KUALA LUMPUR (Oct 15): Malaysia will likely raise spending in the federal budget for 2025, drawing comfort from robust economic growth that will help the government avoid stretching its finances further.

The expansionary policy will lift total fiscal expenditure above RM400 billion for the first time ever, a survey of economists by The Edge shows, as the government raises allocation for operations but reduces the budget for development.

Prime Minister Datuk Seri Anwar Ibrahim is widely expected to announce massive cash handouts, outlays for existing and new infrastructure projects, as well as a splurge on salaries for civil servants, when he presents Budget 2025 in Parliament this Friday (Oct 18).

The largesse, however, would mean that the government will undershoot its own target to shrink the gap in its finances.

Budget deficit, as a proportion of economic output, will likely come in at 3.8% in 2025, according to the median estimate of 11 economists in The Edge’s poll. That compares to the 3.0%-3.5% target set during the 12th Malaysia Plan’s mid-term review.

“The stakes are high,” said OCBC senior economist Lavanya Venkateswaran. “There is a need to balance the fiscal consolidation agenda with growth, development and social objectives.” 

The same poll by The Edge shows that Malaysia’s economy may expand at a median 4.8% next year. 

To finance the expenditures, tax experts and economists say Anwar is expected to expand the scope of existing taxes, such as raising the duty on sugary drinks, rather than introduce new levies.

Goods-and-services tax (GST) is also unlikely to make a comeback next year, even as economists have been calling for the return of the highly unpopular multi-tier consumption tax that would significantly widen its tax base.

Malaysia’s tax revenue stood at only 12.6% of gross domestic product (GDP) in 2023, one of the lowest in Southeast Asia.

“While we do not expect the reintroduction of the GST in the near term, we anticipate [that] the government will pivot towards alternative strategies that support revenue growth, without dampening consumer or business confidence,” said Kenanga Investment Bank.

Malaysia has been trying to lower a long-running fiscal deficit that stretches back to the 1998 Asian Financial Crisis. This year, the government is targeting to narrow its budget’s gap-to-GDP to 4.3%, from 5% last year.

Apart from expanding state coffers, a key plank to fixing government finances is cutting fuel subsidies deemed wasteful and channel the savings to other productive uses.

The government has withdrawn blanket subsidies for diesel this year, and economists have had high hopes that the rationalisation of the RON95 petrol that takes up a large chunk of its subsidy bill annually, would follow suit.

The current environment presents a good opportunity for the government to press ahead with the much needed fiscal and structural reforms in 2025, without burdening the low-income groups, said TA Securities.

“We believe the government will seize this newfound strength to find ways to increase revenue, boost productivity, invest in high yielding ventures, continue upgrading infrastructures, attract investments, cut subsidies and promote sustainable development, without neglecting the socio-economic aspects (of these ventures),” the house said.

On Monday (Oct 14), Economy Minister Rafizi Ramli said Malaysia’s better-than-expected economic growth and the strengthening of the ringgit has given more flexibility for the government to achieve its fiscal consolidation targets.

“With higher economic growth, we have slightly more room to navigate, to meet our fiscal glide target,” he said. “The strengthening of the ringgit also means less pressure on subsidy bills.”

Any cuts to subsidies would help lower the government’s operating expenditure currently financed by revenue. Under Malaysia’s fiscal rules, any government borrowings to cover the budget shortfall are only to finance development expenditure.

As finance minister, Anwar is also expected to continue to dish out cash generously to the lowest income groups, to help boost disposable income amid rising costs of living.

The government has trimmed subsidies — including on electricity and diesel, which could generate some RM8 billion in savings for the government annually — only to later announce an increase in civil servant salaries, totalling RM10 billion, starting next year.

That would swell the government’s allocation for operating expenditure to RM314 billion, The Edge’s poll showed. This is an additional RM10.2 billion compared to the RM303.8 billion allocated in Budget 2024.

Those rigid expenditures — emoluments, pensions payments, and debt service charges — will take up close to two-thirds of government revenue this year, and are only expected to continue growing.

The progressive wage policy also requires government support when it is fully implemented this month. The policy is expected to cover some four million people earning a monthly salary of between RM1,500 and RM4,999 in the formal sectors.

Development expenditure, meanwhile, will dip from RM90 billion allocated in Budget 2024 to RM87 billion, to keep a lid on government borrowings, according to economists surveyed. Under a law passed last year, annual development expenditure is capped under 3% of the GDP.

Still, several existing high-profile projects announced, require funding in 2025. The economic sector would likely remain the largest recipient of development allocation with a focus on the transportation sub-sector, said RHB Investment Bank.

The continuation of projects such as Central Spine Road, East Coast Rail Link, and the Rapid Transit System Link “will propel a surge in public investments and [the] construction sector for the upcoming years,” the house said.

Malaysia is also in the final year of its 12th Malaysia Plan (12MP), and the government had raised its total spending allocation to RM415 billion during the plan’s mid-term review in 2023, from RM400 billion when the plan was launched in 2021.