KUALA LUMPUR (Sept 30): Malaysia’s Budget 2025 is expected to remain expansionary to address the elevated cost of living and bolster economic growth, according to UOB Global Economics & Markets Research.

This is despite the endeavours of narrowing the fiscal deficit to a projected 3.8% of gross domestic product in 2025, against 4.3% in 2024.

Total government outlay is projected to increase 1.7% to RM404.8 billion in 2025 compared to RM398 billion in 2024, driven by the anticipation of an increase in operating expenditure (opex).  

The higher opex is on the back of enhanced targeted cash aid, pay hikes for 1.6 million civil servants and pension adjustments for over 931,000 government retirees, increased special grants of RM600 million each for Sabah and Sarawak, as well as potentially higher supply and services expenses.

UOB's research note said the expansionary budget will give the government a strong justification for a robust economic growth outlook of between 4.5% and 5.5% in 2025 versus an estimated 5% to 5.5% growth for 2024.

“Resilient domestic demand, particularly backed by robust investments and sustained private consumption, will be the key growth drivers for next year, coupled with a continued recovery in the external sector,” it said.

Despite an anticipated 3.8% rise in opex to another record of RM324.8 billion, the government plans to manage its fiscal resources prudently by reducing development expenditure to RM80 billion, 5.9% lower than 2024's RM85 billion allocation.

UOB said further subsidy rationalisation measures will be a key feature of Budget 2025, consisting of expanding targeted diesel subsidies to East Malaysia, as well as potential subsidy cuts for RON95 petrol and food-related items, such as chicken, sugar, local white rice and cooking oil.

“This will help to cap a persistent rise in opex, which has increased by a compounded annual growth rate (CAGR) of 5.7% per annum since 2010 to 2023, exceeding the rise in revenue of 5.4% per annum during the same period,” it said.

The research firm envisaged the government to set its inflation forecast at 2.5% to 3.5% for 2025, after taking into consideration subsidy rationalisation, wage hikes for civil servants and pensions.

It also expects taxation to be the central theme in the upcoming budget as the government needs to broaden its revenue base on the back of higher opex and lower petroleum-related revenue collection in 2025.

“In line with our assumption of lower average Brent oil prices of US$75 per barrel next year and challenges faced by the national oil and gas company from Sarawak’s bid to manage its gas resources, we project Petronas’ dividend to be reduced to RM25 billion in 2025 (from RM32 billion in 2024),” it added.

New tax policies, such as the high-value goods tax, global minimum tax and domestic top-up tax, are likely to be introduced to support fiscal sustainability.

In addition, a new sugar-sweetened beverage tax, a multi-tier levy mechanism for foreign workers and a higher sin tax on cigarettes and e-cigarettes are expected to be implemented in the upcoming budget.  

“In a nutshell, we think that the government will be mindful about taking a balanced approach when unveiling new policies, including tax-related measures in the coming budget for 2025 in order not to derail the positive investor sentiment and momentum of flows achieved thus far.

“The overall budget proposals should further solidify the country’s economic and financial fundamentals with a business-friendly approach and future readiness including adopting digitalisation and preparing for a demographic shift towards an increasingly ageing population,” UOB added.