The easy wins are over

BUDGET 2027 will be notable for two main reasons.

It is the fifth budget by Prime Minister Datuk Seri Anwar Ibrahim’s administration. It may also be the final budget before the 16th General Election or GE16.

However, as Anwar prepares to table Budget 2027 on Oct 9, revenue reforms remain unfinished.

Malaysia is collecting more revenue, its new annual debt levels have narrowed, and subsidy rationalisation has eased some pressure on government finances.

Yet the fundamental weakness in the country’s fiscal structure has not disappeared.

The tax base remains narrow. Government finances remain exposed to rising debt levels and a fiscal deficit, albeit a smaller one.

The deficit has fallen from 6.4% of gross domestic product (GDP) in 2021 to 3.7% in 2025. The government targets 3.5% in 2026 and 3% by 2028.

At the same time, spending commitments continue to rise. Healthcare, education, ageing, infrastructure, social protection and the energy transition will require increasingly large amounts of public money.

To be fair, Anwar inherited much of the problem. Malaysia has recorded a fiscal deficit, spending more than its revenue, since 1998 under the administration of Tun Dr Mahathir Mohamad.

But previous budgets have continued adding cash assistance, subsidies and other commitments without equally aggressive reforms to strengthen the revenue base or to prove that existing spending is generating sufficient economic returns.

Strong economic growth and the data centre investment boom may support revenue for now, but they do not resolve the structural question of how the government will fund its growing commitments over the longer term.

Budget 2027 must confront this, even as the approaching election narrows policymakers’ room to manoeuvre.

Economist Bernard Aw says federal revenue may be increasing, but the underlying structure of recurring revenue remains relatively narrow and volatile.

Only about 15% of Malaysia’s workforce pays personal income tax, while corporate taxes and resource-related dividends continue to play a large role in financing the federal government.

Aw, who is the chief economist for Asia Pacific at Coface, says stronger nominal growth, improved compliance and occasional new taxes may lift revenue for several years, but they do not resolve the long-term mismatch between what Malaysians expect from the government and what it can sustainably finance.

Broader tax base

Meanwhile, OCBC senior Asean economist Lavanya Venkateswaran says federal government revenue grew 14% year-on-year between January and July 2026, supported by better tax administration and higher commodity prices.

She does not characterise Malaysia as having a revenue problem in itself, pointing to improvements in tax administration, higher excise duties on sugary products and sales and service tax (SST) adjustments.

The issue is increasingly one of composition rather than immediate collection.

Lavanya says sustained medium-term consolidation will require revenue to become less dependent on petroleum and more reliant on broad-based consumption taxes, which tend to be less volatile.

Raising taxes when households remain worried about living costs and businesses are absorbing higher operating expenses will be difficult. Avoiding deeper reform only delays the decision.

Socio-Economic Research Centre executive director Lee Heng Guie says Malaysia’s structural revenue challenge stems from a narrow tax base and continued exposure to petroleum-related receipts.

Meanwhile, committed operating expenditure (opex) continues to rise through pensions, debt servicing, emoluments, subsidies and social assistance.

Malaysia therefore needs both a broader revenue base and stronger evidence that taxpayers are getting value from the money already collected.

Previous budgets have made progress, but mostly at the margins.

The expansion of the SST, stronger tax administration and e-Invoicing have increased the government’s ability to collect revenue. Subsidy rationalisation has also reduced some fiscal pressure.

Aw believes Malaysia eventually needs to confront the future of consumption taxation.

“Next, even if re-introducing goods and services tax (GST) immediately is politically difficult amid cost-of-living pressure, outlining a roadmap for a broad-based consumption tax (GST) may be a way to socialise the idea with the public.”

His proposal does not necessarily mean GST needs to return under Budget 2027.

It does, however, raise an issue recent budgets have largely avoided.

Malaysia needs greater clarity over what its long-term tax system is supposed to look like.

Lavanya identifies GST as the most obvious unresolved issue, but similarly does not expect it to make a comeback soon.

“The elephant in the room has been GST, but we do not expect this will be reintroduced any time soon, given it is a political hot potato.”

