Budget 2026: Government’s Macro Prognosis?

 

Budget 2026 will be upon us soon. It may be an opportune time to have a preview of expectations as far as the government’s revenue, expenditure and financials are concerned. (Pankaj C. Kumar presented his insights recently and this is an inspired article). 

The forecast must also consider the need for discipline to ensure the government’s budget deficit targets are on course to dip below 3% by 2030 or earlier. For 2025, the government tabled a RM421bil budget, comprising RM335bil operating expenditure (Opex) and the balance RM86bil in the form of development expenditure. 

In terms of source of income, the government projected total revenue of RM339.7bil, of which 76.2% was derived from taxes (both direct and indirect) and the balance comprised non-tax revenue. The government is also projected to run a budget deficit of RM80bil, translating to a budget deficit of 3.8% for 2025. 

As of the first half of financial year 2025 (1H25), based on data provided by Bank Negara Malaysia, the government’s revenue and Opex stood at RM147.6bil and RM155.3bil, respectively, while total development expenditure amounted to RM33.3bil, resulting in an overall deficit of RM40.5bil. Compared with 1H24, overall revenue is higher by 6.1% year-on-year (y-o-y), while Opex and development expenditure are down by 1.1% and 1.9% y-o-y, respectively. 

The budget deficit in 1H25 improved compared with RM51.6bil for the same period last year, translating to an RM11.1bil or 21.5% reduction. 

Under the 13th Malaysia Plan, the government expenditure targets are expected to grow at an annualised rate of about 4% per annum over the next five years. It is likely that under Budget 2026, the government will project revenue of RM354bil while expenditure is forecast to hit RM346bil. With total development expenditure expected to be held steady at RM86bil, Budget 2026 will likely see an allocation of RM440bil, excluding any contingencies. 

As for RM86bil in total development expenditure, a quarter will likely be allocated to the education and healthcare sectors, amounting to RM13bil and RM8bil, respectively. But are we getting the returns? In Budget 2025, these two sectors saw a total allocation (Opex and development expenditure) of RM127.6bil, of which RM82.3bil was for the Education Ministry and Higher Education Ministry, while another RM45.3bil was allocated to the Health Ministry. However, only RM17.3bil of the total amount was related to development expenditure, while the balance was for Opex, which mainly comprised emoluments and supplies. 

The government should focus on raising the development expenditure for the education sector, as the expected allocation of RM13bil will only be just 0.6% of nominal gross domestic product (GDP). The same goes for healthcare, as even an RM8bil development expenditure allocation in Budget 2026 translates to only 0.4% of nominal GDP. 

We have been under-spending on both education and healthcare as the expected total allocation for the two at RM86bil and RM50bil in Budget 2026 will only be approximately 4.0% and 2.3% of the 2026 nominal GDP, respectively. Of course, these figures exclude private sector expenditure, which raises the two sectors’ ratios to GDP to 7.5% and 3.5%, respectively. 

The government is seen as committed to improving budget deficit targets, having lowered it to 4.1% last year and the expected 3.8% this year. It is estimated that the deficit target will likely be set at 3.5% under Budget 2026, as seen above. 

Although Malaysia has shown progress in reducing budget deficit levels over the past two years and into 2026, the fact that we continue to run these deficits means we have no choice but to expand the federal government’s statutory debt and total debt, as shown in the table. There has to be better accountability on expenditures, or we will have “leakages” that only the rich will get to enjoy! 

The projected 16.1% debt service charge-(DSC) to-expenditure ratio under Budget 2025 is likely to scale higher to 16.4% based on an estimated total DSC of RM58bil in 2026.

This suggests the government’s DSC will move further away from the self-imposed limit of 15% and remain the second-highest expenditure item after emoluments. Surely the 15% limit now seems unachievable. Hence, there must be greater effort to reduce our DSC, which can only occur if we are able to reduce the growth of debt and, at the same time, achieve a higher pace of increase in the government’s revenue. 

GDP growth estimate is at 4.0% to 4.8% for this year. This may be optimistic, given the tariff scenario. Budget 2026 may suggest growth of 4.5% to 5.5%, too challenging under current circumstances. The rise in the cost of doing business, as well as expected higher prices for goods and services, will also see slower growth in domestic consumption. 

In terms of inflation targets, with the lowered target this year to 1.5% to 2.3% and with year-to-date headline inflation at just 1.4% and core inflation at 1.9%. It is likely that the headline inflation forecast will be set at between 1.5% to 2.5%. The removal of blanket subsidies and the impact of higher sales and service tax on goods and services will have an impact! 

