Cover Story 2: A look at the states’ fiscal health

Tuesday 27 Oct 2026

Make The Edge Malaysia your preferred source on Google

This article first appeared in The Edge Malaysia Weekly on February 3, 2025 - February 9, 2025

EVERY year, in late October, the federal government’s budget and fiscal position come under the spotlight when the finance minister tables the annual spending for the following year in parliament.

Factors such as the federal government’s budget deficit, total revenue growth from tax and non-tax sources, and public debt levels are scrutinised for the trajectory of the country’s fiscal and economic situations.

But the government is not just in Putrajaya; it is also made up of the governments of the 13 states.

What are the fiscal situations of the state governments, and which is running the biggest fiscal deficit? What is the state of their public funds and debt positions?

Penang – underappreciated?

Based on the Auditor General’s (AG) Report 2024 on the state governments, Penang’s financial situation stands out.

The small state with an outsized contribution to Malaysia’s gross domestic product (GDP) and trade has rather low revenues and big fiscal deficits. It has been running on a deficit for more than 13 years.

In fact, in 2023, it had the biggest fiscal deficit among the 13 states, at RM421.7 million. Its operating expenditure (OpEx) alone was RM711.8 million, or 120% of its revenues of RM593 million during the year (see infographic on Page 54).

Penang had projected a deficit of RM514.53 million in 2024.

For its 2025 budget, the state government under chief minister Chow Kon Yeow targets a much smaller deficit of RM33.6 million — the lowest in its history — with revenues projected to increase to RM906.5 million, 70% higher than 2024’s target of RM533.08 million.

While the state has taken the necessary steps to reduce its budget deficit — in part by having a lower development expenditure (DevEx) of RM220 million, compared with RM302.93 million in 2023 and RM374.72 million in 2024 — its consolidated funds balance has dwindled as the state has been drawing down on it to supplement its budget every year.

The consolidated funds are projected to decline to a mere RM50 million as at Jan 1, 2025, according to Chow, when tabling the state’s 2025 budget last November. Data from the AG’s Report 2024 shows Penang’s consolidated funds were RM2.1 billion in 2019 and RM2.12 billion in 2022.

“A government budget is not [like] a private company’s budget, for the simple reason that a government’s duty is different from a private company’s,” says Zairil Khir Johari, the assemblyman for Tanjung Bungah, as well as state executive councillor for infrastructure and transport.

Zairil says Penang has been running on a deficit as the state has “no income” or, rather, a small revenue base that is dependent on assessment rates and land tax. In addition, he says the state has not revised the assessment rates and land tax for quite a while.

The fact that Penang does not have mineral or timber resources also gives it a lower revenue base compared with many of the other states.

According to its financial statement for 2023, the biggest contributor to revenues was non-tax income, which amounted to RM325.28 million, or 55% of the total.

Tax revenues stood at RM150.16 million, or 25% of the total in 2023, while the rest (RM117.52 million) came from non-revenue receipts.

The state’s non-tax revenues declined RM11.04 million, or 3.29%, from 2022. Such revenue comprises payments for licences, registration and permits, services rendered, receipts from the sale of goods, rents, profits from investments and financing, as well as fines and penalties.

The largest contributor to Penang’s tax revenues was quit rent, which amounted to RM137.03 million in 2023. This was, however, lower than the RM142.83 million collected in 2022.

In general, state governments’ revenues are largely land-related, such as the sale of land, land premiums charged on conversion of land status, mineral wealth and entertainment duty (see “The laws that govern how a state derives its revenue” on Page 52).

Therefore, it is not a surprise that revenues for Penang, the second smallest state after Perlis, are smaller than the other states’.

However, its contribution to the country’s GDP in 2023 stood at 7.4%, or RM116 billion, higher than that of larger states such as Sabah, Perak and Pahang.

“It is 100% ironic,” says Zairil. “Unfortunately, our federalism is structured that way. There is no institutionalised tax redistribution formula,” he adds.

