, including personal and corporate income taxes, making Malaysia more competitive as an investment destination.
However, Johan cautioned that reintroducing the GST would not automatically increase government revenue if the rate remained at the previous 6%.
“At the same rate, we would potentially collect a similar amount of revenue. However, the tax burden would shift from businesses, including exporters, to consumers,” Johan highlighted.
He added that the GST was generally regressive, as lower-income households tend to spend a larger proportion of their income, leaving them with less capacity to save, while higher-income households have greater proportion of their income available for savings.
“As a result, the proportion of income paid in tax tends to be higher for lower-income households, even if higher-income individuals pay more in absolute terms,” he said.
Johan stressed the need to account for differences in household income when designing targeted policies.
Beyond fiscal consolidation, Johan said raising productivity and accelerating technology adoption would be crucial to Malaysia’s longer-term economic growth.
“Many Malaysian companies were still lagging in digitalisation and artificial intelligence adoption, despite the technology’s potential to transform business operations and the workforce.
“Moving up the value chain requires us to become a high-income, high-productivity economy. Higher productivity typically comes from adopting the latest technologies.
“We need to embrace these technologies if we want to remain relevant and competitive,” Johan said.
He added that the government was supporting this transition through digitalisation grants and automation incentives, while the Malaysian Investment Development Authority or Mida was facilitating connections between domestic vendors and multinational corporations.
On more inclusive growth, Johan said stronger wage growth remained an important objective, but needed to be supported by productivity improvements and greater business investment in technology.
He added that the government was also focused on getting the fundamentals right, including maintaining public infrastructure, improving school facilities and addressing inadequate healthcare facilities, particularly in rural areas.
Touching on digitalisation and AI adoption, SERC’s Lee said small and medium enterprises could start by leveraging business data to understand customer behaviour, improve tracking and streamline operations.
This could reduce operating costs, improve productivity and help local companies better integrate into multinational supply chains while creating demand for higher-skilled, better-paying jobs, he added.
Meanwhile, Mida deputy chief executive officer of investment development Zuaida Abdullah said that Mida had connected 14 global data centre operators, including Amazon Web Services, Google and Microsoft, with 51 local vendors through its industry initiatives to strengthen domestic participation in the sector’s supply chain.
