These recommendations follow the three key priorities of the fifth MADANI Budget: Raising the Ceiling for national growth, Raising the Floor for the people’s living standards, and Driving Reform in Governance.

Through these recommendations, IDEAS seeks to contribute to the wider public discussion on Malaysia’s fiscal and reform priorities, while supporting constructive engagement with the Ministry of Finance, ministers and relevant ministries. We welcome further engagement on the proposals set out below, particularly on improving Malaysia’s Open Budget Survey (OBS) performance and strengthening transparency, accountability and governance across the public sector.

Accountable Governance

Strengthen Transparency and Public Participation Throughout the Budget Process

A better Budget starts with a process that people can understand, scrutinise and contribute to. Malaysia scored 51 out of 100 for budget transparency in OBS 2025, below the 61-point benchmark for informed public debate. Its public participation score was just 20, compared with 33 for Indonesia and 28 for Thailand.

Budget 2027 should address gaps at every stage of the budget cycle. The Executive’s Budget Proposal should give Parliament and the public a fuller account of extra-budgetary funds, government financial and non-financial assets, contingent liabilities, and planned expenditure in the years beyond the budget year, alongside the longer-term sustainability of public finances.

The Enacted Budget should make equally clear what Parliament ultimately approved. One practical approach would be to include the relevant Executive’s Budget Proposal documents in the approved legislative package or formally reference them in the enacted legislation. This would link the detailed proposed allocations to the appropriations that are ultimately authorised.

The Mid-Year Review should explain material changes to expenditure, revenue assumptions and programme implementation. The Year-End Report should then compare plans with results, including estimates against actual outcomes for borrowing, debt, macroeconomic forecasts and non-financial outcomes.

The Government should also restore more structured opportunities for participation during Budget formulation. Malaysia’s declining public-participation score coincided with a move away from topic-specific Public Consultation Papers (PCPs) towards broader open submission and engagement mechanisms. Budget 2027 should combine both approaches: open channels for anyone wishing to contribute, alongside PCPs that set out concrete policy questions and options on which stakeholders can provide informed feedback. MOF should subsequently publish a summary of the principal inputs received and explain how they informed the final Budget. The importance of providing information before engagement and explaining what happened to public input afterwards is also emphasised in the OBS 2025 framework.

Build Fiscal Resilience for Future Crises

Budget 2027 must respond to the immediate pressures of the West Asia energy shock while leaving Malaysia better prepared for the next crisis. This requires stronger fiscal buffers, more predictable sources of revenue, and sufficient investment in the infrastructure and capabilities that can reduce Malaysia’s exposure to future shocks.

First, Malaysia needs a broader and more sustainable revenue base. Malaysia’s tax-to-GDP ratio remains below several regional peers. Based on Malaysia’s own fiscal data, federal tax revenue amounted to approximately 12.8% of GDP in 2025 and is projected at 12.7% in 2026. For internationally comparable regional data, the OECD’s latest harmonised figures for 2024 put Malaysia’s tax-to-GDP ratio at 13.0%, compared with 18.1% in the Philippines, 17.2% in Viet Nam, 17.1% in Thailand and 13.4% in Singapore. Budget 2027 should set out a credible pathway towards holistic tax reform, considering not only consumption tax settings but taxes on wealth, capital, property, and income. While reintroducing the strongest elements of the goods and services tax (GST) — including a broad base, effective input-tax credits, fewer distortions between goods and services and stronger digital administration — would be beneficial, consumption tax reform alone cannot be expected to solve Malaysia’s fiscal unsustainability. Any reform should be based on a transparent assessment of impacts on affected stakeholders, especially to ensure that it improves progressivity through better-targeted relief for lower-income households and small businesses.

Second, Malaysia needs a more predictable and transparent framework for PETRONAS dividends. In Budget 2026, PETRONAS dividends were estimated at RM20 billion for 2026, while total petroleum-related revenue was projected at RM43 billion, or 12.5% of federal revenue. These estimates were made before the escalation of the West Asia crisis, which subsequently pushed crude oil prices above US$100 per barrel, and actual petroleum-related revenues may therefore be higher than originally projected. MOF itself has highlighted the importance of reducing exposure to volatile commodity-based revenue. Rather than determining the dividend primarily on an annual basis, the Government should establish a public, rules-based framework in which a base dividend is determined against PETRONAS’ profitability and a multi-year benchmark for oil prices, with supplementary dividends available during periods of exceptional profitability. The methodology, assumptions, and any departures from the framework should be clearly disclosed in Budget documents. This would provide greater certainty for fiscal planning, improve public accountability over petroleum revenues, and give PETRONAS greater certainty to make long-term investment decisions.

