The budget comes at a pivotal moment, with domestic economic growth slowing to 4.4% in the first half of this year.
BUDGET 2026, which will be tabled on Oct 10, marks the first budget to support the goals of the 13th Malaysia Plan (13MP).
This budget is built on expectations that it will seek to sustain domestic demand by implementing income-enhancing measures such as continued cash transfers, fostering stable employment, manpower reskilling and supporting private-sector investments. It will lay the foundation for future-proofing the economy.
The budget comes at a pivotal moment, with domestic economic growth slowing to 4.4% in the first half of this year (1H25) compared with 5.2% in 2H24, and global uncertainty fuelled by the US tariff threats and geopolitical tensions posing persistent challenges going into 2026.
The government is expected to project real GDP growth of 4% to 5% for next year against the estimated 4% to 4.8% for this year.
Changes in domestic compliance, subsidies rationalisation and tax policy have added to domestic cost challenges.
Cost of living pressures remain a real and widespread concern for Malaysians. Businesses have been facing increased costs across multiple areas, impacting their operating costs and profit margins, and are adopting a cautious investment approach.
The pressure comes from rising labour costs, energy prices, raw-material prices, and even increased compliance costs such as e-invoicing, environmental, social and governance standards, the expanded sales and service tax, Employees Provident Fund (EPF) contributions for foreign workers, port charges, and electricity and water tariffs hikes.
Against this backdrop, we expect the Budget 2026 to focus on three pillars, Resilience, Sustainability, and Inclusivity, reaffirming the government’s commitment to fostering economic growth, strengthening economic and financial resilience, and creating an inclusive development landscape.
The budget’s priorities are lifting household and business sentiment, securing social wellbeing, unleashing growth, infrastructure projects, advancing investment in high-growth high-value (HGHV) sectors, empowering small businesses, developing workforce skills, the green and blue economy, fostering youth potential as well as empowering women.
We expect the government to target a fiscal deficit of between 3.3% and 3.5% of gross domestic product (GDP) for next year, a reduction from the estimated 3.8% of GDP for this year, moving gradually towards the 13MP’s target of less than 3% by end-2030.
Gross development expenditure is budgeted to increase by 3.5% to RM88bil next year against the RM85bil this year.
The allocation and distribution of Sumbangan Asas Rahmah or Sara and Sumbangan Tunai Rahmah assistance is expected to see higher amounts and improvement benefitting 8.8 million recipients, involving an allocation of RM15.5bil, against RM13bil in Budget 2025.
Higher allocations will be given to the education and training development, healthcare, economic and social sectors as well as industrial development. Small and medium enterprises (SMEs) will continue be given bigger support in terms of capacity building funding, grants, and financial facilities.
The tourism sector, which received nearly RM550mil in Budget 2025, will be allocated around RM300mil to RM400mil to boost tourism for Visit Malaysia Year 2026.
The construction sector will benefit from the people-centred projects, public transportation and infrastructure such as highways, ports and roads.
It is expected that the Home Ownership Campaign 2.0 will be extended to Dec 31, 2026, with first-time home buyers receiving a 100% stamp duty exemption for properties priced RM500,000 and below.
Civil servants, estimated at 1.7 million or 10.2% of total employment, will enjoy a salary adjustment of 7% in the second phase of the revised Public Service Remuneration System, costing RM5bil.
Financial assistance payments of RM500 for civil servants in Grade 56 and below, and RM250 for pensioners is set to cost around RM1bil.
The government will review the mandatory retirement age from 60, adapting to an ageing population while introducing changes to the EPF through a new scheme to provide monthly payouts to retirees.
New tax measures on households and businesses is unlikely in the budget.
In making Malaysia’s tax and regulatory systems more business friendly, a New Investment Incentive Framework can implement tax and business reforms that streamline approvals, simplify compliance, reduce costs, reduce red tape, enhance transparency and better align investment incentives with national economic goals.
The streamlining of incentives and non-fiscal benefits can be replaced by a simpler and competitive tax rate of 22% from 24% currently to spur investment. Malaysia’s tax rate is considered uncompetitive compared with Singapore (17%), Vietnam (20%), Thailand (20%), and Indonesia (22%).
Supporting SMEs comprehensively across multiple fronts is essential as they form 98.4% of total business establishments. SMEs have already been burdened with substantial increases in business and operating costs.
Hence, it is proposed that an increase in the threshold to the first RM2mil chargeable income, enjoying a 15% preferential tax rate, from RM150,000 currently.
SMEs’ support should encompass providing accessible and varied financial instruments like grants and loans for innovation and research, export capacity, talent acquisition and retention, and sustainability initiatives and green technology adoption as well as artificial intelligence (AI).
