Budget 2026: Balancing welfare and fiscal discipline

Published on 14 Oct 2025.

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Budget 2026 showcased the government’s continued commitment to fiscal consolidation while still setting out measures to secure economic growth. While no extraordinary measures were announced, this year’s “Belanjawan Rakyat” or the People’s Budget, aims to return some fruits of labour from recent reforms to the rakyat, partially through expanded social assistance to address cost of living concerns. Being the first budget under the 13th Malaysia Plan (13MP), Budget 2026 also reiterated many of the government’s commitments outlined in the five-year development plan and other key policy documents such as the New Industrial Masterplan 2030. 

Fiscal Consolidation Continues

Malaysia is so far, on track to meet this year’s fiscal deficit ratio of 3.8% from 4.1% last year. This will be pared further to 3.5% of GDP next year, largely to be achieved through a reining in of expenditure increases. The government expenditure-to-GDP ratio is projected to decline to 19.7% in 2026, its lowest since 2018. Operating expenditure (OpEx) is expected to rise by only RM6.1 bil to RM338.2 bil next year, well below the 10-year historical annual average increase of RM11.5 bil. This moderate rise partly reflects a smaller subsidy and social assistance bill, which is projected to fall by RM8.1 bil following the recent implementation of targeted subsidies and lower oil prices. Meanwhile, development expenditure (DevEx) will increase marginally to RM81.0 bil (2025e: RM80.0 bil, 2024: RM84.0 bil). While a shrinking DevEx-to-GDP ratio could raise concerns about whether the government is adequately supporting the economy, we take solace in that the ratio remains comparable, if not higher, to levels seen just prior to the pandemic. 

Revenue Falls on Lower Oil and Gas Related Revenue

On the other hand, revenue as a share of GDP is projected to fall to 16.1% next year (2025e: 16.6%), largely due to a reduction in petroleum-related royalties and dividends amid a lower global oil price environment. Meanwhile, tax revenue as a share of GDP is expected to remain relatively stable, with direct tax revenue staying at 8.8% of GDP next year and indirect tax inching up to 3.9% from 3.8% in 2025.

There were no major tax reforms announced. The incremental sin tax and carbon tax will be more than offset by the various income tax-related reliefs and deductions introduced, leading to a net revenue loss of RM791.64 mil. Ongoing governance reforms may help plug revenue leakages moving forward. The more conservative move in bolstering government receipts is justifiable under the current uncertain economic climate, but more broad-based and diversified revenue measures will be necessary in the near future to improve new revenue generation.

Narrowing of Fiscal Deficit Ratio Could Restrict DevEx Expansion

The various efforts in fiscal tightening reiterate policymakers’ commitment to meet the 3.0% fiscal deficit-to-GDP target by 2028 under the Public Finance and Fiscal Responsibility Act 2023 (FRA). The latest medium-term fiscal framework (MTFF), which covers 2026 to 2028, suggests lower DevEx-to-GDP and OpEx-to-GDP over the next three years compared to last year’s MTFF, at 3.6% of GDP (MTFF 2025-2027: 3.7%) and 15.4% of GDP (MTFF 2025-2027: 15.6%), respectively. Yet, nominal GDP growth is expected to average at 6.3%, lower than the 7.2% projected in last year’s MTFF, suggesting a larger restriction of expenditures than previously projected in order to consolidate finances. Meanwhile, revenue growth expectations remain intact at 15.7% of GDP, which indicates that the narrowing of fiscal deficit is to be achieved through restraining expenditure growth. This gives rise to concerns of insufficient DevEx to spur future new growth.

Chart 1: Development expenditure to GDP ratio falling but remains above ratios during late 2010s

Sources: Ministry of Finance, RAM
Note: 2025E and 2026B denote figures tabled in Budget 2026

Eye on Government Debt Management 

The government may need to keep a closer eye on its debt management to ensure that debt remains at sustainable levels. Preliminary estimates show that Malaysia’s total debt-to-GDP ratio will increase for the fourth consecutive year, albeit at a more moderate pace, to 65.8% in 2026 from 65.7% estimated in 2025. Malaysia’s debt levels have yet to come down to pre-pandemic levels (2019: 52.4% of GDP) and is higher compared to its peers’. In 2024, Malaysia had the second highest debt-to-GDP ratio among ASEAN-6 and surpassed the median of 57.6% among countries rated A- by S&P. Furthermore, Malaysia’s MGS, MGII and MITB borrowings stood at 63.5% of GDP as of end-June 2025, remaining just below the 65% ceiling allowed under the FRA and well-above the 60% target in the medium term, leaving limited headroom for contingency borrowings. Meanwhile, debt service charges have gradually increased to a projected 17.0% of revenue in 2026 from circa 10.0% in the early 2010s and is above the Ministry of Finance’s self-imposed 15% limit. 

Increased Focus on Social Protection, Small Businesses Support Remains

Similar to the previous budget, this year’s “Belanjawan Rakyat” continues the shift in spending away from the economic services sector towards the social services sector. The social services sector, which encompasses measures on healthcare, education, and housing, is expected to make up 35.3% of development expenditure in 2026 (2025e: 34.7%). For example, 5,800 students from low-income families will receive free education in public higher education institutions amounting to RM120 mil through PTPTN. It is noteworthy that business-centric policies remain a key focus in Budget 2026, with measures ranging from assisting small businesses through incentives and loans to ensuring the resilience and future-readiness of businesses in technology and artificial intelligence (AI). Initiatives such as the ASEAN Business Entity (ABE) Status, Investor Pass, Residence Pass-Talent Fast Track, and Green Investment Tax Allowance will support the ease of doing business and climate resilience goals in Malaysia. Meanwhile, infrastructure investments continue through the undertaking of projects such as the RM2 bil Sambungan Kabel Dasar Laut MADANI (SALAM) undersea fibre optic cable to connect East Malaysia and Peninsular.

Challenging Macro Outlook Underscores Growth-Supportive Positioning of Budget

The macro landscape is expected to remain challenging next year, with the government targeting GDP growth of 4.0%-4.5%, below the pre-pandemic trend (2011–2019 average: 5.1%). While we would have liked to see bolder reforms on improving revenue mobility and fiscal sustainability, the restraints exhibited in the Budget are understandable given the continued external headwinds from US trade restrictions and geopolitical tensions. Overall, the government’s prioritisation of social protection and targeted economic development, while still ensuring fiscal consolidation remains on track, is appropriate given the current landscape and should provide the required support for the growth target next year.

Table 1: Key government forecasts

Sources: Ministry of Finance, US Energy Information Administration, RAM
Note: 2025E and 2026B denote figures tabled in Budget 2026

 

Analytical contacts Nur Nadia Mazlan (603) 2708 8287 nadia@ram.com.my		Media contact Sakinah Arifin (603) 2708 8212 sakinah@ram.com.my
Woon Khai Jhek, CFA (603) 2708 8286 khaijhek@ram.com.my

 

 

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