Third, fiscal resilience requires greater productive development expenditure, not simply stronger revenues. Federal development expenditure has declined from RM90 billion, or approximately 4.5% of GDP, in Budget 2024 to RM86 billion, or 4.1% of GDP, in Budget 2025 and RM81 billion, or 3.8% of GDP, in Budget 2026. This downward trend sits uneasily alongside the scale of Malaysia’s future investment needs. Energy transition is only one of many areas requiring sustained development expenditure: the National Energy Transition Roadmap (NETR) alone estimates that RM1.2 trillion to RM1.3 trillion of investment will be required by 2050, including investment in renewable generation, grid infrastructure and green mobility.

This investment is increasingly important for Malaysia’s fiscal and economic resilience. As the International Energy Agency (IEA) forecasts global oil demand growth to slow and approach a plateau towards the end of the decade, Malaysia cannot assume that petroleum-related revenues and PETRONAS dividends will provide the same fiscal support indefinitely. At the same time, greater investment in domestic renewable energy, grid capacity and other transition infrastructure can reduce Malaysia’s exposure to volatile global fossil-fuel prices, which can raise domestic energy and production costs and add to inflationary pressures.

Budget 2027 should therefore reverse the decline in productive development expenditure and prioritise investments that strengthen Malaysia’s resilience and deliver existing national strategies such as the NETR, New Industrial Master Plan 2030 (NIMP 2030) and National Semiconductor Strategy. Public spending cannot finance these ambitions alone, but it has an important role in providing the infrastructure and catalytic investment required to crowd in private capital.

Finally, subsidy rationalisation should be responsive to energy-market conditions rather than pursued mechanically irrespective of oil prices. The West Asia crisis demonstrates the fiscal risks of maintaining a fixed-price subsidy: Malaysia’s monthly fuel subsidy bill rose from around RM700 million in January and February 2026 to as high as RM7.5 billion in April 2026. Because of this, total spending on fuel subsidies in 2026 could reach RM40 billion, more than double the RM15 billion initially allocated in Budget 2026. Budget 2027 should therefore establish a more predictable, sustainable and transparent framework that ties subsidised prices and quotas to movements in global oil prices. If the Government is determined to maintain fuel-specific subsidies, it should follow a managed float against global oil prices, cushioning the impact of exceptional price shocks without completely blunting price signals or shifting the entire risk to the Budget. Targeted programmes such as Sumbangan Tunai Rahmah (STR) and Sumbangan Asas Rahmah (SARA) provide more flexible mechanisms for directing assistance to households most in need and could be expanded instead. Any savings generated from subsidy rationalisation should also be transparently reported. This would maintain the longer-term shift away from broad-based subsidies while giving the Government sufficient flexibility to respond to external energy shocks.

Greater Clarity and Accountability around Government, GLC and GLIC Expenditure

The Government is increasingly incorporating investment by GLCs, GLICs and other public entities into the wider Budget picture. Budget 2025 presented RM86 billion in federal development expenditure alongside RM9 billion in Private Finance Initiative (PFI) and RM25 billion in GLIC domestic direct investment, while Budget 2026 went further by presenting RM470 billion in overall public expenditure, including RM50.8 billion in GLIC investments, public-private investments, and investments by Federal Statutory Bodies and MOF Inc. companies. IDEAS does not support normalising the treatment of GLC and GLIC investment as Budget expenditure. Doing so risks misleadingly conflating taxpayer-funded expenditure with commercially financed investment, obscuring the Government’s underlying fiscal position and weakening the distinction between public finances and the balance sheets of commercial entities. This represents a step backwards in fiscal governance and can create greater scope for opaque spending and misuse of public resources. Budget 2027 should therefore clearly distinguish conventional federal expenditure from investment undertaken by GLCs, GLICs and other public entities, rather than combining them within a single headline spending envelope.

At the same time, if the Government increasingly turns to GLCs, GLICs, Federal Statutory Bodies and MOF Inc. companies to mobilise investment and deliver national policy priorities, the arrangements governing these investments and the activities of the entities involved should be subject to higher standards of transparency and accountability. Budget 2027 should clearly disclose which institutions are providing funds, the programmes and investments being supported, their financing arrangements, expected economic and social outcomes, and subsequent performance against those commitments. This should be accompanied by stronger governance safeguards, including transparent and merit-based appointments, clear ownership rationales, published performance objectives, annual public reporting and stronger parliamentary scrutiny. These measures would build on IDEAS’ Pantau Kuasa work, which has highlighted weaknesses in political appointments and called for transparent and independent appointments, clear ownership rationales, performance charters with measurable economic and social objectives, annual public reporting and stronger parliamentary oversight, thereby ensuring that greater reliance on public entities’ balance sheets is matched by clearer accountability for how public resources are governed and used. 

