Budget 2027: Broadly prudent, balancing fiscal consolidation with economic resilience; revenue reforms still to accelerate

Published on 13 Oct 2026.

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Budget 2027 is viewed as an expansionary budget that prioritises economic resilience while still ensuring continued fiscal consolidation in a time of elevated external uncertainty. The latest fiscal stance remains broadly prudent, even as fuel subsidies remain a big commitment in 2027. At the same time, the budget includes various household support measures, including continued fuel subsidies, increased cash handouts, and greater tax relief measures.

Stronger revenue streams to bolster fiscal space

Government revenue is projected to grow by 4.7% to RM380.8 bil on the back of higher tax revenue, which will comprise 78.0% of total revenue (2026e: 77.2%). The shift in revenue composition, while seemingly marginal, reflects higher SST receipts, which are expected to make up 19.2% of total revenue in 2027 (2026e: 18.4%, 2025: 16.6%). SST collections have improved progressively in recent years, underpinned by a broader tax base and the phased e-Invoice implementation, which has strengthened tax administration and compliance. However, the various tax relief increases and income tax rate reductions announced in Budget 2027 would decrease direct tax revenue by about RM2.96 bil (or -0.8% in revenue growth) if the proposed measures are ratified.

Government revenue will also be supported by larger dividends from Petronas (RM32 bil, +RM5 bil from 2026) and Bank Negara Malaysia (RM7 bil, +RM2 bil from 2026), while Khazanah’s dividend will remain at RM2 bil. Yet, total revenue-to-GDP ratio is expected to slip to 16.4% in 2027, with tax revenue unchanged at 12.8% of GDP. Considering neighbouring peers like Thailand and the Philippines have tax revenue of more than 14% of GDP while the OECD average is at around 15.7% of GDP, the tax coverage for Malaysia is low, implying room for reforms to create more durable revenue streams and rebuild fiscal space over time. While the government’s Medium-Term Revenue Strategy will focus progressively on strengthening revenue collection, encouraging compliance and reducing revenue leakages, Budget 2027 could have taken more meaningful steps to broaden the revenue base and accelerate much-needed revenue reforms.

Spending increases remain relatively contained

Expenditure management remains a key feature of the budget as the government continues its fiscal consolidation path. Operating expenditure is set at RM376.8 bil and development expenditure at RM83.0 bil, only 3.8% and 2.5% higher than the amount estimated to be spent in 2026, respectively. The RM2 bil increase in development expenditure is distributed almost evenly across security, social, economic and general administration. Total development expenditure will represent a healthy 3.6% of GDP, above the minimum of 3.0% set under the Public Finance and Fiscal Responsibility Act 2023 (FRA). Key projects that will be funded include roads in East Malaysia (RM3.3 bil), basic rural infrastructure (RM3.3 bil), and water infrastructure (RM2.5 bil).

Fiscal consolidation remains essential to contain debt pressures

The fiscal deficit is projected to narrow to 3.3% of GDP in 2027, keeping the government on track to meet the medium-term target of 3% of GDP stipulated under the FRA. This follows an expected deficit of 3.6% of GDP this year, marginally wider than the original Budget 2026 target of 3.5%. Although higher-than-expected energy prices raised fuel subsidy costs by about RM25 bil over the budgeted amount this year, stronger revenue and spending reprioritisation helped limit the extent of the fiscal slippage.

Reducing the fiscal deficit would help contain further increases in government debt and the associated debt servicing burden. Debt stood at 63.1% of GDP at end-June 2026 and is projected to reach 63.7% of GDP by end-2027. While this would be a slight improvement from the estimated 64.0% by end-2026, the ratio would remain above the 60% cap stipulated in the FRA. Malaysia’s debt trajectory has yet to see a meaningful improvement to below 60% of GDP, following the sharp increase in government borrowing during the pandemic (2015-2019 average: 52% of GDP). Debt service charges is projected to also remain sizable at 16.0% of revenue in 2027. Therefore, continued fiscal consolidation remains important to fortify fiscal space for future readiness to deal with economic shocks.

