This was first published on Fulcrum on 3 November 2025 here.
Malaysia’s 2026 budget continues fiscal reforms but exposes structural fragilities such as heavy operating costs and rising debt. These factors may threaten long-term fiscal stability.
Earlier this month, the Malaysian Madani administration tabled its fourth annual budget. The expansionary budget of RM470 billion for 2026 continues the administration’s emphasis on fiscal reform, but still lags on key issues such as heavy operating expenditures, a narrow revenue base, and governance accountability.
This was not an election budget but a continuation of the administration’s generally prudent fiscal approach. However, the RM470 billion figure includes RM50.8 billion in investments from government-linked companies (GLCs), which are not conventionally recorded as government expenditure. Deducting the injections from government-linked investment companies (GLICs), federal statutory bodies (FSBs) and Minister of Finance Incorporated (MOF Inc) companies, total operating and development expenditure amounts to RM419.2 billion – only slightly higher than 2025’s RM410.9 billion.
Since the pandemic, the government has increasingly relied on its GLICs and GLCs to cushion public spending and stimulate recovery. While they serve an important socio-economic function, over-dependence risks displacing what truly drives long-term growth: a competitive private sector operating in a predictable, business-friendly environment.
From a public finance perspective, it is a positive that subsidies and social assistance are expected to fall by RM8 billion, or 2.7 per cent. The government projects annual savings of RM15.5 billion from reduced subsidies for chickens, eggs, electricity, diesel and RON95 petrol. However, there have been calls for the government to be transparent about its math and how these figures are computed.
These savings have been channelled into cash handouts and assistance schemes. The RM100 Sumbangan Asas Rahmah (SARA) cash aid for adults will continue. The same applies to Sumbangan Tunai Rahmah (STR) for low-income families, whose allocations will be increased from RM13 billion to RM15 billion in 2026. While politically popular, such handouts reduce the fiscal room gained from subsidy rationalisation.
Cancelling out the increase in savings will also impact the country’s fiscal outlook. Although the fiscal deficit is projected to narrow slightly from 3.8 per cent in 2025 to 3.5 per cent in 2026, achieving the 3 per cent target under the Public Finance and Fiscal Responsibility Act (FRA) 2023 within five years is uncertain. Debt levels also continue to rise, with the debt-to-GDP ratio climbing from 64.7 per cent in 2025 to 65.8 per cent in 2026 – above the FRA’s 60 per cent target.
This was not an election budget but a continuation of the administration’s generally prudent fiscal approach.
The debt service charge (DSC) will also increase from 16.3 per cent to 17 per cent of revenue, meaning RM17 of every RM100 earned will go toward servicing debt (principal and interest), leaving only RM83 to pay for other types of spending. Under the IMF-World Bank Debt Sustainability Framework for low-income countries, countries with strong debt-carrying capacity like Malaysia should maintain an external debt service-to-revenue ratio below 23 per cent. Malaysia remains within this range, but the upward trend is of concern.
At the same time, development expenditure — which funds infrastructure, public transportation, schools and hospitals — is declining as a share of GDP, from 4 per cent to 3.8 per cent, despite a modest 2.9 per cent increase year-on-year. This indicates there is reduced fiscal space for long-term growth investments.
Operating expenditure continues to weigh disproportionately heavily, constituting more than 80 per cent of total spending. Two particularly concerning components are emoluments and retirement charges, both of which are seeing allocations increasing by 5.7 per cent and 7 per cent respectively. Emoluments — civil servants’ salaries — the largest component of operating expenditure, will see a 7-15 per cent salary increase for some of them. This follows a 13 per cent increase in December 2024. Retirement charges are also set to grow as the number of pensioners is expected to increase. To address this, the government plans to introduce a defined-contribution pension scheme administered by the Employees’ Provident Fund, which could help reduce long-term fiscal pressure.
Given the spending and debt pressures, it is troubling that revenues as a percentage of GDP are projected to fall from 16.6 per cent in 2025 to 16.1 per cent in 2026. Compounding this is the lowest Petronas dividend in nine years at RM20 billion. The government plans higher excise duties on tobacco and alcohol, and a new carbon tax on steel, iron and energy set to be rolled out in 2026. But these are modest measures. This was a missed opportunity to broaden Malaysia’s narrow revenue base by restoring the goods and services tax (GST).
The currently expanded sales and service tax (SST) is expected to generate RM51.7 billion in 2025, but it covers only 41 per cent of goods and services, compared to GST’s 76 per cent (when it was in force). Restoring the GST, while politically sensitive, would strengthen fiscal resilience and provide more sustainable revenue. Expanding revenues and national productivity must therefore form the backbone of the country’s medium to long-term strategy.
Malaysia has seen improvements in the legal and regulatory framework governing public finance with the passing of new laws in recent years, such as the FRA and the Government Procurement Act (GPA) 2025. Despite flaws, these laws enhance Malaysia’s fiscal framework by institutionalising transparency and responsibility.
However, more is needed to strengthen government accountability further and curb abuse and leakages. Several new laws, such as the Freedom of Information Act, Ombudsman Act and State-Owned Enterprises Act, were mentioned in the pre-budget statement but were omitted from the Prime Minister’s budget speech. These omissions are disappointing given the government’s heavy reliance on the GLC ecosystem.
The Madani Budget 2026 has already generated much debate and praise, but its omissions and shortcomings deserve continued scrutiny. It signals continued reform, but reveals certain structural fragilities that the government must urgently tackle to ensure fiscal and governance resilience. With these in place, Malaysia will be laying strong foundations to withstand any unexpected global shocks while working toward sustainable future long-term growth.