The unity government must present a pragmatic, forward-looking and disciplined budget for the window will likely close by next year when Budget 2027 is presented. 

Reference:

Budget 2026 – spending it right, Pankaj C. Kumar, The Star, 13 September 2025

Isn’t Proton Rebadged Chinese Car?

 

The fundamental architecture, design, styling, and key EV components (e-motor, battery cells, BMS) are all developed by Chery. The Proton S70 (based on the Chery Arrizo 8) and the Proton e.mas (based on the Chery EQ7) are undeniably Chinese cars at their core. This is a known business model called "badge engineering" or rebadging. It's a faster and cheaper way for Proton to fill gaps in its lineup (especially in the critical EV segment) without investing billions in all-new R&D from scratch. 

Proton's position is that they are moving beyond simple rebadging to a deeper level of local integration and development. The cars are CKD (Completely Knocked Down), not CBU (Completely Built-Up). This means the cars are assembled in Malaysia (in Proton's Tanjung Malim plant) from boxes of parts. This process: 

   · Adds local value through labour and assembly.

   · Creates and sustains jobs for Malaysian engineers and technicians.

   · Allows for the gradual increase of local part sourcing (from the 30-40% content initially to say 80% in later years). 

But what is the cost of this strategy?

 

Source: https://commons.wikimedia.org

The most comprehensive and frequently cited study on this topic comes from the Institute for International Economics (IIE) in a 2010 report. According to the 2010 study by the IIE, the total cost of Proton's protectionism to Malaysian consumers from 1985 to 2010 was estimated at RM 33.6 billion (in 2007 Ringgit terms). This figure primarily represents the "consumer tax"—the extra amount Malaysians had to pay for cars due to high tariffs and the lack of competition that kept Proton's prices artificially high. 

The total cost to the consumer is not just the higher sticker price of a Proton. It's a combination of direct and indirect costs: 

High Import Tariffs: Taxes of up to 300% were placed on fully imported cars, making them prohibitively expensive for most Malaysians. 

Excise Duties: High excise duties were applied to all cars, but local assemblers (like Proton) received significant exemptions, further skewing the market in their favour. 

Import Quotas and Approved Permits (AP): The system limited the supply of foreign cars, reducing competitive pressure. Malaysians therefore paid significantly more for both Protons and all other cars than they would have in a free market. For example, a Proton Saga that might have cost RM 20,000 to produce could be sold for RM 35,000 because a comparable Japanese car (after tariffs) would cost RM 60,000. The consumer lost the choice to buy a better-quality foreign car at a reasonable price. 

The IIE's RM 33.6 billion figure is largely the sum of this "overpayment" by every Malaysian car buyer over that 25-year period. 

Economic Inefficiency and Misallocation of Resources 

The billions spent overpaying for cars could have been spent on other goods and services (e.g., housing, education, food, entertainment), stimulating other, potentially more productive, sectors of the economy. 

Commercial vehicles (vans, trucks) were also more expensive. This increased the operating costs for virtually every Malaysian business, from SMEs to large corporations, making them less competitive and contributing to higher prices for goods and services across the board. 

Quality and Choice Suppression 

Consumers were forced to accept. Proton was slow to innovate because it faced little competitive pressure. Without the need to compete globally on quality, standards often lagged international peers. The market offered far less choice than a similar-sized open market like Thailand or Australia. 

The Cost of "Bailouts" and Government Support 

Proton consistently required financial support from the government (and by extension, the taxpayer), including: 

·       Soft loans and direct cash injections.

·       Writing-off of debts.

·       Cost of implementing and administering the protectionist system (e.g., the AP system). 

The "Benefits" (The Rationale for Protectionism) may include: 

-Job Creation: Proton and the supporting vendor ecosystem created thousands of jobs. 

-Industrial Development: It forced the development of a local automotive parts and engineering sector (over 200 vendor companies). 

-Technology Transfer: The initial partnership with Mitsubishi provided some level of technical know-how. 

-National Pride: Proton became a symbol of national engineering capability and independence. 

Most economic analyses conclude that the costs of Proton's protectionism vastly outweighed the benefits. The RM 33.6 billion cost (1985-2010) is an estimate of the direct consumer burden. The benefits, like job creation, could arguably have been achieved at a much lower cost through other industrial policies or by fostering competition that would have forced Proton to be efficient from the start (much like how the national airline, MAS, had to compete internationally). The policy ultimately created a reliant, uncompetitive company that struggled the moment market liberalization began. Malaysia's automotive market is now more open, and Proton's survival is largely attributed to its strategic partnership and eventual majority acquisition by China's Geely in 2017. 

