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
