INTO the third year of administration and presenting the Madani government's fourth budget since taking power in November 2022, Budget 2026, which was presented last Friday, can be said to be modest and achievable in terms of fiscal targets and growth expectations.
However, it fell short in terms of addressing the need to raise the government's revenue, while fiscal enhancement was driven by lower subsidies, as the government took the opportunity to reduce its development expenditure (DE) and shift that burden to government-linked investment companies (GLICs), government-linked companies (GLCs), and other private sector incentives.
The overall revenue for next year was forecasted to expand to RM343.1bil, an increase of 2.7% from a lower base of RM334.1bil.
The government also forecasted a lower pace of increase in expenditure in 2026, rising by just 1.8% year-on-year.
More importantly, the government is now projected to reduce its planned DE not only for Budget 2026 but also for this year. There is a RM6bil reduction in the net DE this year, while at the same time, net DE for next year is now set at RM79.5bil.
GLICs, GLC, and private-public partnership are now entrusted to carry out some of the Budget 2026 measures amounting to RM30bil, RM10.8bil and RM10bil, respectively, an increase of RM10.7bil from this year's commitment.
This relieves the government of footing the expenditure bill that would otherwise cause severe repercussions to the nation's finances as well as budget deficit targets.
Speaking of the budget deficit, after hitting 5% in 2023, the Madani government is committed and maintaining its fiscal prudence with a 3.5% budget deficit target for 2026, which meets our earlier estimate.
However, the same cannot be said for debt to gross domestic product (GDP) ratios, as the lower GDP forecast of between 4% and 4.5% for 2026 was lower than our estimate of 4.5%-5.5%.
The projected growth next year was perhaps done intentionally to consider the impact of the 19% tariff imposed on Malaysian exports to the US.
The lower GDP forecast also suggests that nominal GDP growth this year will likely be at 4.3% against the previous growth estimate of 6%. The slower growth translates to a higher debt/GDP ratio of about one full percentage point, as seen in the table (see table).
Even growth in tax collection as a percentage of GDP remains uninspiring, with an expected tax to GDP ratio of 12.7% next year from the expected 12.6% this year, despite the expected surge in sales and service tax (SST) collection to almost RM60bil in 2026, and accounting for 17.4% of total revenue.
Positively, the government is projecting a lesser contribution from PETRONAS next year as the national oil company's forecast dividend was slashed to RM20bil from RM32bil for this year.
This is a positive development as the nation moves away from being over-reliant on PETRONAS, as petroleum-related revenue as a percentage of total revenue will fall to just 12.5% in 2026.
However, there is now a renewed concern that the government's revenue as a percentage of GDP is on a declining trend as it is expected to drop to 16.1% in 2026 from 16.6% this year.
Rising DSC
Despite a slower growth in total operating expenditure (OE) next year, emoluments, debt service charges (DSC), and retirement charges are expected to increase by 5.6%, 6.8%, and 7.4% respectively. As a result, emoluments and retirement charges will now make up 45% of OE, while DSC is to increase to 17.2% of OE, well above the government's self-imposed limit of 15%. The rise in these three items remains a concern as the three big OE items, which accounted for 55.3% in 2023, have been rising steadily, and are now projected to rise to 62.7%!
Despite a 14.1% drop in subsidies to RM49.0bil in 2026, it remains a relatively large portion of the government's expenditure. The benefit of lower subsidies has been netted off by an increase in cash handouts, which also includes another RM100 to all Malaysians under the Sumbangan Asas Rahmah (SARA) scheme in February next year.
Tax measures
While the government did mention that a carbon tax will be introduced next year for certain large carbon-emitting industries, it did not recommend a rate of tax just yet. For the sin sector, the higher taxes on cigarettes and the 10% increase in excise duties for alcoholic beverages can be said to be less impactful than expected. Nevertheless, the government should be more concerned with tackling illicit trades to generate more tax revenue instead of resorting to higher taxes on legal supplies.
The government also did not renew the current exemption status for completely built-up (CBU) electric vehicles (EV), which is expiring at the end of this year, while the floor price of RM100,000 for EV cars sold was not reviewed either. Hence, CBU EVs will be sold in the market at a higher price due to the tax element.
For the property sector, the increase in the stamp duty rate to 8% from 4% previously for residential property ownership transfer by foreign individuals and foreign-owned companies can be said to be a surprise, especially when foreigners are not significant when it comes to purchasing local properties. This could be a dampener for properties that are in prime locations, both for properties that are sold by developers as well as in the secondary market.
Another key observation is related to the full rollout of the e-invoicing in 2026, which will perhaps lift the government's revenue in a more sustainable manner as it is able to capture undeclared or under-declared income that was previously part of the shadow economy.
Widespread DE
Although no mega projects were announced, the planned DE is widespread, covering the entire economic spectrum. Some large allocations were also announced, including a RM13bil investment by Pengurusan Aset Air Bhd over the next five years for several water treatment plants. The government also announced a RM3bil allocation to replace 820km of ageing pipes in several states, RM2.3bil for airport upgrades, and RM5.6bil for the Malaysian Road Records Information System. In the energy sector, the government remained committed to its energy transition journey with large-scale solar generation projects under the LSS6 programme, with a total capacity of up to 2GW from the private sector worth RM6bil and GLICs/GLCs are mobilizing investments worth some RM16.5bil in other energy transition rollouts next year.
In conclusion, while Budget 2026 can be said to be well crafted with targets that are realistic but at the same time it also lacks substantive reform measures that would boost the government's finances in the form of new or higher direct or indirect taxes. More worrying is the rising trend in the three main government OE items, especially those related to DSC. As seen in the previous years, the budget again had some hits, but there were more misses.
Pankaj C. Kumar is the managing director of Datametrics Research and Information Centre. The views expressed here are the writer's own.