To assist SMEs who are unsure about what kind of AI solutions to adopt and how to get started, provide pre-approved GenAI solutions with up to 50% grant support.
The budget is expected to double down on attracting investments into HGHV sectors, including semiconductors, advanced manufacturing, AI-driven services, renewable energy, and digital technology.
The government can consider enhancing the Reinvestment Allowance and Investment Tax Allowance by increasing both the qualifying capital expenditure allowance rate and the percentage of statutory income to be set off to encourage reinvestment or continued investment.
Review the matching basis and maximum reimbursable amount of Domestic Investment Accelerator Fund.
Although tax incentives for research and development are available in Malaysia, there is room to fine-tune the definitions, qualifying conditions and approval processes.
Offer an enhanced tax deduction for research and development expenses like Singapore at 250% to 400%, along with capital gains tax exemptions for investments in innovative startups.
Allowing multiple claims in digitalisation grant for SMEs would allow businesses to better match the incentive to their actual growth plans. Alternatively, provide an annual allocation of RM2,000 per SME to support long-term adoption of digitalisation tools, with priority given to higher allocations for those adopting local software and applications.
The focus on education and manpower reskilling is a continuous effort to build a future-ready workforce capable of thriving in the digital and AI age, while maintaining momentum in science, technology, engineering and mathematics (STEM), technical and vocational education and training (TVET), and lifelong learning.
To establish a Unified National Training Platform, it would be better to consolidate all accredited programmes from the likes of HRD Corp, NTW Malaysia, Malaysia Digital Economy Corp, and the Higher Education Ministry for ease of applications, identifying training courses and optimisation of resources.
To encourage self-driven upskilling and personal development, it is proposed to introduce a Universal Skills Credit system that directly empowers individuals, particularly those who are not covered by their employer’s human resources development levy, to pay for their own training.
To expand our export markets, the government can consider widening and raisingthe Allowance for Increased Exports (AIE); increase the lifetime cap of the Market Development Grant to RM500,000; raise the per-claim ceiling to RM35,000 for international trade fairs and exhibitions, and RM10,000 for locally held trade fairs and exhibitions; and establish a special scheme for first-time exporters, particularly SMEs, to cover certification, packaging redesign, compliance, and initial overseas marketing costs.
The government has implemented interim measures to alleviate the burden of rising medical costs, including spreading out premium increases over time, and offering a temporary pause on adjustments for seniors.
The budget may consider introducing a basic medical insurance scheme that has features of co-payment – “top-up” and “out of pocket” payments, and allow withdrawals from Account 2 of the EPF to pay for health insurance premiums.
Additionally, it is proposed that income tax relief for parents’ medical expenses be increased to RM12,000 from the current RM8,000; income tax relief for life insurance be increased to RM5,000 and education and medical insurance to RM7,000; and providing citizens aged 50 and above with an annual subsidy or voucher of RM200 to purchase nutritional supplements, health foods, or access traditional and complementary treatments related to the prevention or management of non-communicable diseases.
The allocation will amount to RM1.3 billion, benefiting 6.6 million citizens aged 50 and above.
To maintain momentum for solar adoption and renewable energy, the budget should consider extending the Net Energy Metering (NEM) programme (up to 300MW for businesses through NEM NOVA; and an additional 150MW for residential NEM Rakyat users) beyond its June 30 expiry; introduce financial incentives to accelerate household battery adoption, provide full exemptions on import duties and sales taxes for key renewable energy components, including solar panels, inverters, and battery energy storage systems (BESS); and introduce a Green Personal Tax Relief category for individuals, allowing tax deductions for new investments in solar panels, BESS, and electric vehicle charging equipment installed at private residences.
The relief can be structured as RM5,000 per year up to a lifetime cap of RM20,000, or offered as a one-off RM20,000 tax deduction.
The 13MP stated that a multi-tiered levy mechanism (MTLM) for foreign workers will be introduced next year. The plan also proposes to reduce the ratio of foreign workers to total workforce from 14.1% currently (2.4 million documented foreign workers) to 10% by 2030, and further to 5% by 2035. An MTLM Trust Fund will be established to support automation and mechanisation.
The tiered levy should be structured based on the number of foreign workers instead of ratio to total workforce so as to have a proportional impact on smaller businesse.
SMEs should be granted a two-year moratorium after its initial implementation for large companies singce SMEs have already incurred increased operating costs from a series of costs-induced policy and tax changes this year.
Lee Heng Guie is the executive director of the Socio-Economic Research Centre. The views expressed here are the writer’s own.
