Kuala Lumpur, 12 October 2025: The Institute for Democracy and Economic Affairs (IDEAS) welcomes the government’s latest MADANI budget and its continued focus on people-centred budget policies. Budget 2026, tabled on Friday by Prime Minister and Finance Minister YAB Dato’ Seri Anwar Ibrahim, continues a gradual reprioritisation of spending towards those who need it most under a steady path of fiscal consolidation. However, it missed another opportunity to pursue structural reform that would safeguard against future economic headwinds in a time of heightened global volatility.

Fiscal Constraints and the Need for Broader Revenue Reforms

The government maintains a gradual and prudent pathway towards fiscal consolidation, projecting a 3.5% deficit to GDP in 2026; remaining on course towards the Public Finance and Fiscal Responsibility Act’s target of 3%.

However, with limited strategies to increase revenue, the government faces a structurally rigid budget that constrains development spending. Budget allocations and growth remain skewed towards operating expenditure, which is set to rise slightly by 1.8% to RM 338.2 billion in 2026. Much of the increase goes to civil servants’ salaries, pensions, and debt servicing, making up more than 60% of the total operating expenditure, leaving limited space for new services and investments.

While efforts to improve tax compliance and curb leakages are commendable, Budget 2026 lacks substantial reforms to diversify and deepen the tax base that would increase fiscal space. With the Petronas dividend half of what it was two years ago, overall revenue growth is shrinking relative to GDP. Development expenditure remains stagnant at RM 81 billion, under four percent of GDP, largely tied to ongoing projects such as ECRL, MRT3, RTS Link, and the Pan Borneo highway. This leaves limited fiscal space for new high-impact investments under RMK-13.

Malaysia’s debt position remains elevated, leaving little fiscal buffer against future shocks. The federal government’s debt-to-GDP ratio stood at 64.7% as at end-June 2025, broadly unchanged in the first full year under the Public Finance and Fiscal Responsibility Act. The Act requires the government to table a fiscal adjustment plan should it be unable to reach its 60% to GDP target — which appears unlikely under current conditions. While there is no need to rush towards this target nor overly constrain new borrowing, measures such as expenditure reprioritisation, reducing leakages, and employing GLC and GLICs in public programmes, are weaker contributors to the fiscal buffer, compared to much needed revenue raising measures.

Competitiveness and Sustainability

With external headwinds threatening Malaysia’s economic competitiveness, the government’s continued focus on high-impact sectors, start-ups, and digitalisation is welcome. The Strategic Co-Investment Fund and Industrial Development Fund further signal Malaysia’s commitment to upgrading its position in the semiconductor, AI, and sustainability sectors.

Institutional support for the National Semiconductor Strategy remains significant, with over RM1 billion allocated through Khazanah, KWAP and BPMB for research, development, and design financing. Initiatives such as SemiconStart and the Bukit Kayu Hitam Special Border Economic Zone also reflect long-term commitment to building regional value chains.

Budget 2026 reaffirms Malaysia’s decision to introduce a carbon tax on iron, steel and energy and to reform Malaysia’s investment incentives regime to rein in tax credits for low-value-added industries. The steep decline in Petronas dividends should highlight the urgent need to shift Malaysia’s competitiveness from fossil fuels to clean energy, with carbon pricing as a key mechanism to achieve this.

The New Investment Incentive Framework (NIIF) remains a positive initiative to attract high-value job-creating investments, although the limited scope and delay in implementation until the first half of 2026 risks slowing momentum.

Minor Tweak For Reforms And Governance Despite Rhetorical Emphasis

Increased funding for Parliament is welcome to support Parliament’s role in exercising independent oversight. IDEAS maintains the call for Parliament to have full autonomy in staffing and funding. The government deserves recognition for continuing its institutional reform agenda, building on the Public Finance and Fiscal Responsibility Act and the Parliamentary Services Act. However, the recently passed Government Procurement Act, which entrenches ministerial influence in procurement, raises questions about whether it will strengthen transparency and accountability as intended.

The budget speech references to forthcoming legislative reforms to separate the powers of the Attorney General and Public Prosecutor, as well as political financing reform, are encouraging. IDEAS calls for joint political commitment on these reforms, and to proceed with other reforms, such as establishing an Ombudsman and a Freedom of Information Law.

Social Measures Reflect Greater Inclusion, But Lacking In Long-Term Investment

A direct consequence of the difficulties in broadening and diversifying revenue sources is that Budget 2026 does not sufficiently increase social sector expenditure. Overall, the government’s social priorities are reflected in a 1.1% increase in social sector spending as a share of total expenditure, against minor decreases for economic and other sectors. Yet, development expenditure for education and health is set to fall in real and relative terms.

IDEAS welcomes the 23.7% increase in allocations for Orang Asli and persons with disabilities, as well as the RM20 million allocation to strengthen child protection and address online exploitation. Effective and inclusive implementation will be critical.

The Budget is notable for the absence of major social sector expenditures that have long-term impact. Key gaps persist, with large public health needs, little investment into childcare expansion, stagnant childcare tax relief, and the still-absent Social Work Profession Bill, as well as the necessary funding for professionalisation of social workers.

Conclusion

Overall, Budget 2026 manages immediate pressures, but lasting progress depends on the government’s ability to turn fiscal restraint into reform. Expanding the revenue base, improving spending efficiency, and strengthening institutions must take priority to ensure Malaysia’s stability evolves into sustainable growth.

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Aza Jemima
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