Strengthen Fiscal Decentralisation through Fairer Federal-State Transfers

Malaysia’s fiscal system remains highly centralised. IDEAS’ latest harmonised cross-country comparison found that state governments raised only around 10.4% of total government revenue in 2022. States remain reliant on relatively narrow revenue sources and federal transfers, with major broad-based taxes reserved for the federal government.

While federal grants have increased from RM8.1 billion in 2022 to RM10.3 billion in 2025, with RM10.5 billion expected in 2026, IDEAS’ research finds that the transfer system does not sufficiently account for differences in states’ fiscal capacity, development needs and service-delivery costs. The 25% increase in the capitation grant in 2026 was a welcome step, but its real per-capita value remains below its 2002 level, and its share of federal transfers has fallen substantially over time. Budget 2027 should strengthen the equalisation role of federal transfers by allocating resources more systematically according to states’ fiscal capacity, development needs and differences in service-delivery costs.

Transfers should also become more rules-based, predictable and transparent. Most currently lack publicly available formulas or clear legal foundations, while projected and actual disbursements can differ substantially. In 2023, for example, Sabah received nearly 50% more than projected, while Terengganu received only 45% of its estimated transfers. Budget 2027 should clearly set out the legal basis and allocation methodology for major transfers, publish state-by-state estimates, report actual disbursements against them, and explain material deviations. This would improve fiscal planning for state governments while strengthening parliamentary and public scrutiny over how federal resources are distributed.

Competitive Economy

Make data-centre growth conditional on measurable economic spillovers

Data centres have become a major source of investment, accounting for around 44% of approved investments alone in 1H 2026. A Data Centre Task Force (DCTF) has been established to manage the pace of expansion, and the Government is increasingly vocal around balancing data centre growth with power and water capacity and tangible benefits to local supply chains. 

Budget 2027 should strengthen the DCTF’s role beyond screening and approving projects towards monitoring their outcomes after approval. This would allow the Government to assess whether data centres are delivering the expected investment, employment and local economic spillovers, alongside their electricity and water consumption and sustainability performance. Greater emphasis could also be placed on strengthening linkages with Malaysian firms and MSMEs, including through local procurement and services. The objective should be to ensure that Malaysia captures broader economic benefits from data-centre investment while managing the associated infrastructure and resource requirements.

Strengthen post-approval monitoring of investments

Malaysia introduced the New Investment Framework (NIF) for manufacturing from 1 March 2026, representing a shift away from traditional activity-based incentives towards an outcome-based approach. With the NIF now entering implementation, Budget 2027 should focus on whether the new framework is actually changing the quality and economic impact of investment, rather than simply increasing approved investment values. Post-approval monitoring should track whether projects deliver on commitments relating to high-value jobs, wages, domestic procurement, technology transfer, R&D and productivity. This monitoring could also help identify bottlenecks preventing approved projects from being realised, including land, utilities and talent constraints. The emphasis should therefore shift from “how much investment has been approved?” towards “what economic outcomes has the investment delivered?”

Make MSME support simpler and more outcome-driven

The Government already has a wide range of MSME financing, grant, digitalisation and capacity-building programmes. Among the most recent is the RM10 billion BNM-CGC post-crisis guarantee scheme, intended to strengthen MSMEs’ access to financing, technology, talent, certification and larger-company supply chains.

The priority should not be to keep adding new schemes but to improve the effectiveness and accessibility of the support already available. Budget 2027 could streamline overlapping grants and financing schemes, reduce application and compliance costs, and make it easier for firms to identify and access relevant support. Greater emphasis could also be placed on productivity-enhancing digitalisation, including AI, cybersecurity, business software, automation and tools that reduce the cost of compliance and ESG reporting. At the same time, financing support should extend beyond traditional grants towards mechanisms that help viable firms scale, while stronger connections between MSMEs and larger domestic and foreign investors can allow local firms to participate in higher-value supply chains.

Direct industrial-park investment towards regional economic diversification

RMK-13 places greater emphasis on developing economic activity beyond the country’s existing major investment centres and strengthening regional economic corridors. The Plan recognises the need to improve infrastructure and connectivity to support investment, while continuing to develop strategic industrial areas and economic corridors. Major connectivity projects such as the ECRL, which is expected to improve connections between the East Coast and the West Coast of Peninsular Malaysia, are also being developed during the RMK-13 period. RMK-13 further identifies industrial and specialised production hubs as part of efforts to create new sources of regional growth (MOE, 2025).

