Copyright thediplomat
Malaysia’s 2026 budget contains few surprises, and that is a good thing. Generally speaking, people want consistency in their country’s fiscal plans, rather than a wild and unpredictable ride. The nature of next year’s budget reflects Malaysia’s relatively stable macroeconomic conditions and outlook, despite global economic headwinds and high levels of uncertainty around trade. The country's economy is predicted to grow between 4 and 4.5 percent in 2026, about the same rate as in 2025. Consistent year-over-year growth is no small feat, given the times we are living in, especially for countries where global trade and investment play a big role in the economy as they do in Malaysia. Consistent growth allows the government to collect more tax revenue, and revenue is expected to rise 2.7 percent in 2026, reaching 343 billion ringgit ($81 billion). Expenditures are set to grow more slowly, at just 1.7 percent. This will further shrink the deficit from 3.8 percent of GDP in 2025 to an expected 3.5 percent in 2026. For fans of conservative fiscal policy, this will be welcome news. It continues a trend from recent years where Malaysia has steadily been closing its fiscal deficit through a combination of increased revenue and more prudent spending. It’s one of the few countries in the region that has been able or willing to impose tighter fiscal discipline following the budget-busting pandemic years. Indonesia, by contrast, has been pretty clear that it intends to leverage fiscal capacity more aggressively as an engine of growth, while Thailand has little choice but to run big deficits as its economy continues to slow. Taking a closer look at the numbers, we see that Malaysia’s shift toward a broader tax base continues apace. Malaysia has historically relied heavily on non-tax revenue, such as dividends from state-owned oil and gas giant Petronas. And while natural resource rents can be lucrative, they are also volatile, going up and down depending on global energy prices. As a result, Malaysia has for several years been trying to increase the amount of revenue sourced directly from taxes, including by increasing the Sales and Service Tax. And it’s working. In 2026, taxes are expected to contribute nearly 79 percent of revenue, up from 74 percent in 2024. Meanwhile, revenue from petroleum is expected to fall to 17 percent of the total. Over the long run, this will provide a more stable and sustainable source of revenue for the state compared to rents from natural resource exploitation. On the spending side, the main way the government is keeping the deficit in check is by continuing to trim subsidies. Subsidies and social assistance accounted for 21 percent of public spending in 2024. In 2026, it is expected to fall to 14.5 percent. Spending on subsidies spiked during the post-pandemic period as the state sought to cushion consumers from inflationary pressure. But with inflation under control, the government has been steadily pruning these back. For instance, recent reforms to make fuel subsidies more effective and targeted are expected to save almost $1 billion a year. Ultimately, there is little that surprises in this budget. Solid, consistent growth and prudent spending are closing the deficit in Malaysia at a time when many other countries in the region are widening theirs. Revenue continues to shift away from non-tax sources, like oil and gas, and toward a more sustainable, broad-based system of taxation. Spending is being checked mainly by trimming subsidies. All of this is fairly straightforward and maybe a bit boring, but boring is what budget planners live for. Taken together, it places Malaysia in a sound fiscal position as it prepares to face the next few years of global uncertainty and unpredictable U.S. policy.