Its absence leaves Malaysia relying on a narrower consumption tax system while trying to rebuild fiscal buffers.

Fuel subsidies remain another politically difficult reform.

Although rationalisation has progressed, Lavanya says fuel support remains broad-based and continues to consume fiscal resources.

If SST remains the primary consumption tax, policymakers also need to address its weaknesses.

Aw calls for unnecessary exemptions to be rationalised, better treatment of input taxes, and measures to reduce cascading costs imposed on businesses.

If a broader consumption tax is ultimately required, the government needs to explain when it becomes necessary, how vulnerable households would be protected, and how the additional revenue would be used.

Annual tax adjustments without a longer-term direction risk leaving businesses and households facing repeated changes without greater certainty.

IPPFA Sdn Bhd director of investment strategy and country economist Mohd Sedek Jantan describes the problem as one of both revenue capacity and revenue composition.

Malaysia’s tax-to-GDP ratio stood at 13.2% in 2024, compared with an Asia-Pacific average of 19.7%.

He cautions that this does not mean Malaysia should simply raise taxes until it reaches the regional average, because tax systems, social security arrangements and public services differ.

It does, however, underline Malaysia’s relatively limited tax capacity.

His preferred approach is to broaden the effective tax base rather than repeatedly raising rates.

E-Invoicing can improve the government’s ability to match economic activity with taxable income, while stronger administration can raise compliance without necessarily increasing tax rates.

Malaysia also needs more stable revenue, because commodity-linked income, mainly from petroleum, remains cyclical.

He sees further potential in improving returns from government assets, licences, concessions and other public resources, while cautioning against simply raising fees that ultimately fall on households and companies.

SME National Council member Anthony Dass similarly argues that Malaysia’s challenge lies in the structure of revenue rather than simply insufficient collection.

“Yes, Malaysia still has a revenue challenge, but I would describe it more as a revenue structure problem than simply a shortage of revenue.”

He cautions against responding every year with another tax or higher rates on those already paying.

Instead, Malaysia should broaden the tax base, strengthen compliance, reduce leakages and simplify taxation, while generating better returns from government assets.

A stronger economy should also become part of the revenue solution by producing more successful companies and higher-income workers capable of contributing to the tax base.

“A sustainable revenue system is built not only by collecting more, but by creating a larger and stronger economy from which to collect,” Dass adds.

This exposes another weakness in recent budgets. Fiscal reform has focused heavily on how much the government collects and spends, but less on whether expenditure creates the productive capacity needed to strengthen the future tax base.

Spending efficiency

Dass believes much stronger measurement of programme outcomes is needed.

Mohd Sedek makes a similar argument. He says better performance measurement should become central to future spending decisions.

Budget 2026 allocated RM338.2bil for opex compared with RM81bil for development expenditure.

Completing an infrastructure project within budget should not be enough. The government should assess whether it lowered logistics costs, improved connectivity, attracted investment, created employment or lifted productivity.

Major programmes should have measurable indicators before funding is approved and be evaluated against them afterwards.

Programmes that consistently fail should be redesigned or discontinued, instead of automatically receiving another allocation.

This is where Budget 2027 can distinguish itself from its predecessors. Instead of adding more initiatives, it can start removing those that have failed to produce sufficient results.

Instead of announcing only the size of allocations, it can disclose the outcomes expected from them. Instead of treating revenue and expenditure as separate issues, it can link spending more directly to productivity, wages and future taxable economic activity.

Lee argues that spending efficiency should come before imposing heavy new taxes.

“Prioritising spending efficiency and eliminating financial leakages must come before introducing heavy new taxes.”

He wants greater attention on procurement inefficiencies, opex and border enforcement, while cash transfers and subsidies are targeted more precisely towards households that genuinely need them.

Such reforms matter because the government has limited room to cut the deficit rapidly without affecting other economic priorities.

Lee expects only a modest reduction next year. “We estimate a small reduction in the fiscal deficit to 3% to 3.3% of GDP in Budget 2027, from estimated 3.4% of GDP in 2026.”

