2026 Budget: A credible compass for Malaysia's fiscal future

THE 2026 Budget presents a decisive test for Malaysia’s fiscal credibility.

With global risks rising and domestic reforms advancing, the government must strike a careful balance between discipline and development.

The economy is gradually recovering, but the headwinds remain strong: tight global financial conditions, shifting geopolitical alignments, and commodity price volatility.

Against this backdrop, Malaysia must now move beyond rhetoric and embed real fiscal anchors into 2026 Budget.

Rules-Based Approach for Resilience

The Fiscal Responsibility Act (FRA) provides a robust starting point.

Its targets – to reduce the fiscal deficit below three per cent of gross domestic product (GDP) and federal debt toward 60 per cent of GDP – must be operationalised, not merely acknowledged.

A formal expenditure rule should cap real primary spending growth at the economy’s long-term potential. This ensures that public spending remains aligned with national productivity capacity.

To enhance transparency and pre-empt investor uncertainty, the Finance Ministry should also publish detailed fiscal sensitivity tables.

These should show how variations in GDP growth, oil prices and subsidy policies impact the deficit and debt trajectory.

This approach would anchor expectations and help insulate Malaysia from shocks – whether external downgrades or domestic political volatility.

Malaysia’s fiscal deficit stood at 5.0 per cent of GDP in 2023, and is projected to narrow to 3.8 per cent in 2025 under current plans. The 2026 Budget is expected to bring this further down while adhering to the 65 per cent statutory debt ceiling.

This is the moment to demonstrate consistency and clarity in fiscal policy—without undermining development priorities.

Rationalise Subsidies, Reinvest Strategically

One of the most critical reforms underpinning 2026 Budget is the full rationalisation of blanket fuel subsidies.

The government’s decision to target diesel subsidies in June 2024 was a major structural shift.

The next logical step is to extend targeting to RON95 petrol, leveraging the Padu socioeconomic database to protect B40 and vulnerable M40 groups through direct cash transfers.

Blanket subsidies disproportionately benefit high-income groups while distorting price signals. In contrast, a tiered cash assistance model – indexed to fuel prices and usage – ensures fiscal efficiency, equity, and economic logic.

To preserve public trust, 2026 Budget should include a transparent “Subsidy Savings and Use” framework.

One-third of the savings could go toward deficit reduction, another third toward expanded social assistance (e.g., Sumbangan Tunai Rahmah, childcare and transport support), and the remainder toward growth-enabling development expenditure.

At the same time, revenue reform must continue. With the service tax raised to eight per cent in 2024, the focus now should be on improving tax efficiency, particularly in B2B supply chains.

The Inland Revenue Board’s phased rollout of e-Invoicing should reach full implementation by mid-2026. This will significantly enhance compliance, reduce leakage and expand the tax net, without the need to raise rates.

Capital gains tax (CGT) on unlisted shares, introduced in 2024, should be retained and clarified. Technical guidelines must ensure that the CGT is transparent, avoids double taxation, and provides certainty to investors.

In parallel, Malaysia must move from Pillar Two design to enforcement—ensuring our investment incentives are globally compliant while remaining attractive.

Spend Productively, Manage Debt Proactively

Fiscal prudence must not come at the cost of long-term productivity.

The 2026 Budget should protect and prioritise high-impact development expenditure. This includes projects aligned with the New Industrial Master Plan (NIMP 2030) namely, industrial upgrading, digital infrastructure and the green economy.

Public investment management systems should be strengthened to score projects by job creation, export complexity, and environmental outcomes.

Publishing a shortlist of top projects with cost-benefit summaries would further enhance credibility.

Meanwhile, core operating budgets for health and education must be protected but with strong performance benchmarks and efficiency reforms.

Service quality, not just spending levels, must be the focus.

Given the debt stock remains near the statutory ceiling, Malaysia should pursue active liability management. This includes lengthening bond maturities, expanding the retail sukuk base, and smoothing redemptions through strategic buybacks.

Petronas dividends, set at RM32 billion in 2025, should remain stable, but any windfall should be allocated toward one-off debt reduction, not structural expenditure.

Institutional reform must also progress. A light-touch Independent Fiscal Institution (IFI) could publish pre-budget forecasts, policy costings, and long-term fiscal risk assessments.

This would complement the Medium-Term Revenue Strategy (MTRS), which should now integrate SST base-broadening, e-Invoicing gains, CGT enforcement, and a roadmap for green levies and tax incentive reviews.

Lastly, climate-fiscal integration must begin. 2026 Budget should outline a carbon pricing roadmap—starting with large emitters and transitioning to a border adjustment framework by 2028.

Revenues should be ringfenced for green investments, from EV charging networks to smart grids and household retrofits. This aligns fiscal reform with Malaysia’s broader energy transition goals.

Conclusion

The 2026 Budget must be more than a policy document – it must be a credible pivot point. It cannot afford to be a political wishlist or a piecemeal compromise.

It must demonstrate that Malaysia is prepared to meet its obligations, manage its risks, and invest in its future.

The world is moving. 2026 Budget must show that Malaysia is not just catching up but catching on.

*The writer is an economist, international relations analyst, adjunct lecturer at Universiti Teknologi Petronas (UTP), and a senior consultant with Global Asia Consulting. The views expressed here are entirely his own.

© New Straits Times Press (M) Bhd

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