Addressing Malaysia’s fiscal challenges

LAST week, this column focused on economic reforms and why it is difficult to address some of the long-standing structural issues related to the removal of subsidies, the introduction of new or higher taxes, and Malaysia’s relatively low wage structure.

These issues, which are clear concerns for any government running the country, have significant fiscal implications if not addressed head-on.

The tabling of the 13th Malaysia Plan (13MP) last week also shows that we are far from addressing fiscal issues, as the government still expects Malaysia to run a fiscal deficit not only over the next five years, but beyond.

Higher debt

While Malaysia is on the right track in reducing its fiscal deficit from a high of 5.5% in 2022 to 4.1% last year and 3.8% this year, the pace of reduction has been rather slow, mainly due to delayed reforms in terms of revenue collection and expenditure.

The RM100 handout for every Malaysian above the age of eighteen and the lowering of the pump price for RON95 to RM1.99 per litre sounded more populist than substantive.

In terms of fiscal reforms, one would expect the government to raise tax collections via the introduction of not only new taxes but also by expanding the tax scope and removing unnecessary reliefs given to businesses and individuals.

Malaysia’s low tax revenue as a percentage of gross domestic product (GDP) needs to improve to reduce our dependence on debt to fund government spending.

The country also needs to address persistent leakages that continue to drain resources every year – no matter which political party is helming the government – unabated.

Tax-to-GDP

In 2024, Malaysia’s tax-to-GDP ratio fell to 12.4% as total tax revenue expanded by 4.8%, reaching RM240.2bil from RM229.2bil in 2023, while nominal GDP expanded at a faster pace of 5.9%.

The low tax-to-GDP ratio has really been a pain for the government’s reform efforts, as any move to raise taxes – whether directly or indirectly via methods such as those related to the sales and services tax (SST) – has been met with disapproval among Malaysians.

Last week, the government decided not to proceed with the high value goods tax, missing another opportunity to increase revenue.

Nevertheless, due to issues related to thresholds and tax quantum, the removal of this tax was seen by many as a positive move.

After all, the current SST regime already captures tax on these goods.

Legislative framework

The government has taken steps to rein in spending with the introduction of the Fiscal Responsibility Act (FRA), 2023. Under the Act, the government is required by law to maintain fiscal discipline as spelt out in the First Schedule.

This includes keeping annual development expenditure at least at 3% or more of GDP; a fiscal deficit of 3% or lower as a percentage of GDP; a debt level at or below 60% of GDP; and financial guarantees not exceeding 25% of GDP.

Section 27(1) of the FRA also requires the minister to table a fiscal adjustment plan in Parliament if the fiscal objectives and targets specified in the First Schedule are not achieved.

According to the government, Malaysia’s debt stood at RM1.3 trillion as at the end of the second quarter of financial year 2025, compared with RM1.25 trillion at the end of 2024, while government liabilities reached RM384.6bil as of June 2025.

Based on the 2024 figures, Malaysia’s debt-to-GDP ratio stood at 64.6%.

Hence, with an estimated additional net debt burden of RM32bil this year to fund the projected development expenditure of RM86bil, the total federal government debt is expected to rise to RM1.33 trillion.

With an expected nominal GDP growth of about 5.8% for 2025, assuming a real GDP growth forecast of 4.5%, Malaysia’s debt-to-GDP is set to close the year at close to its statutory ceiling of 65%.

According to the 13MP tabled last week, the government is expected to continue to drive the economy with relatively high development expenditure, averaging at about RM86bil per annum, similar to this year’s allocation.

To support this, the government’s annual borrowings will likely be RM84bil per annum over the next five years, taking total government debt to RM1.74 trillion by the end of 2030.

Assuming a nominal GDP growth of 6.7% per annum, Malaysia’s nominal GDP may hit RM2.89 trillion, leaving the debt-to-GDP ratio at approximately 60.1% by the end of the 13MP period.

Based on these projections, the government would be able to meet the threshold levels that are set out under the FRA – but only barely.

The government should intensify its efforts to improve its revenue collection and expenditure controls to enhance the operating surplus.

This will help the government to reduce the need to raise funds via fresh borrowings.

Every RM10bil improvement in the operating surplus can reduce the debt-to-GDP ratio by 0.3 percentage points.

In terms of reducing expenditure, the government should target to remove direct subsidies to the public, as there must be a time frame when the crutches of subsidies are removed once and for all.

Greater efforts

Based on data provided in the 13MP, government revenue over the next five years is expected at RM1.82 trillion, while total expenditure is envisaged at RM1.81 trillion, leaving a meagre surplus of just RM12bil.

Under the 13MP, the government did not specifically target any new form of taxes other than the proposed carbon tax, but reiterated its efforts to widen the scope and rate of the existing, as well as implement the Global Minimum Tax.

This is in line with the expectations of a lower tax contribution from petroleum-related taxes going forward.

However, with the expected growth in nominal GDP over the next five years under the 13MP, tax collection needs to increase at a faster pace to raise Malaysia’s currently low tax-to-GDP ratio and to be less dependent on borrowings to fund economic growth.