Higher financial assistance and fuel subsidies are likely to constrain a more aggressive reduction.

Lavanya is even more cautious. Her house view is for the fiscal deficit to remain at 3.6% of GDP in both 2026 and 2027, even if the government states an intention to narrow it next year.

She expects the fiscal stance to be broadly neutral rather than contractionary, meaning it is unlikely to become a significant drag on growth in 2027.

The difference between the forecasts highlights how difficult the next stage of consolidation may be.

Moving towards the government’s 3% medium-term target requires further restraint, but sharper cuts risk weakening economic activity if they hit productive expenditure.

Mohd Sedek similarly cautions against across-the-board spending cuts. Further consolidation should focus on changing the composition of spending rather than indiscriminately reducing it.

Investment in infrastructure, healthcare, education and digitalisation can raise productivity and potential output. Cutting such spending may improve the deficit mathematically while weakening longer-term growth.

Budget 2027 also cannot ignore another weakness in recent budgets: the cost of reform has not fallen evenly.

Lee says small and medium enterprises (SMEs) have absorbed higher minimum wages, mandatory Employees Provident Fund contributions for foreign workers, the expanded SST, higher transportation costs, fuel subsidy rationalisation, electricity tariffs and rising raw material prices.

He believes SMEs need greater relief through preferential tax treatment, cheaper financing and targeted support for automation and the green transition.

He also proposes reducing the service tax on non-residential rental and leasing services for micro, small and medium enterprises and raising exemption thresholds.

Wage growth versus cost of living

Middle-income households face similar pressure. Lee says several personal income tax relief thresholds have failed to keep pace with household expenses, including personal, spouse and child relief.

Such measures would return some disposable income to taxpayers who may not qualify for the largest forms of assistance but have still faced rising housing, healthcare, education and transport costs.

Budget 2027 will also announce the government’s decision on whether to raise the minimum wage from the current RM1,700.

But another increase in the wage floor will only go so far if household costs keep rising alongside pay.

Aw says a single budget can improve real disposable income only at the margins.

Meaningful improvement requires productivity-driven wage growth and a lower cost of living to move together.

The government should prioritise investment in higher-value industries to drive stronger wages and encourage policies that link compensation more closely to productivity and employee performance, Aw adds.

At the same time, reducing essential costs through areas such as public transport and affordable housing can help more of those wage gains translate into real purchasing power.

Programmes such as Sumbangan Tunai Rahmah and Sumbangan Asas Rahmah can remain temporary buffers, while higher personal income tax relief thresholds and wider middle-income tax brackets could provide additional relief.

Dass says cash assistance, tax relief and targeted subsidies can ease pressure, particularly among vulnerable households.

“But they cannot permanently solve the problem if housing, food, transport, healthcare and other essential costs continue rising faster than household incomes.”

Mohd Sedek argues that purchasing power should be measured after households have paid for essential expenditure.

A household whose wages rise while healthcare, food, housing, childcare and transport costs increase at a similar pace has not necessarily become materially better off.

Budget policy can therefore improve disposable income not only through cash payments or tax cuts, but also by reducing structural household expenses.

More accessible healthcare, affordable childcare and stronger food security can reduce recurring costs while improving labour participation and economic resilience.

Previous budgets have been good at announcing assistance. Budget 2027 needs to be more demanding about what government policy actually produces.

Revenue reform cannot simply mean collecting more from the same taxpayers. Fiscal consolidation cannot simply mean cutting expenditure.

A higher minimum wage cannot by itself guarantee stronger purchasing power. Household support cannot become an annual substitute for stronger wages.

Business incentives cannot continue indefinitely without evidence that recipients become more productive. Economic investment cannot be celebrated solely through headline values if the resulting jobs, wages and local linkages remain inadequate.

Five budgets into the administration, the easier parts of fiscal reform are running out.

Tax administration has improved. SST has been widened. Subsidies have been rationalised. The deficit has narrowed.

Budget 2027 will show whether the government is prepared to move beyond incremental fixes towards a clearer long-term fiscal structure, even as an election approaches.