So, was it worth it? No, and Mahathir knew this! We are a small economy with limited sales volume (total industry volume was about 500,000 to 600,000 units for many years. Now it is reaching 800,000). To be a serious global player, we need a throughput of at least a million units (of just Proton cars). It might have been better if we had focused on a niche area of the total car market and did the gamut including the R&D.

Is It Just Incompetence?

 

A former Malaysian Minister (Zaid Ibrahim) said recently, “Malaysia is not at risk of collapse because of ideology. It is at risk because of incompetence.” “Nations fall when their leaders fail to govern effectively, when debts spiral beyond control, when resources are squandered, and when corruption robs citizens of their future.”

 

“Oil, gas, timber, and land; our natural inheritance is depleted or monopolised. An economy stolen. Cartels, cronies, and politically connected companies enrich themselves while ordinary Malaysians are asked to (tighten) their belts,” said Zaid.

 

Source: https://commons.wikimedia.org

 

Citing Nepal and Indonesia, Zaid pointed out that the problems plaguing both countries had nothing to do with extremism. Nepal did not become one of Asia’s poorest nations because of extremism. It became poor because of chronic political instability and weak governance. Indonesia, in 1997, did not collapse because its people were too religious. It collapsed because of crony capitalism, corruption, and unsustainable debt. So too for Sri Lanka, Bangladesh and Pakistan. They had other issues as well but corruption, cronyism was at the core.

 

But it is just that for Malaysia? Racial discrimination in education, employment and business contracts has no parallel anywhere else in the world. And we accept it as “takdir”?

 

Let me be very plain, if one is a non-Malay and aspiring to be a doctor, one may never be able to realise one’s dream. A creative genius will be shunted out of the system or the country (I speak with experience – my son serves the NHS as a consultant not the MOH). A young person with a desire to become an ambassador will also be deprived of the opportunity to study liberal arts and win a government scholarship.

 

The sad truth is that innocent Malay children also suffer from this system too by virtue of having privileges that others do not. The disenfranchised from poor families are taught in bad schools where standards are low because it appears the system does not believe that gaining access to the best education is critical. They are thus less able to compete and they grow up believing they are entitled.

 

Indeed, the sense of entitlement applies across the economic spectrum. Such is the perverse nature of discriminatory policies. What is the large-scale discrimination that everyone knows about but only whispers of? It has nothing to do with how affirmative action should be used to benefit poor Malays, but everything to do with a deep psychosis at the heart of the political and economic system. That psychosis is institutional racism.

 

But the non-Malay, will find a way and will emerge stronger and better. In a perverse way, by being stoical and tolerant of blatant racism, you have in-built resilience and a great chance to succeed as a professional. You are helping to build the country. You fortify the country against the risks arising from the lack of meritocracy in key institutions, which allows many of your Malay classmates to reach elevated positions and earn shockingly high salaries without competing with you. You become the backbone of the country. Without you, the economy of the country would be in tatters. By staying and building the country, you have become a proud patriot!

 

True incompetence is a derived relationship of entitlement, background, social standing, confidence (or the lack of it) and the absence of skill sets necessary to navigate a new world.  But our politicians choose to be oblivious!

 

References:

Zaid: Incompetence a bane to M'sia's progress, not ideology, Malaysiakini, 12 September 2025

 

Non-Malays must attain grades that are 3 times better than a Malay student in order to gain access to a local university, The Coverage, 9 September 2025

FDIs: Why Approvals Are Up but Inflow Down

 

The Statistics Department (DOSM) recently reported on foreign direct investment (FDI) into Malaysia - inflow plummeted from RM15.6 billion in the first quarter to RM1.6 billion in the second quarter of this year. 

In their overseas missions, both Prime Minister Anwar Ibrahim and Investment, Trade, and Industry Minister Tengku Zafrul Abdul Aziz routinely announce huge investment commitments made. Mida said in February, Malaysia attracted RM378.5 billion of approved investments in the services (RM252.7 billion), manufacturing (RM120.5 billion), and primary (RM5.3 billion) sectors last year, a 14.9 percent increase compared to RM329.5 billion in 2023. Domestic investments accounted for a substantial 55.0 percent or RM208.1 billion of the total approved investments, while foreign investments contributed 45.0 percent, amounting to RM170.4 billion. 

Impressive, but why are these figures not being translated into actual FDI? The short answer is that commitments and even approvals don’t become investments until two to three years later. There are some valid explanations. Foreign investments are lumpy in nature but might take some time to materialise. There may be changes in investment decisions or even higher repatriation of income by foreign investors. 

