Malaysia’s Fiscal Challenges!

Malaysia is on the right track in reducing its fiscal deficit from a high of 5.5% in 2022 to 4.1% last year and 3.8% this year. But the pace of reduction has been rather slow. This is mainly due to delayed reforms in terms of revenue collection and reigning in of unwarranted expenditure. 

The RM100 handout for every Malaysian above the age of eighteen and the lowering of the pump price for RON95 to RM1.99 per litre is more populist than substantive. In terms of fiscal reforms, one would expect the government to raise tax collections via the introduction of not only new taxes but also by expanding the tax scope and removing unnecessary reliefs given to businesses and individuals.

 

Malaysia’s low tax revenue as a percentage of gross domestic product (GDP) of 12% needs to improve to reduce our dependence on debt to fund government spending. In 2024, Malaysia’s tax-to-GDP ratio fell to 12.4% as total tax revenue expanded by 4.8%, reaching RM240.2bil from RM229.2bil in 2023. The low tax-to-GDP ratio has really been a pain for the government’s reform efforts. The other rigour required is curtailing expenditures and “leakages”. Expenditures are essential but some have been bloated with interference of cronies or an act of political largesse. Leakages have been highlighted yearly by the Auditor General, but no real measures have been seriously implemented. When there is no accountability, the problem repeats. 

The introduction of the Fiscal Responsibility Act (FRA), 2023, includes keeping annual development expenditure at least at 3% or more of GDP; a fiscal deficit of 3% or lower as a percentage of GDP; a debt level at or below 60% of GDP; and financial guarantees not exceeding 25% of GDP. Section 27(1) of the FRA also requires the minister to table a fiscal adjustment plan in Parliament if the fiscal objectives and targets specified in the First Schedule are not achieved. 

According to the government, Malaysia’s debt stood at RM1.3 trillion as at the end of the second quarter of financial year 2025, compared with RM1.25 trillion at the end of 2024, while government liabilities reached RM384.6bil as of June 2025. Based on the 2024 figures, Malaysia’s debt-to-GDP ratio stood at 64.6%. Hence, with an estimated additional net debt burden of RM32bil this year to fund the projected development expenditure of RM86bil, the total federal government debt is expected to rise to RM1.33 trillion. 

According to the 13MP tabled recently, the government is expected to continue to drive the economy with relatively high development expenditure, averaging at about RM86bil per annum, similar to this year’s allocation. 

To support this, the government’s annual borrowings will likely be RM84bil per annum over the next five years, taking total government debt to RM1.74 trillion by the end of 2030. With a lower growth in 13MP period, this statutory ceiling ratio could be under threat. 

Based on data provided in the 13MP, government revenue over the next five years is expected at RM1.82 trillion, while total expenditure is envisaged at RM1.81 trillion, leaving a meagre surplus of just RM12bil. Under the 13MP, the government did not specifically target any new form of taxes other than the proposed carbon tax but reiterated its efforts to widen the scope and rate of the existing, as well as implement the Global Minimum Tax. 

What is lacking sorely is reform of the tax regime and new tax measures to reduce government borrowings and improve inequalities. If we continue with “more of the same” there is no solid end in sight for fiscal improvement but more “firefighting” measures in the annual Budget.

 Reference:

Addressing Malaysia’s fiscal challenges, Pankaj C. Kumar, The Star, 9 August 2025