By Dr Stewart Nixon and Nor Nazirah Mohamed 

The passage of the Capitation Grant Bill 2026 marks a significant milestone after a near quarter-century wait, providing a long overdue boost to federal fiscal transfers to states based on the size of their populations. Total funds transferred under the revised capitation grant rates are set to increase by 25% from this month, granting state governments an extra RM109 million to support local needs.

States need and will enthusiastically take any increase, particularly the less populous states that benefit most from the formula changes. The steepest increases under the new formula apply to the first 100,000 residents, with a declining scale reintroduced thereafter. Less populous states such as Perlis benefit from a steep increase in average capitation grant transfers per person (from RM31 to RM43.50), while populous states like Selangor receive more modest increases (from RM12.10 to RM14.30; see Figure 1).

But while the new rates are a steep improvement on last year, they fall short of returning capitation grant funding to 2002 levels, let alone restoring fair value diminished over a longer history. Nominal value comparisons neglect the diminishing purchasing power of money and obscure a wider trend decline in unconditional funding transfers. A decline that seemingly contradicts the intent of Malaysia’s constitution upon introducing the grants to guarantee minimum transfers to support state expenditure planning.

Adopting a longer historical lens and measuring the changes in real values provides greater perspective, highlighting the substantial drop in the value of capitation grants over time (see Figure 2).

Comparing the real values under the new formula (2026) and the previous formula when it was introduced (2002), the new rates do not even compensate for historical inflation. Widening the lens further and estimating the original constitutional grant rates in today’s ringgit value (1957; using historical populations and adding Sabah and Sarawak for the sake of comparison), the decline is even more pronounced. The total population average was about RM57.50 per person (ranging from about RM40 for Perak to RM135 for Perlis) in 1957, about RM24 in 2002, and below RM17 today.

The revised rates likewise do little to reverse the diminished relative importance of capitation grants among federal fiscal transfers. While available historical data on the broader suite of intergovernmental transfers does not make comparison easy, IDEAS’ estimates put the capitation grant share of transfers at around 30% at the beginning of the 1980s and just 5% today. What was a foundational unconditional transfer to support predictable state budgeting has become a relative footnote against other federal transfers.

Part of the diminution of capitation grants also reflects an increase in other transfers, which would be of lesser concern if alternative measures provide states with equivalent or greater funding certainty, flexibility and equality. The capitation grant changes are accompanied by increased tourism revenue transfers and improvements to infrastructure-related transfers, which together represent modest gains.

But they do not arrest a large and sustained trend away from unconditional transfers towards funding tied to outcomes determined by Putrajaya. Conditional transfers can be beneficial for coordinating national projects, but extensive use imposes excessive control and funding uncertainty that undermines democratically elected state governments from pursuing policies tailored to local needs.

The Capitation Grant Bill 2026 not only could have done more to sustainably boost unconditional transfers to states, it missed an opportunity to rebalance the formula by economic development need. As both the dots in Figure 1 and the left to right ordering of Figure 2 illustrate, there is no clear relationship between state population and gross domestic product per capita and therefore no resultant pattern between grant size and GDPPC.

Kelantan has the greatest development need yet six states will receive higher capitation grants per person. Penang, with GDPPC of almost 4.5 times higher than Kelantan, is among those to receive a higher grant rate per person.

A formula that counts persons with vastly different incomes as the same is deeply inequitable and inconsistent with a core purpose of federations to promote equal prosperity. And as a one-off exercise to adjust the formula, the legislation does nothing to address the structural problems of grants not being indexed to inflation nor mandated for revision at regular intervals.

So while the bill and associated changes to federal transfers provide a desperately needed funding injection, it cannot be seen as meaningfully addressing the country’s excessive fiscal centralisation.

States will continue to face the triple challenge of having heavily circumscribed powers to raise their own revenue, receiving far lower transfers, and facing greater restrictions on transfer use than states in comparable federations. The Madani government and National Financial Council have much more reforming to do.