KUALA LUMPUR (Nov 7): International credit rating agency Moody’s Ratings has expressed concerns about the Malaysian government’s approach to fiscal consolidation in Budget 2025, warning that cutting development expenditure — particularly on infrastructure and human capital — could undermine the country’s competitiveness in the global market.

While acknowledging the government’s efforts to reduce fiscal deficits and manage debt, Moody's senior sovereign risk analyst Christian de Guzman cautioned that the reduction in development spending could pose negative risks on Malaysia's long-term growth prospects.

"Spending as a share of GDP [gross domestic product] has come down faster than revenue, and much of this reduction is happening in development expenditure," he said during an online panel discussion organised by the Malaysian Rating Corp Bhd (MARC).  

"If you want to continue to position yourself as a very favourable location or destination for investment, you do have to invest. I understand, of course, the near-term concerns with regard to fiscal sustainability, but at some point, you can’t keep cutting development expenditure."

Development expenditure under Budget 2025 was set at RM86 billion. This compares to RM92 billion in 2024, and the record-high outlay of RM96.09 billion in 2023, according to the federal government expenditure estimates report published by the Ministry of Finance.

As a percentage of GDP, development expenditure accounted for 5.3% in 2023 but is estimated to come down to 4.4% in 2024, and 4.1% in 2025.

However, it should be noted that 2023's development expenditure includes an allocation to redeem a US$3 billion 1Malaysia Development Bhd (1MDB) bond that matured in March that year — or about RM14-15 billion.

De Guzman also raised concerns about the government’s declining revenue-to-GDP ratio, which is projected to fall further in the coming years.

He noted that while there are positive signs in the expansion of the sales and service tax (SST) and the introduction of a dividend tax, overall revenue remains insufficient to support the country’s debt obligations.

"Overall, revenue as a share of GDP is coming down. That is bad for, what we call in the rating agency business, debt affordability. And we will continue to see a worsening of debt affordability," he said, adding that this could limit the government’s flexibility in managing its fiscal position in the future.

Meanwhile, another panellist, Center for Market Education (CME) chief executive officer Dr Carmelo Ferlito, echoed de Guzman’s concerns on government revenue but took a more critical stance on the lack of comprehensive tax reforms in the budget.

Ferlito acknowledged the government’s narrative of fiscal consolidation but argued that it does not translate into substantive action, particularly on the revenue side.

"While I see this commitment in the [fiscal consolidation] narrative, that commitment doesn't seem to be reflected in the actual way in which the budget is designed. From the revenue side, I think we don't see anything really substantial that can consolidate revenues," he said.

"So I think this was a missed opportunity for a more global and holistic approach to tax reform. They had spot measures, dividend tax, some little variation on SST, but then a holistic approach to tax reform is missing," Ferlito added.

Total government revenue has been steadily rising since it dipped almost 15% in 2020, estimated to hit a fresh record high of RM339.71 billion in 2025, up 5.5% against a revised estimate of RM322.05 billion in 2024, driven by an increase in both direct and indirect tax collection.

While total government revenue has been on an uptrend over the past decade, its share to the country's GDP is expected to drop to 16.3% in 2025, compared with 16.5% in 2024, and 17.3% in 2023. The ratio has never exceeded 18% since 2015, raising concerns over debt reliance to support fiscal requirements.