Budget 2027 should increase the effectiveness of investment in industrial parks outside the Klang Valley, Penang and Johor, particularly where new transport infrastructure can unlock previously less-connected investment locations. Rather than focusing only on increasing the number of industrial parks, allocations should prioritise the readiness and competitiveness of existing and strategic parks, including access to reliable electricity, water, logistics, digital connectivity, and other basic infrastructure required by investors. The completion of the ECRL also provides an opportunity to reassess the investment potential of the East Coast and ensure that infrastructure spending is matched by efforts to attract suitable industries and build linkages with local firms. The JS-SEZ should continue to receive support, but this should be complemented by efforts to broaden investment capacity across other regions.

For the halal sector, the Government could consider reducing administrative and certification costs for smaller firms, including reviewing halal certification fees and processes, to make it easier for MSMEs to participate in the halal economy.

Inclusive Society

Future-Proofing Social and Health Systems for Long-Term Demographic and Economic Resilience

Malaysia must transition from one-off, reactive budget allocations towards sustained investments in public services, healthcare workforce, and social protection systems. As the country approaches an aged society, Budget 2027 must establish foundations for managing demographic change, rising healthcare costs, labour shortages, and the needs of vulnerable populations over the next decade.

Strengthen health system capacity and affordability

New treatments, including gene therapies, offer considerable promise but can place costs beyond the reach of households and the public health system. Budget 2027 should invest in local clinical trial infrastructure, biosimilar development, domestic pharmaceutical manufacturing, and Health Technology Assessment (HTA) to support more affordable access. Public-sector health officials would also benefit from more structured training in health economics, cost-effectiveness evaluation, and strategic procurement so that health spending delivers better value.

Building on Budget 2026 commitments such as assistance for Persons With Disabilities (PWDs), mobility vans, and tax relief for early intervention, Budget 2027 must mandate universal design by default across public transport, digital government portals, and healthcare facilities. These investments would serve both PWDs and an ageing population.

Supporting athletes with disabilities beyond competition

Budget 2027 should provide continued government support for athletes with disabilities after they leave the national programme. The end of an athletic career can also mean the loss of a regular income, while costs such as rehabilitation and assistive equipment continue. The Government should provide a dedicated allocation for the National Sports Council to help athletes plan their next steps before they leave, including education, skills training and employment support. Rehabilitation and essential equipment should remain available for a defined period afterwards. The programme should be developed with athletes with disabilities and reviewed against their experience of life after sport. 

Retain the healthcare workforce

The increase in the Ministry of Health’s allocation in Budget 2026 (RM46.5 billion) and planned RMK-13 targets to raise primary healthcare spending to 32% of total health expenditure will fail to produce ideal outcomes if system capacity continues to be constrained by brain drain. Budget 2027 should address working conditions, career progression, specialist training access, and administrative burdens of health professionals to retain talent in the public sector. While recent commitments to absorb contract doctors and nurses into permanent posts are acknowledged, broader retention incentives are urgently required to meet the demands of an ageing society and rising non-communicable disease (NCD) rates.

Build Institutional Capacity and Embed FPIC in Orang Asli Development

While recent allocations, including the RM412 million dedicated to Orang Asli development, planned amendments to the Orang Asli Act 1954, and RM155 million for rural road connectivity, demonstrate targeted commitment, policy implementation remains constrained by institutional gaps. Budget 2027 must pair direct capital expenditure with sustained investment in the institutional and corporate capacities required to deliver these programmes respectfully and effectively.

For all interventions touching upon Indigenous lands, livelihoods, and education (such as the expansion of the Chup Badui Sikulah programme), Budget 2027 should establish mandatory cultural competency and Indigenous rights training for public officers, civil servants, contractors, and corporate partners. Furthermore, adherence to Free, Prior, and Informed Consent (FPIC) processes must be institutionalised and funded prior to project design and implementation. To ensure authentic delivery and community empowerment, funds for these training and monitoring programmes should be directly allocated to and executed by Orang Asli organisations and community leaders.

Build an Integrated Legal and Economic System for Refugees

Malaysia’s ongoing investments in the Refugee Registration Document (DPP) system and centralised biometric data infrastructure demonstrate increased administrative control, yet registration without legal inclusion leaves refugee populations vulnerable and economically sidelined. At the same time, Malaysia faces persistent labour shortages in essential sectors, with only 352 local applications submitted via MyFutureJobs for thousands of unfilled 3D (dirty, dangerous, difficult) roles, alongside ongoing efforts to process 15,000 foreign worker applications and meet long-term RMK-13 dependency reduction targets.

