Into the third year of administration and presenting the Madani government’s fourth budget since taking power in November 2022, Budget 2026, can be said to be modest and unexciting in terms of fiscal targets and growth expectations.
It fell short in terms of addressing the need to raise the government’s revenue. The overall revenue for 2026 was forecasted to expand to RM343.1bil, an increase of 2.7% from a lower base of RM334.1bil. The government also forecasted a slower pace of increase in expenditure in 2026, rising by just 1.8% year-on-year.
More importantly, the government is now projected to reduce its planned Development Expenditure (DE) not only for Budget 2026 but also for 2025. There is a RM6bil reduction in the net DE this year, while at the same time, net DE for next year is now set at RM79.5bil.
GLICs, GLC, and private-public
partnership are now entrusted to carry out some of the Budget 2026 measures
amounting to RM30bil, RM10.8bil and RM10bil, respectively, an increase of
RM10.7bil from this year’s commitment. This is outside the scope of GLICs and
GLCs?
The Madani government is committed and maintaining its fiscal prudence with a 3.5% budget deficit target for 2026.
However, the same cannot be said
for debt to gross domestic product (GDP) ratios, as the lower GDP forecast of
between 4% and 4.5% for 2026 was lower than our estimate of 4.5%-5.5%.
The projected growth for 2026 was perhaps done intentionally to consider the impact of the 19% tariff imposed on Malaysian exports to the US. A 1% drop in US GDP growth could cause about a one percentage point reduction in Malaysia’s GDP growth. A 1% decline in China’s GDP growth could potentially shave 0.5 percentage point off Malaysia’s economic growth.
The lower GDP forecast also suggests that nominal GDP growth this year will likely be at 4.3% against the previous growth estimate of 6%. The slower growth translates to a higher debt/GDP ratio of about one full percentage point. Even growth in tax collection as a percentage of GDP remains uninspiring, with an expected tax to GDP ratio of 12.7% next year from the expected 12.6% this year, despite the expected surge in sales and service tax (SST) collection to almost RM60bil in 2026, and accounting for 17.4% of total revenue.
The government is projecting a lesser contribution from PETRONAS next year as the national oil company’s forecast dividend was slashed to RM20bil from RM32bil for this year. However, there is now a renewed concern that the government’s revenue as a percentage of GDP is on a declining trend as it is expected to drop to 16.1% in 2026 from 16.6% this year.
The federal government’s debt
stood at RM1.3 trillion or 64.7% of GDP as of the end of June, compared with
RM1.25 trillion or 64.6% of GDP at the end of 2024. It remains above the
statutory threshold of 60% of GDP under the Public Finance and Fiscal Responsibility
Act 2023. With estimated net borrowings of RM77.2bil this year, the
government’s total debt is projected to reach RM1.32 trillion or 65.7% of GDP
by the end of this year. Under the baseline scenario, the ratio is expected to
stand at 65.8% this year, before gradually easing to 60% by 2030, in line with
the target set under 13MP. The combined debt and liabilities exposure stood at
RM1.69 trillion or 84.1% of GDP as of June, underscoring the importance of
proactive fiscal risk and liability management.
Public debt is expected to reach 64.7% of GDP in 2025, with debt-servicing costs remaining elevated
A carbon tax will be introduced next year for certain large carbon-emitting industries, it did not recommend a rate of tax just yet. For the sin sector, the higher taxes on cigarettes and the 10% increase in excise duties for alcoholic beverages can be said to be less impactful than expected. Nevertheless, the government should be more concerned with tackling illicit trades to generate more tax revenue instead of resorting to higher taxes on legal supplies.
The government also did not renew the current exemption status for completely built-up (CBU) electric vehicles (EV), which is expiring at the end of this year. The floor price of RM100,000 for EV cars sold was not reviewed either. Hence, CBU EVs will be sold in the market at a higher price due to the tax element. This is a protection for two national cars. Shouldn’t it be removed gradually? Why must the taxpayer protect these two favoured companies since the 1980s?
For the property sector, the increase in the stamp duty rate to 8% from 4% previously for residential property ownership transfer by foreign individuals and foreign-owned companies can be said to be a surprise, especially when foreigners are not significant when it comes to purchasing local properties. This could be a dampener for properties that are in prime locations, both for properties that are sold by developers as well as in the secondary market.
Although no mega projects were announced, the planned DE is widespread, covering the entire economic spectrum. Some large allocations were also announced, including a RM13bil investment by Pengurusan Aset Air Bhd over the next five years for several water treatment plants. The government also announced a RM3bil allocation to replace 820km of ageing pipes in several states, RM2.3bil for airport upgrades, and RM5.6bil for the Malaysian Road Records Information System. In the energy sector, the government remained committed to its energy transition journey with large-scale solar generation projects under the LSS6 programme, with a total capacity of up to 2GW from the private sector worth RM6bil and GLICs/GLCs are mobilizing investments worth some RM16.5bil in other energy transition rollouts next year.
There is nothing substantive in the Budget. Boring, lacks excitement and goes with the status quo. Despite Trump, we must chart a course of action that provides hype for 2026 and tailors into the 13MP, but alas that is not so!
References:
Budget 2026 – Some hits, more misses, Pankaj C. Kumar, The Star, 13 October 2025
A prudent yet supportive Budget 2026, Lee Heng Guie, The Star 13 October 2025
Budget 2026: Fiscal continuity and the pursuit of
domestic resilience, Press Announcement, MARC
Ratings Berhad, 13 October 2025
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