Subsidy cuts, tax reforms set to reshape Malaysia’s economic landscape, say experts

[KUALA LUMPUR] As Malaysia rolls out its largest budget on record, phasing out subsidies and introducing broader tax measures, market watchers anticipate rising inflationary pressures while maintaining optimism about the country’s economic outlook.

Their comments followed Prime Minister Anwar Ibrahim’s announcement of a larger RM421 billion (S$128 billion) budget for 2025 last Friday (Oct 18), with government revenue projected to grow 5.5 per cent to RM339.7 billion, driven by higher tax collections.

A key pillar of Budget 2025 is the shift to targeted subsidies, designed to channel support directly to lower-income groups while phasing out benefits for higher-income earners – a decisive move towards greater fiscal responsibility.

For instance, the top 15 per cent of income earners will lose access to subsidised RON95 petrol from the middle of 2025, a move that Anwar told parliament could generate estimated savings of RM8 billion each year.

Currently, RON95 is sold at RM2.05 a litre in Malaysia, significantly lower than in Thailand and Singapore, where it costs around RM5.85 and RM9.02 a litre, respectively. Unsubsidised fuel RON97 is selling at RM3.19 per litre.

In addition to fuel, other subsidies, including those for boarding schools and public healthcare, which are currently available to all Malaysians, will be revised to exclude high-income groups, as part of broader efforts to better target government assistance.

Anwar said that these measures are necessary for economic stability, and to reduce income disparities.

Even so, economists have raised concerns about the implementation mechanisms for these subsidy changes, noting that different approaches could have varying impacts on inflation.

RHB Research has proposed two methods. The first method involves accurately identifying 85 per cent of the eligible population for subsidised petrol, while the second suggests raising RON95 prices and offering cash transfers to those outside the top 15 per cent higher-income bracket.

“The first method is expected to have a limited impact on inflation, whereas the second could significantly affect inflation rates, as petrol constitutes 5.5 per cent of the consumer price index basket,” said RHB in a report.

CIMB Treasury and Markets Research expects Malaysia’s inflation rate to reach 2.6 per cent in 2025, factoring in the effects of subsidy retargeting.

Fiscal consolidation and deficit reduction

Budget 2025 highlights the government’s ongoing commitment to fiscal consolidation, targeting a narrower fiscal deficit of RM80 billion, or 3.8 per cent of gross domestic product (GDP), from RM84.3 billion, or 4.3 per cent of GDP in 2024.

The fiscal stance remains expansionary to sustain GDP growth momentum, projected to range from 4.5 to 5.5 per cent in 2025, compared with an estimated 4.8 to 5.3 per cent in 2024.

MIDF Research noted that the improvement in fiscal balance will reduce the government’s reliance on new debt for financing, with a goal of lowering overall government debt to 3 per cent of GDP in line with the Fiscal Responsibility Act.

OCBC senior Asean economist Lavanya Venkateswaran noted that for Malaysia to achieve its 2025 fiscal deficit target, it is crucial for the government to follow through the subsidy rationalisation.

“If the targeted RON95 subsidy rationalisation does not yield the anticipated fiscal savings, the door should remain open to eliminating these subsidies altogether,” she said in a note.

Tax reforms

To tackle the ongoing fiscal imbalance, the government aims to boost tax revenue by increasing direct taxes by 6.6 per cent in 2025, up from the current 3.3 per cent, through initiatives such as e-invoicing and raising personal income taxes.

Meanwhile, indirect taxes are projected to rise by 9.8 per cent, driven by an expanded scope for the sales and services tax and the introduction of a 2 per cent progressive tax on dividend payouts exceeding RM100,000, targeting avid stock investors.

Additionally, other tax measures, including taxes on sugary drinks, a global minimum tax and a carbon tax, are projected to add RM4.4 billion to government coffers.

Steve Chia, tax leader at PwC Malaysia, noted that these measures signify a consolidation phase following previous budget announcements of the introduction of the low-value goods tax, capital gains tax and e-invoicing, alongside ongoing measures such as the global minimum tax.

“The initiatives collectively establish a strong foundation for economic resilience, family support and streamline tax administration,” he added.

However, OCBC’s Venkateswaran noted that a tax revenue growth rate of 5.5 to 6.5 per cent may be insufficient to achieve fiscal consolidation in line with medium-term fiscal goals, which aim to reduce the fiscal deficit to an average of 3.5 per cent of GDP between 2025 and 2027.

She emphasised the need for a broader consumption tax, such as the goods and services tax, but noted that its introduction was not addressed in Budget 2025.

Catalysing economic growth

In contrast to the previous budget’s focus on government-led mega infrastructure projects, Anwar’s third budget adopts a new strategy aimed at enhancing productivity, increasing wages, and positioning Malaysia as a more attractive destination for high-value investments.

PwC’s Chia noted that the proposed plan to increase the minimum wage to RM1,700 with effect from February next year, with six months’ deferred implementation for employers with fewer than five employees, acknowledges economic realities while aiming to improve living standards.

The proposed introduction of mandatory Employees Provident Fund contributions for non-citizen workers represents another inclusive social security initiative, allowing businesses to gradually adapt to the additional financial obligations.

Environmental considerations also feature prominently, with a proposed carbon tax for the steel and energy sectors by 2026, encouraging the adoption of low-carbon technologies.

In the new budget, Anwar proposed an allocation of more than RM300 million for the National Energy Transition Facilitation Fund and RM1 billion for the Green Technology Financing Scheme until 2026, supporting renewable energy efforts.

Abdul Wahid Omar, chairman of Bursa Malaysia, highlighted that the new budget places a renewed emphasis on environmental and social action.

“Overall, Budget 2025 is balanced in addressing Malaysia’s more immediate societal needs, and in catalysing actions towards economic growth and environmental protection,” he said.

The new budget also focuses on accelerating digitalisation and positioning Malaysia as a digital hub within the Asean region.

Anuar Fariz Fadzil, chief executive officer of Malaysia Digital Economy Corporation, noted that the budget’s support for artificial intelligence (AI) adoption and inclusive growth aligns with the country’s goal to lead in digital innovation.

“As Malaysia prepares to chair Asean in 2025, strategic initiatives in AI, the digital economy and innovation are expected to strengthen regional collaboration. The budget’s incentives for local and foreign investors are intended to attract high-value investments in digital services and other growth areas, contributing to Malaysia’s competitiveness in the region,” he said.