Budget 2026 – spending it right

WITH less than a month before Budget 2026, it is an opportune time to have a preview of expectations as far as the government’s revenue, expenditure and financials are concerned.

The forecast must also consider the need for discipline to ensure the government’s budget deficit targets are on course to dip below 3% by 2030 or earlier.

For 2025, the government tabled a RM421bil budget, comprising RM335bil operating expenditure (Opex) and the balance RM86bil in the form of development expenditure.

In terms of source of income, the government projected total revenue of RM339.7bil, of which 76.2% was derived from taxes (both direct and indirect) and the balance comprised non-tax revenue. The government also projected to run a budget deficit of RM80bil, translating to a budget deficit of 3.8% for this year.

As of the first half of financial year 2025 (1H25), based on data provided by Bank Negara Malaysia, the government’s revenue and Opex stood at RM147.6bil and RM155.3bil, respectively, while total development expenditure amounted to RM33.3bil, resulting in an overall deficit of RM40.5bil.

Compared with 1H24, overall revenue is higher by 6.1% year-on-year (y-o-y), while Opex and development expenditure are down by 1.1% and 1.9% y-o-y, respectively.

The budget deficit in 1H25 improved compared with RM51.6bil for the same period last year, translating to an RM11.1bil or 21.5% reduction.

Hence, while the overall budget deficit seems to be on target based on Budget 2025 estimates, the first half Opex and development expenditure were relatively slower. The government is expected to raise its expenditure in 2H25 to meet Budget 2025 targets.

RM440bil?

Under the 13th Malaysia Plan, the government expenditure targets are expected to grow at an annualised rate of about 4% per annum over the five years.

It is likely that under Budget 2026, the government will project revenue of RM354bil while expenditure is forecast to hit RM346bil.

With total development expenditure expected to be held steady at RM86bil, Budget 2026 will likely see an allocation of RM440bil, excluding any contingencies.

As for RM86bil in total development expenditure, a quarter will likely be allocated to the education and healthcare sectors, amounting to RM13bil and RM8bil, respectively.

In Budget 2025, these two sectors saw a total allocation (Opex and development expenditure) of RM127.6bil, of which RM82.3bil was for the Education Ministry and Higher Education Ministry, while another RM45.3bil was allocated to the Health Ministry.

However, only RM17.3bil of the total amount was related to development expenditure, while the balance was for Opex, which mainly comprised emoluments and supplies.

With the dire need to ensure our young Malaysians are well educated in terms of a conducive learning experience as well as quality teaching, the government should focus on raising the development expenditure for the education sector, as the expected allocation of RM13bil will only be just 0.6% of nominal gross domestic product (GDP).

The same goes for healthcare, as even an RM8bil development expenditure allocation in Budget 2026 translates to only 0.4% of nominal GDP.

We have been under-spending on both education and healthcare as the expected total allocation for the two at RM86bil and RM50bil in Budget 2026 will only be approximately 4.0% and 2.3% of the 2026 nominal GDP, respectively.

Of course, these figures exclude private sector expenditure, which raises the two sectors’ ratios to GDP to 7.5% and 3.5%, respectively.

Budget deficit of 3.5%

The government is seen as committed to improving budget deficit targets, having lowered it to 4.1% last year and the expected 3.8% this year. It is estimated that the deficit target will likely be set at 3.5% under Budget 2026, as seen in the table.

Tight finances

Although Malaysia has shown progress in reducing budget deficit levels over the past two years and into 2026, the fact that we continue to run these deficits means we have no choice but to expand the federal government’s statutory debt and total debt, as shown in the table.

The measured approach in reducing the deficit and debt-to-GDP levels will ensure the government’s finances are maintained within the statutory limit of the Fiscal Responsibility Act 2023.

Having said that, the government’s reform agenda, especially those related to improving revenue (via new and higher taxes) and reducing expenditure (subsidy reduction), should be continuous.

The government’s debt service charges (DSC) as a percentage of total revenue will be another focus for the market.

The projected 16.1% DSC-to-expenditure ratio under Budget 2025 is likely to scale higher to 16.4% based on an estimated total DSC of RM58bil in 2026.

This suggests the government’s DSC will move further away from the self-imposed limit of 15% and remain the second-highest expenditure item after emoluments. Surely the 15% limit now seems unachievable.

Hence, there must be greater effort to reduce our DSC, which can only occur if we are able to reduce the growth of debt and, at the same time, achieve a higher pace of increase in the government’s revenue.

GDP growth of 4.5% to 5.5%

After revising the 2025 GDP growth estimate to 4.0% to 4.8% for this year, Budget 2026 will likely pen down a slightly higher growth projection for 2026, with growth outlook seen at between 4.5% to 5.5%, amid a challenging global economy, especially with Trump’s tariffs in place.

The rise in the cost of doing business, as well as expected higher prices for goods and services, will also see slower growth in domestic consumption.

In terms of inflation targets, with the lowered target this year to 1.5% to 2.3% and with year-to-date headline inflation at just 1.4% and core inflation at 1.9%, it is likely that the headline inflation forecast will be set at between 1.5% to 2.5%, amid pricing pressure from the removal of blanket subsidies and the impact of higher sales and service tax on goods and services.

Last call

Budget 2026 is seen as the last call for the unity government to present a pragmatic, forward-looking and disciplined budget, as the window will likely close next year when Budget 2027 is presented, especially with the 16th General Election on the horizon.