Malaysia’s fiscal federalism presents a structural paradox. While state governments are highly dependent on the federal government for fiscal resources, they receive a comparatively smaller share of transfers than subnational governments in many other countries. At the same time, states operate under tight legal and institutional constraints on revenue-raising, limiting their ability to independently finance development and public service delivery.

This imbalance has important implications for equity, development outcomes, and intergovernmental relations. Differences in fiscal capacity (or revenue-raising ability) across states, if not offset by federal transfers, risk reinforcing regional economic disparities and distorting incentives, encouraging states to prioritise activities aligned with their limited revenue instruments, rather than broader national policies. Debates over revenue sharing, constitutional entitlements, and fiscal autonomy have become increasingly prominent despite the Madani government’s measures to raise transfers.

Despite the growing importance of these issues, there remains limited empirical evidence on whether Malaysia’s fiscal transfer system effectively addresses disparities in fiscal capacity across states. In particular, questions remain as to whether transfers perform an equalisation role, by providing greater support to states with structurally weaker own-source revenue bases.

This event launches a new IDEAS policy paper examining equalisation and the distribution of federal fiscal transfers in Malaysia. The paper empirically assesses whether transfers reduce disparities in fiscal capacity across the federation or entrench persistent disparities. Bringing together policymakers, researchers, and practitioners, this launch aims to foster a more grounded and evidence-based discussion on the future of fiscal federalism in Malaysia.