According to MIDA, its approved FDI figures for the manufacturing and services sectors represent proposed investment projects with foreign equity participation that have been granted licences, incentives, permits, grants, soft loans and so on by relevant ministries and agencies. They are measured based on capital expenditure (capex) and operating expenditure (opex) such as land, building and resources. By the same token, approved domestic investment (DI) figures measure similar data but by domestic investors. 

DOSM’s figures, broadly, measure inflows and outflows of foreign investments. They capture financial transactions, including for equity such as shares and reinvested income. This figure refers to investments by non-residents via transactions of financial instruments including equity, reinvestment of earnings and debt instruments (such as inter-company loans and advances as well as trade credits). 

Mida does not provide actual FDI figures. The DOSM does. It is instructive to note that actual FDIs in 2024 were RM51.5 billion, up from RM38.6 billion in the preceding year. 

That’s still far from the approval figures of RM380 billion and RM330 billion for 2024 and 2023, respectively, and indicates that these figures must be used with considerable caution.

Perhaps the most instructive of charts for FDIs is as above, which shows volatility in yearly figures but a steady uptrend for cumulative FDIs. The actual FDI (in blue) peaked in 2022 when the Madani government was in power for barely a month and therefore could not claim credit. In 2023, when it was in power for a full year, the actual FDI declined, but made a good recovery in 2024. Considering that actual FDI for the first two quarters was just RM17.2 billion (15.6+1.6), the full-year figure is likely to be much less than last year’s RM51.5 billion. 

We may safely conclude that in the short term, FDIs simply don’t reflect the quality of the government, although in the longer term, it is likely to, especially if investment conditions and incentives remain steady. The seeming paradox of rising approvals and falling of actual FDIs is likely to remain and some people interpret differently to suit their arguments, including yours truly! 

References:

Comment | The paradox of rising approvals and falling FDIs, P Gunasegaram, Malaysiakini, 19 August 2025

My Say: Approved investments versus FDI: Manipulation or truly a non-issue? Tengku Zafrul/The Edge Malaysia, 25 August 2025

More Wealthy Malaysians Join B40

 

Escalating healthcare costs in the private sector are driving more affluent Malaysians, including Tan Sris and VIPs, to seek treatment at Hospital Kuala Lumpur (HKL). Its director told Berita Harian that many of HKL’s wealthy patients were referred from private medical centres, often after their insurance coverage ran out or when treatment costs became too high. This shift has been evident over the past decade, reflecting both financial pressures and confidence in HKL’s specialists and facilities. Trend shows that affluent patients also trust HKL’s quality of care and medical expertise. 

HKL currently houses 417 medical specialists, supported by nearly 900 medical officers and more than 3,800 nurses, treating up to two million patients annually. The public hospital is also equipped with advanced technology, including robotic-assisted surgery in its Urology Department, one of only two such facilities in Malaysia.

 

Source: https://en.wikipedia.org

HKL prioritises low-income groups, but it cannot turn away wealthier patients and has first-, second- and third-class wards to accommodate different needs. The M40 and T20 patients often sought oncology and radiology services at HKL, which are both highly specialised and costly in private hospitals. If we look at other countries, none offer healthcare services at RM1. 

Despite longer waiting times compared to private facilities, patients leave HKL with quality treatment, affordable medication and access to expertise that matches or surpasses the private sector. 

If we have the facilities, the people and leadership, we could do wonders in the public sector, especially in healthcare. This is the same in education or sports. Let the best people rise and we will have quality in our output or outcome! 

Reference:

Insurance runs out, costs too high: More wealthy Malaysians join B40 at Hospital Kuala Lumpur, Malay Mail, 7 September 2025

Malaysia’s Economy: Identity Politics and Reality!

The recent move by the United States to impose new tariffs makes one thing clear: we are heading toward economic warfare. You do not need weapons to attack and bring down a government. Economics is simple. It doesn’t care about your race, religion, or rhetoric. It rewards productivity and punishes inefficiency. It respects innovation, not entitlement. 

And this is where Malaysia keeps failing. We need to educate ourselves that the era of the 1990s and early 2000s—is over. Our future now boils down to pure productivity, innovation, and collaboration. For decades, we’ve been trapped in the politics of identity. We argue about quotas, special rights, and who deserves what, while the world races ahead.

 

Source: https://en.wikipedia.org

 

Vietnam is attracting manufacturers we once had. Indonesia is building a digital economy. Even Singapore, with no natural resources, is outpacing us (and that too with a population one-fifth of ours).

