KUALA LUMPUR (Oct 18): Malaysia is aiming to further shrink its budget gap next year as the government continues down the path of fiscal consolidation sidetracked by the 2020 pandemic, the Ministry of Finance (MOF) said.

Fiscal deficit as a percentage of the economic output is expected to come in at 3.8% in 2025, according to the Fiscal Outlook and Federal Government Revenue Estimates report. That matches the median estimate of 11 economists surveyed by The Edge ahead of the report’s release.

“This reduction will provide ample fiscal space to cushion the impact of global uncertainties and alleviate debt burden over the long term,” the MOF said.

If successful, it would be the first time in five years that the deficit has fallen below 4%. The hole in the budget would also be the smallest in absolute terms since 2020 when the government stretched its finances to prop up the economy ravaged by the coronavirus pandemic.

This year, the government is targeting to narrow its budget’s gap to 4.3% from 5% of gross domestic product (GDP) last year.

At 3.8% to GDP, the government will miss its own target to bring the deficit down to 3.0%-3.5% set during the 12th Malaysia Plan’s mid-term review. Malaysia has been trying to lower a long-running fiscal deficit that stretches back to the 1998 Asian Financial Crisis.

At stake is Malaysia’s prized investment-grade sovereign ratings. Any downgrade would threaten the confidence of lenders and investors, leading to higher borrowing costs for the country.

A key to repairing government finances, urged by ratings agencies and economists, is widening the revenue base. Malaysia’s tax collections, which will total 12.4% of GDP next year, have been lower than the average in Southeast Asia.

For 2025, the government is banking on strong revenue to help cushion the rise in operating expenditures from an increase in civil servant salaries, while maintaining allocation for development spending, the MOF said in the report.

At the same time, Malaysia has to continue rebuilding its public finances against potential future shocks by pursuing rationalisation of subsidies widely deemed wasteful and channel the savings to social assistance programmes.

The MOF also said it would also rationalise statutory bodies to eliminate overlapping functions and focus its development allocation on financing infrastructure and projects that would generate economic activities and social benefits.

“This prudent fiscal approach aims to boost economic resilience, thereby advancing sustainable growth and development while enabling the government to effectively manage its risk exposure,” MOF added.

Click here to read more about the Economic Report 2024/2025.