He claims that Penang contributes RM8 billion a year in income taxes to the federal kitty. In 2023, its non-revenue income stood at RM117.52 million, which was RM7.11 million or 6.44% higher compared with RM110.41 million in 2022.

Out of the RM117.52 million of non-revenue income, Penang received RM100.78 million from government agencies. These receipts made up around 17% of Penang’s revenues of RM593 million in 2023.

Sarawak – the sleeping giant awakens

At the other end of the spectrum, Sarawak is the richest state in the country. The state government projects that its revenues will reach RM14.2 billion this year, compared with the revised estimate of RM13.91 billion in 2024.

In 2023, its actual revenues were RM13.3 billion, almost equivalent to that collected by the next four states combined — Sabah (RM7.6 billion), Selangor (RM2.71 billion), Johor (RM1.94 billion) and Pahang (RM1.31 billion).

The giant state’s revenues have grown tremendously over the last seven years. It collected RM7.2 billion in 2018, RM7.27 billion in 2019 and a much higher RM10.65 billion in 2020.

In 2021, revenues declined to RM7.62 billion, before recovering to RM11.91 billion in 2022, due to the positive movement in crude oil and natural gas prices. In 2024, according to Sarawak’s estimates of revenue and expenditure report, it should have earned a total of RM12.75 billion, which is slightly lower than in 2023.

Note that in December 2020, the state government and Petronas announced the conclusion of negotiations on a commercial settlement for the imposition of state sales tax on petroleum products.

In 2019, the state government took Petronas to court to compel the national oil company to pay over RM1.3 billion in state sales tax for the period up to June 30, 2019.

According to the AG’s Report on Sarawak’s finances for 2021, the state collected RM4.82 billion in tax revenues from oil and natural gas in 2020, as the outstanding taxes in 2019 of RM3 billion were received in 2020.

Sarawak collected RM3.45 billion in 2021 and RM4.37 billion in 2022 in taxes on oil and natural gas, as prices for the commodities continued to increase during the two-year period.

The imposition of sales tax on crude oil and natural gas has become the largest contributor to the state’s revenues, making up 36.7% of the total in 2022. Its tax revenues, however, fell to RM6.26 billion in 2023, from RM6.7 billion in 2022.

The huge increase in revenues helped Sarawak register a surplus of RM1.45 billion in 2022, without jeopardising its services to the people of the state. The state’s OpEx rose to as much as RM5.94 billion in 2021, from RM2.64 billion in 2018, before falling to RM4.2 billion in 2022.

However, Sarawak spent less on DevEx, even as its revenues grew throughout the five-year period to 2022. In 2022, the state spent RM6.26 billion for development purposes, down from RM8.33 billion in 2018.

Nevertheless, this situation is changing, as Sarawak started spending more on DevEx starting in 2023.

According to its revenue and expenditure estimates, in 2023, the state transferred RM6.8 billion to its statutory funds — essentially its DevEx. OpEx was RM4.48 billion, slightly higher than in 2022.

The state recorded a surplus of RM1.94 billion during the year.

Last year, Sarawak spent RM7.8 billion on DevEx and RM4.77 billion on OpEx, and registered a smaller surplus of RM1.23 billion. For 2025, the state estimates that its surplus is going to be even smaller, at RM485.7 million, as it plans to spend RM13.7 billion while collecting RM14.2 billion in revenues.

The huge revenues allowed Sarawak to accumulate RM26.9 billion in consolidated funds as at 2023. Meanwhile, it also had RM2.23 billion in claimable loans, as well as RM10.06 billion worth of investments.

On the other hand, its public debts stood at RM1.86 billion as at 2023.

Its revenues are expected to continue to surge in the years ahead, as its oil and gas company Petroleum Sarawak Bhd (Petros) resumes the role of sole gas aggregator in the state. Sarawak is Malaysia’s largest producer of natural gas.

The implications of Petros assuming this role will be significant for Sarawak’s revenues, as it is believed that Petronas made an annual profit of between RM10 billion and RM15 billion from gas exports from Sarawak.

Will Malaysia’s economic centre shift towards East Malaysia in the years to come, as Sarawak uses its wealth to build the state’s economy?

