KUALA LUMPUR: Malaysia’s federal spending is set to rise 2.7 per cent to RM430 billion in 2026, with the government expected to prioritise targeted subsidies, direct cash aid and major infrastructure projects, UOB said.
Its senior economist Julia Goh and economist Loke Siew Ting said the expansion reflects a more calibrated approach compared with previous years but underscores continued support for households and domestic demand.
A key component will be higher social assistance, with direct cash transfers under the Sumbangan Asas Rahmah and Sumbangan Tunai Rahmah programmes are projected to remain sizeable, following RM15 billion allocations this year.
Public sector salaries and pensions will also weigh on operating expenditure given the second pay hike for 1.7 million civil servants and higher pensions for 900,000 retirees could cost RM18 billion in 2026, up sharply from RM10 billion in 2025, making it the government’s largest recurring liability.
Despite subsidy rationalisation efforts, support for fuel and essential goods is expected to stay significant.
About 90 per cent of Malaysians will continue to enjoy RON95 petrol at RM1.99 per litre, alongside subsidies for rice, cooking oil and LPG.
On the development side, Goh and Loke said spending is projected at RM86 billion, with allocations for large-scale projects such as the MRT3, Penang LRT, Pan Borneo Highway and Sarawak–Sabah link road.
Other initiatives include flood resilience works, industrial park development, and new or upgraded hospitals across several states.
The economists project Malaysia’s gross domestic product (GDP) to grow 4.5-5.5 per cent in 2026, up from 4.0–4.8 per cent in 2025, supported by resilient domestic demand, subsidy retargeting and accommodative monetary policy.
Key catalysts include Visit Malaysia Year 2026, the Johor–Singapore Special Economic Zone and the RM120 billion GEAR-uP programme spearheaded by government-linked investment companies and government-linked companies.
Goh and Loke, however, said the domestic bond market may face pressure in 2026 due to a sizable volume of maturing government bonds.
“When combined with our projected budget deficit of RM77.2 billion for 2026 and the option of partial financing via treasury bills, gross bond issuance is expected to rise to around RM185 billion in 2026.
“Consequently, the federal government’s debt-to-GDP ratio is expected to remain above 60 per cent in 2026, compared to RM1.3 trillion or 63.9 per cent of GDP as at end-Jun 2025,” they said.
2026 Budget, under the theme “Driving the Madani Economy: Empowering the People”, will be tabled on Oct 10.
It is the fourth Madani budget and the first to be aligned with the goals of the 13th Malaysia Plan for 2026-2030.
The budget is expected to pursue gradual fiscal consolidation, aiming to narrow the fiscal deficit to 3.6 per cent of GDP amid moderate growth prospects.
© New Straits Times Press (M) Bhd
