Malaysia Budget 2026: Walking the tightrope between fiscal discipline and populist spending

[KUALA LUMPUR] With state elections looming, Malaysia’s Budget 2026 is expected to walk a fine line between fiscal consolidation and voter-friendly measures.

Prime Minister Anwar Ibrahim – halfway through his term – will unveil the Budget on Friday (Oct 10), the first under the 13th Malaysia Plan (13MP) and the fourth of his premiership since taking office in 2022. The 78-year-old is also Malaysia’s finance minister.

The stakes are high. Anwar’s Madani economic vision calls for sustainable and compassionate development, as his government faces the test of shoring up political support ahead of possible national polls in 2026 or 2027. Out-of-cycle state elections, including Sabah’s state poll in December, add to the political calculus.

Dr Paul Anthony Maria Das, senior lecturer at the Faculty of Business and Law at Taylor’s University, said Budget 2026 inevitably doubles as a political manifesto.

“As the first Budget under the 13MP, it must walk a tightrope: providing relief to households, proving the government’s commitment to reform, and signalling fiscal discipline to investors,” he said in a recent note.

Political undertones

Economists said that while state contests are often swayed by local issues, federal policies still matter.

A recent report, co-authored by CGS International economists Nazmi Idrus and Mas Aida Che Mansor, pointed out that state elections are often driven by local issues, a trend that may be compounded by low voter turnout.

They also highlighted the potential for misalignment, stating that “favourable policies at the federal level may not be aligned with all states”.

“As one or two state elections could be held in 2026, we expect the upcoming Budget to be voter-friendly. We see savings from the subsidy rationalisation to be channelled back towards expansion of social assistance,” they wrote.

A record of bigger Budgets

Since Anwar assumed office, Budgets have grown larger each year: RM388.1 billion (S$119 billion) in 2023, RM393.8 billion in 2024 and RM421 billion in 2025. Whether Budget 2026 surpasses these remains to be seen.

Despite the rising total, development spending has shrunk from RM99 billion in 2023, during the post-pandemic recovery push, to RM86 billion in 2025.

Economists expect RM86 billion to RM89 billion for 2026, sustaining investment in flagship projects such as the Penang Light Rail Transit, the Carey Island terminal and major flood mitigation works.

“Spending will be channelled towards infrastructure, digitalisation and the green transition,” said Michelle Chia, regional head of research at CIMB Treasury and Markets Research.

Chia and her colleague Azri Azhar highlighted alignment with major blueprints, including the New Industrial Master Plan 2030, National Energy Transition Roadmap and National Semiconductor Strategy.

Narrowing deficit

Economists expect continued fiscal consolidation without austerity. Malaysia’s deficit, which ballooned during the pandemic, is projected to ease to 3.5 per cent of gross domestic product in 2026 from 3.8 per cent this year, said RHB Research, with a medium-term goal of 3.2 per cent in 2027.

“Budget 2026 is poised to be a pivotal instrument in steering Malaysia towards sustained and inclusive growth amid a complex global environment,” said RHB chief economist Barnabas Gan and senior economist Chin Yee Sian.

Debt remains elevated at about 64.6 per cent of GDP, though still under the 65 per cent ceiling. The bond market faces pressure from RM108.7 billion in maturities in 2026, up 30 per cent from this year, alongside a RM77 billion deficit.

RHB Research projects this could push gross bond issuance to RM185 billion in 2026, compared with RM167.5 billion in 2025.

Economists said that the financing burden is manageable, but maintaining credibility will hinge on steady deficit reduction.

Growth prospects

Official projections put GDP growth at 4.5 to 5.5 per cent in 2026, up from the 4 to 4.8 per cent GDP forecast this year.

UOB senior economist Julia Goh and economist Loke Siew Ting expect 4.5 per cent this year, supported by resilient consumption, civil service pay hikes and cash transfers.

Key 13MP initiatives – such as the Johor-Singapore Special Economic Zone (JS-SEZ), Visit Malaysia Year 2026, and the RM120 billion Government-linked Enterprises Activation and Reform Programme – are expected to provide an additional lift.

Still, CIMB Research is more cautious, projecting 4.1 per cent growth, citing softer consumption and weaker private capital expenditure. Even so, RM8 billion in civil service wage hikes and expanded cash transfers should help sustain household demand.

Tax matters

Rather than introducing sweeping new taxes, Budget 2026 will likely fine-tune existing measures.

The expanded sales and service tax (SST), introduced in mid-2025, is forecast to raise RM10 billion annually, with another RM5 billion possible if the scope is widened to food, beverage and telecoms.

Economists expect updates on:

• carbon tax: targeting steel, energy and other high-emission industries, with deductions possible for companies investing in carbon monitoring and reporting;
• sin taxes: incremental hikes on tobacco, alcohol and vape products to support public health;
• e-invoicing: wider roll-out to curb leakages and boost compliance; and
• RON95 fuel subsidy rationalisation: savings of RM2.5 billion to RM4 billion annually from the new Budi95 scheme, which caps subsidised purchases at 300 litres a month for eligible Malaysians at RM1.99 a litre.

“A higher GDP growth target is expected, with the government likely to maintain an expansionary fiscal stance, supported by ongoing reforms such as e-invoicing and subsidy retargeting, alongside accommodative monetary policy,” said UOB’s Goh and Loke.

CGS International expects further tightening of fuel and cooking oil subsidies, while labour reforms – such as raising the retirement age to 65 and reducing foreign worker reliance to 10 per cent of the labour force by 2030 – are likely to be highlighted in the coming Budget announcement.

“Coupled with the multi-tier foreign worker levy and the mandatory Employees’ Provident Fund contribution for foreign workers, we think this should further encourage hiring of local workforce as well as promote automation,” said Nazmi and Mas Aida.

Some fiscal wiggle room

Fiscal policy is expected to remain accommodative, leaving Bank Negara Malaysia room to act if needed.

OCBC’s Lavanya Venkateswaran expects the central bank to hold rates at its November meeting, with a 25-basis-point (bps) cut possible in the first half of 2026 should growth falter.

“With fiscal policy geared in the right direction, Bank Negara Malaysia will likely remain on hold at its Nov 6 meeting,” she added.

The central bank lowered its benchmark interest rate by 25 bps to 2.75 per cent in July – the first time in five years.

After a volatile 2024, the ringgit has traded firmer and recorded gains against the US dollar this year. As at Tuesday (Oct 7) the ringgit was trading at 4.2141 against the greenback, marking an appreciation of nearly 5.8 per cent from 4.4715 at the start of the year.

Maybank Investment Bank expects the ringgit to maintain its strength, forecasting that it will trade around 4.10 in the current quarter, and further appreciate to 4.05 in the first quarter of 2026.

Malaysia’s revenue strength is also helping, said Venkateswaran, noting that tax collections rose 6.1 per cent year on year in H1 2025, led by corporate taxes and SST receipts, offsetting weaker non-tax revenues from lower Petronas dividends and commodity prices.

Solid tax revenue collections and subsidy rationalisation have allowed the fiscal deficit to narrow to 3.7 per cent of GDP on a 12-month rolling sum basis, as at July 2025.

“There is a chance that the 2025 fiscal deficit could undershoot the target, but this will be known only in the fourth quarter of 2025 once the mechanism of RON95 rationalisation is clearer,” said Venkateswaran.