Kelantan — making do without oil royalties

Even before Sarawak began asserting its rights on the sharing of its wealth from natural resources with the federal government, Kelantan had been fighting for its fair share of the petroleum pie since the 1990s.

As Kelantan was the only state governed by a party different from the one at the federal level between 1990 and 2008, its leadership had long pressed for royalty payments for petroleum produced in waters off its shores.

However, its demands were rejected by the federal government. Under the Continental Shelf Act 1966, the “territorial waters” of a state are defined as seawaters adjacent to the coast not exceeding three nautical miles measured from the low water mark.

The argument is that petroleum produced in waters off Kelantan’s coast is not the state’s to begin with, as it is produced from wells beyond its territorial waters. This has led to the state being deprived of any royalties from petroleum produced off its coast.

Nevertheless, the federal government has been paying compassionate funds to Kelantan, and this has been a major source of income for the state.

In 2023, the state government recorded total revenues of RM824.7 million, 16% lower than the previous year’s RM983.4 million. This was, however, higher than in 2020 and 2021, when it recorded RM747 million and RM773.5 million respectively.

Kelantan’s lower revenues in 2023 were due to the smaller amount of compassionate funds from the federal government, compared with 2022. In 2023, it received RM217.96 million in compassionate funds, compared with RM331.38 million in 2022.

The compassionate funds are a major source of income for Kelantan, as they made up about 26% of the state’s revenues in 2023 and 33.7% in 2022.

Compassionate funds are one source of non-revenue income for the state, and Kelantan is very much dependent on it to run its services.

Non-revenue income has been the biggest source of income for the state since 2019. In 2023, non-revenue receipts made up 49.4% of the state’s income, ahead of tax revenue and non-tax revenue.

Meanwhile, the state has been running on a deficit since 2020. In 2023, the deficit stood at RM263.2 million, the highest in the five-year period since 2019. This is because the state has been spending much more on OpEx each year.

OpEx increased from RM579.5 million in 2019 to RM862.4 million in 2023. The only year OpEx was lower than in the preceding year was 2021, when the state spent RM681.9 million.

The east coast state has also spent an increasing amount on DevEx, from RM137.4 million in 2019 to RM225.6 million in 2023. Again, 2021 was the only year when the state spent less than in the preceding year.

The state government is facing some financial difficulties. Its consolidated funds declined by a significant RM245.4 million, or 43%, to RM325.46 million in 2023, from RM570.86 million in 2022.

The negative balance of its development funds also expanded by RM141.67 million, or 12.7%, in 2023 to RM1.26 billion, from a deficit of RM1.11 billion in 2022.

Despite this, the state government has managed to pare its public debts year after year. In 2023, the balance of its public debts stood at RM650.94 million, compared with RM815.14 million in 2019.

Nevertheless, its outstanding debt payments to the federal government rose by RM16.24 million, or 6.5%, in 2023 to RM267.47 million, from RM251.23 million in 2022. The state paid only RM10.48 million, or 3.8% of the RM278.03 million that it had to pay, to the federal government in 2023.

For its Budget 2025, RM1.45 billion was allocated for the operation and development of the state. The state projects it will collect RM997.26 million in revenues this year.

More developed states earn less than less developed ones

Looking at the states’ revenues compared with their GDP, it is clear that the more developed states are not necessarily earning more than their less developed counterparts.

With a GDP of RM406.1 billion in 2023, Selangor’s revenues of RM2.71 billion during the year translate into a mere 0.67% of its GDP, which is the largest among all the states. As a comparison, the federal government’s revenues as a percentage of Malaysia’s GDP stood at 16.2%.

Of course, most of the government functions such as land public transport, healthcare, education, internal security and defence are under the federal list of the constitution, and states have less responsibility than the federal government.

However, state governments do have some major responsibilities, such as developing and maintaining water infrastructure, as well as state roads and drainage and irrigation systems.

Most states are unable to develop and maintain their own water infrastructure, and have had to rely on borrowings and funding from the federal agency Pengurusan Aset Air Bhd. Most states’ debts are due to borrowings from the federal government for water infrastructure purposes.