Rather than treating registration as an administrative end in itself, Budget 2027 should leverage this data infrastructure to establish a structured, end-to-end refugee management and economic integration system. Creating formal, lawful pathways for refugees already residing in the country to work legally will fill critical labour shortages, eliminate dependence on informal or exploitative labour markets, and generate economic returns through formal regularised systems. This framework should be accompanied by structured access to basic education for children, language and civic orientation programmes, and clear operational guidelines across federal, state, and local agencies. Investing in integration converts a perceived fiscal burden into a structured contribution to economic productivity and social cohesion.

Empower Digital Resilience and Protect Vulnerable Workers

As digital ecosystems expand under the Online Safety Act 2025 and National AI frameworks, social protection and public empowerment must keep pace with technological and demographic shifts.

Budget 2027 should allocate targeted resources toward parent- and community-focused digital literacy and cyber safety programmes to empower families, protect children from online harms, and build capacity alongside national AI and STEM education efforts.

Social protection must also reflect how Malaysians now work. Budget 2027 should expand routes to EPF and SOCSO coverage for informal, gig, and care workers. Targeted incentives for affordable, quality childcare, and flexible work arrangements would help more women enter and remain in the workforce while strengthening household resilience.

Advancing Sustainability

Increase investment in climate finance for mitigation and adaptation at the sub-national levels.

In order to improve national preparedness for floods, extreme weather and climate change, the Federal Government needs to invest more in climate finance for mitigation and adaptation at the sub-national levels. Last year, RM3.91 billion was allocated across national climate-related initiatives; this should increase to at least RM5.50 billion to fund expanded Ecological Fiscal Transfers (EFT) to state governments and direct local council (PBT) drainage infrastructure upgrades, and to develop decentralised, district-level disaster preparedness mechanisms across all states.

Larger and more transparent green energy investment allocations

While the Federal Government continues to deploy substantial resources toward supporting fossil fuels (spending tens of billions on fuel subsidies), green energy investments remain a negligible fraction of spending. Explicit allocations for renewable energy and environmental protection remain low, with NRES only receiving 0.1% of GDP as compared to 0.4% in previous years. Instead, green efforts are offloaded onto GLCs such as PETRONAS and TNB. For greater transparency, relying on the budget from GLC green commitments makes it difficult for Parliament and the public to track expenditures on climate mitigation and green infrastructure. Budget 2027 should mandate clearer, standardised green budget tagging and comprehensive reporting to ensure climate-related expenditures are transparent, trackable, and backed by direct public investment alongside corporate capital.

Resilient Democracy

Institutional reform cannot wait for another budget cycle. The Government must prioritise enactment of institutional reforms and ensure that the relevant agencies — including the Legal Affairs Division of the Prime Minister’s Department and the Attorney-General’s Chambers, Malaysian Anti-Corruption Commission (MACC) and Election Commission (EC) — are adequately funded to conduct meaningful and inclusive stakeholder engagements and expeditiously progress the reforms. 

The enactment of a robust political financing act

The Political Financing Bill is particularly relevant to Budget 2027 because its proposed provisions on public funding, disclosure, oversight, and enforcement will have direct funding implications. We urge the Government to table a comprehensive Bill under the National Anti-Corruption Strategy (NACS). It should include limits and prohibitions on private political donations, provisions for public funding, transparency and public disclosure requirements, and independent oversight and enforcement mechanisms. Budget 2027 should provide the resources needed to consult on these provisions and prepare for their implementation. This is particularly timely given that the Ombudsman Bill and the Government-Owned Entities Bill were outlined in the pre-budget statement.

Redelineation exercise

The redelineation exercise, a constitutional process of reviewing and redrawing electoral boundaries to ensure fairer voter representation, is taking place in Sarawak. Budget 2027 should provide adequate resources to the Election Commission (EC) and other relevant stakeholders to facilitate the process, including public engagement and the consideration of representation from affected communities.

Amendment to the Election Offences Act (EOA)

The Government and the EC should undertake robust stakeholder engagement on proposed amendments to the EOA. This should include reviewing candidate spending limits so that they reflect the current economic realities and the increasingly digital nature of electoral campaigning. Budget 2027 should support this engagement, as well as the voter education and public awareness programmes to strengthen understanding of electoral rules and offences.

Consultation on the AI Governance bill

As deliberation on the proposed AI Governance Bill continues, Budget 2027 should provide adequate and sustainable resources for further stakeholder engagement and for the institutions that will be responsible for implementing the eventual framework.