[KUALA LUMPUR] Malaysia will implement a new sales tax in September to replace the consumption levy that it's scrapping next month as Prime Minister Mahathir Mohamad looks for ways to temper concerns on the nation's budget.

The government is studying a 10 per cent rate for the sales and services tax, he told reporters in Putrajaya after a Cabinet meeting. Ministers also agreed to cancel a proposed multibillion-dollar high-speed railway link to Singapore and the third phase of a mass rapid transit line in Kuala Lumpur, he said.

Dr Mahathir is seeking more fiscal space to fulfill election pledges that include reducing living costs and fuel subsidies after finding the state saddled with debt and contingent liabilities exceeding 1 trillion ringgit (S$337.2 billion). The government will satisfy one such promise when it sets the goods and services tax at zero on June 1.

"We find that the situation is worse than we thought when we were preparing the manifesto," Dr Mahathir said. "That's why the promises will be fulfilled, but they must take into account the financial situation."

While Malaysia must take drastic short-term steps to restore fiscal strength, it won't set aside programs to boost growth, Economic Affairs Minister Azmin Ali said in a statement. The government will revise development plans for the rest of the decade in line with election pledges and will continue projects that have a large impact on the economy, he said.

The revised framework "will focus on a free-market and investor-friendly economy as well as an emphasis on humane economics based on social justice programs," Mr Azmin said.

The government will review the Bandar Malaysia property project conceived by 1MDB, while the high-speed rail and other major projects will be revisited when the country is in a better financial position, Dr Mahathir said.

As a celebration marking the end of the Muslim fasting month approaches, Mahathir said civil servants will get a 400 ringgit bonus payment, while road users will enjoy a 50 per cent discount on tolls in the two days leading up to the Eid al-Fitr festival, which is set to fall in mid-June.

The government will keep prices for diesel and RON95 gasoline unchanged, while the RON97 grade of petrol will move according to market prices, the premier said.

BLOOMBERG