Considerable household support measures to sustain domestic demand

Budget 2027 provides meaningful household support, with about RM80 bil earmarked for subsidies, welfare and assistance measures next year. Continued fuel subsidies will remain a key cushion for households against price shocks, while other measures such as increased cash handouts and higher government pensions will raise disposable income and support consumption. Additionally, higher individual income tax reliefs and lower income tax rates would generate savings of up to RM8.0 bil across many households.

In providing these measures, subsidies and social assistance spending remains relatively sizable at RM72.7 bil in 2027 (2026e: RM74.5 bil, initial Budget 2026 allocation: RM49.0 bil), around 12% above the average for 2023-2025. Fuel subsidies account for a significant share of this spending at about RM40.0 bil, as the government expects Brent crude oil prices to average at an elevated USD85 per barrel next year (2026e: USD85 per barrel). Over the longer term, subsidy spending without targeted measures may not be sustainable, trading off against fiscal consolidation.

Investment-led support to strengthen MSME growth

Micro, Small and Medium Enterprises (MSMEs) will also receive support through lower tax payments, expanded financing and guarantee facilities, and investment incentives that encourage digitalisation and productivity improvements. The one percentage-point (ppts) reduction in income tax rates for MSMEs could provide up to RM6,000 in additional income for around 300,000 MSMEs, while other tax-related incentives such as favourable capital allowances and lower stamp duties should offer some support. A RM7 bil increase in loan facilities and financing guarantees through schemes like SJPP and CGC, bringing the total to RM57 bil, should help ease businesses’ funding constraints. Collectively, these measures should provide some operating cost relief while also encouraging growth and productivity among MSMEs, the backbone of the economy.

Tiered minimum wage warrants careful implementation

The RM300 increase in the national minimum wage to RM2,000 could impose additional cost burden on businesses, although MSMEs with annual revenue under RM50 mil will be temporarily exempted. The introduction of a tiered minimum wage, under which graduates and semi-skilled workers would earn at least RM2,500, could add further business cost pressures. Based on 2025 data, this new minimum wage would benefit over 50% of employed semi-skilled workers (around 2.9 million workers), whose median wage sat below the new wage floor at RM2,223. In comparison, the median wage for graduates stood at RM4,521 in 2024, suggesting that a smaller share of employed graduates would benefit.

A higher starting wage for fresh graduates could potentially change their employment opportunities, depending on how the workers’ income framework is implemented. Close to a third of employed graduates (around 1.6 million workers) faced skill-related underemployment in 2024, indicating that many worked in semi-skilled or low-skilled jobs. If this wage increase is accompanied by relevant support towards upskilling technology transformations, it could encourage businesses over time to invest in productivity enhancements and create skilled job opportunities, rather than continue relying predominantly on low-skilled labour.

Welfare-focused budget to preserve growth

Malaysia’s economic outlook remains subject to heightened external uncertainty stemming from geopolitical tensions. The government projects GDP growth of 4.2%-5.2% in 2027, slightly higher than our forecast range of 4.0%-5.0%. Against this backdrop, Budget 2027’s emphasis on household support should help sustain consumption and cushion the economy from external pressures. Our rough estimates suggest that the additional household income support measures could provide an initial boost of up to 0.4ppts to GDP growth in 2027, led by minimum wage increases at around 0.18ppts, personal income tax reliefs and rate reductions at up to 0.15ppts and larger direct cash transfers and assistance at approximately 0.07ppts.

In conclusion, while the budget contains limited material reforms to expand revenue generation, the projected fiscal deficit of 3.3% of GDP signals a continued commitment to fiscal consolidation. However, with debt and subsidy spending still elevated, further progress on subsidy targeting, revenue mobilisation and productivity remain crucial to strengthen fiscal resilience and ensure sustainable growth over the medium term.

 

Analytical contacts Nadia Mazlan (603) 2708 8287 nadia@ram.com.my		Media contact Sakinah Arifin (603) 2708 8212 sakinah@ram.com.my
Dinessh Kumar Thanasegeren (603) 2708 8251 dinessh.k.thanasegeren@ram.com.my
Woon Khai Jhek, CFA  (603) 2708 8286 khaijhek@ram.com.my

 

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