 

Meanwhile, we’re still measuring opportunity through the lens of race. Are we doing a disservice to our nation and to future generations? Here’s the hard truth: the global market doesn’t care if you’re Malay, Chinese, Indian, Kadazan or Iban. Investors only ask: Can you deliver? Can you innovate? Can you be trusted? If not, they will take their money elsewhere. The world owes Malaysia nothing.

 

Every time we reward mediocrity based on race, we punish the excellence that could lift the entire country. Every time we craft policy based on identity instead of merit, we weaken our international competitiveness. Every time we allow politics to divide us, we hand our future over to our rivals.

 

The government should not assume ordinary Malaysians are blind to this. Walk into a pasar malam or a kopitiam, and you’ll see people of all backgrounds trading, buying, and working together seamlessly.

 

On the ground, economics is colour-blind. It is politics that has poisoned the system for decades. If Malaysia wants to prosper, we must have the courage to separate race and religion from economics. This is a bitter pill to swallow, but a necessary one.

Education must focus on skills, not slogans. Our mantra must be quality education that delivers unmatched, excellent skills. Opportunities must be based on merit, not ethnicity. Merit breeds productivity and innovation—a fact proven by our own history. Productivity must matter more than privilege. Otherwise, we will slide into irrelevance.

 

Economics is not sentimental; it is not swayed by hype. It does not reward identity. It rewards those who work, innovate, and cooperate. If Malaysia doesn’t learn this truth soon, we will pay the price—not in political rhetoric, but in lost jobs, declining industries, and a generation left behind.

 

The staggering statistics of brain drain to our neighbours, who were once a part of us, tell the whole story or those that have left us for Canada, US, UK or Australia (over 285,000). And to Singapore… over 2 million. What’s the point of STEM, if we don’t have R&D in this country. What’s the point of space launch pads in Sabah or Pahang when we don’t have the engineers or astro-physicists? What’s the point of national cars which have out-dated technologies and remain shielded from competition? What’s the point of APs if it’s only for Ali Babas to thrive? Time is now to reform this nation. Have the courage please!

 

Reference:

Malaysia’s economy: Identity politics doesn’t pay the bills, KT Maran, Focus Malaysia,
1 September 2025

What Really is Keluarga Malaysia?

 

Malaysians have marked 68 years of independence on Aug 31 with an air display, fireworks, and waving of Jalur Gemilang. Official speeches highlighted our steady gross domestic product (GDP) growth, cultural vibrancy, and Malaysia’s role as Asean chair. We will have of our four-year low in inflation and tourist arrivals that outpace our neighbours.

 

However, shadowing the political platitudes is last month’s protest in Dataran Merdeka over rising living costs and lack of real reformasi promised in November 2022. The disconnect between the staged official optimism and public discontent is growing and glaring.

 

Source: https://en.wikipedia.org

 

Surveys by the Merdeka Centre show that three in four Malaysians rank the rising living costs as the biggest concern. The ruling coalition adds to the perception that 68 years of independence have yet to translate into policies that instil inclusivity and accountability in governance, stem corruption, nepotism, and cronyism. Besides delivering on its reformasi promises, the spirit of Merdeka is tested not in the pompous speeches but in the government’s commitment to “reducing inequality and enhancing (socioeconomic) mobility” (joint report, World Bank Group and the Economy Ministry, February 2025).

 

Many may perceive Merdeka as a hollow celebration when policies are steeped in creating a privileged and underprivileged class, an increasing proportion comprising millions of migrant workers.

 

So, what kind of Keluarga Malaysia are we really?

 

For a more meaningful Merdeka, we ought to march in step to a different beat post-2025 as one Keluarga Malaysia. The people perform their duties. The state recognises the people’s rights as members of the extended family. When an extended family member falls into difficulties, each family member is obliged to help. When a nation state slides into the pits, we are duty-bound to pull it out of sinking further.

 

By this logic, Keluarga Malaysia’s greatness is less measured by material gains than by how each family member is responsible for another. These are the values that grow the extended family and prosper as one people.

 

While protests, placards and political rallies do send a strong message to Putrajaya, ultimately, real change in mindsets and inter-racial engagements starts with us, in our homes, at our front gates, across the fences, and in our neighbourhood ties. But it is always difficult if politicians focus on differences rather than similarities. Diversity (to be celebrated) rather than homogeneity. Meritocracy rather than mediocrity. Openness rather than blinkered narrowness.

 

We don’t have much time. But our politicians and leadership remain oblivious!

 

Reference:

COMMENT | What kind of Keluarga Malaysia are we, really? Eric Loo, Malaysiakini, 30 August 2025