For example, of Kedah’s RM1.93 billion public debt in 2023, RM1.23 billion is debt for water supply purposes. For Penang, RM27.8 million, or 75.7% of its public debt in 2023, was the result of water supply purposes.

Selangor’s 0.67% revenue-to-GDP ratio is smaller than Kedah’s and Kelantan’s 1.21% and 3% respectively in 2023. However, it is higher than Penang’s 0.5% that year, when the state produced RM116 billion in goods and services.

This raises the question of whether state governments should be allowed to collect more revenues from their own people, rather than just depending on revenues that are tied to land matters and property assessments.

As can be seen with the case of Sarawak, whose revenues shot up in 2020 when it received the green light to collect sales tax on petroleum products, the other states should perhaps be allowed to collect some form of indirect tax that better reflects their economic wealth.

However, the capability of the states to collect indirect taxes, as well as what they will do with the additional funds, would also be in question.

The laws that govern how a state derives its revenue

Under the Federal Constitution, the state governments’ revenue is largely tied to land matters.

Under Part 3 of the Tenth Schedule of the Federal Constitution, sources of revenue assigned to states include revenue from lands, mines and forests; receipts from land sales and sales of state property; receipts in respect of water supplies, including water rates; entertainment duty, as well as fees and receipts in respect of specific services rendered by departments of state governments.

There are also specific grants such as the capitation grant, which is based on the number of people in a state, as well as state road grants to maintain state roads.

Meanwhile, Sabah and Sarawak are granted additional sources of revenue, including import duty and excise duty on petroleum products; export duty on timber and other forest products; state sales taxes; and fees and dues from ports and harbours other than federal ports and harbours.

Petroleum producing states such as Sabah, Sarawak, Kelantan, Terengganu and Pahang are also granted royalties on the petroleum produced in the waters of the respective states through the Petroleum Development Act 1974. The states are entitled to a 5% royalty on revenue from petroleum derived from their respective territories, including state waters.

This right is delimited by the Territorial Sea Act 2012, which stipulates that state waters refer to such part of the sea adjacent to the coast thereof not exceeding three nautical miles measured from the low-water line.

However, the Sarawak government argues that the state had never relinquished its rights to its continental shelf. While the rest of the country is governed by the Territorial Sea Act 2012 and the Continental Shelf Act 1966, the state points out that it has rights over its own continental shelf, guided by the colonial era Sarawak (Alteration of Boundaries) Order in Council 1954.

This Order in Council, which was made in Buckingham Palace, extends the territorial boundaries of the then Colony of Sarawak to include the area of the continental shelf, being the seabed and its subsoil which lies beneath the high seas contiguous to the state’s territorial waters.

Under the Federal Constitution, state territories are those comprising therein immediately before Malaysia Day — Sept 16, 1963.

While parliament may by law alter the boundaries of any state, a law doing this — such as the Territorial Sea Act 2012 and the Continental Shelf Act 1966 — shall not be passed without the consent of that state, expressed by a law made by the legislature of the state and the Conference of Rulers.

On top of Sarawak’s claim rights over its continental shelf, the state government also claims that it has powers over the governance and management of mineral exploitations in its territories, under the Oil Mining Ordinance 1958.

Largest contributors to GDP not necessarily the most prosperous

The same five states and one federal territory — Selangor, Sarawak, Johor, Penang, Sabah and Kuala Lumpur — have accounted for slightly more than 70% of Malaysia’s gross domestic product (GDP), at least in the last seven years. The services sector in turn accounted for half of total GDP.

According to data provided by the Department of Statistics Malaysia (DoSM), Selangor took the lead in 2023, contributing 25.9% to Malaysia’s GDP or RM406.1 billion in absolute terms. This was up from 23% contributed in 2017.

Although the largest contributor to the nation’s GDP, Selangor was not the most economically prosperous, if the GDP per capita metric was used as a benchmark.

While the state had a GDP per capita that was well above the national average of RM54,612 in 2023, its GDP per capita of RM62,492 showed a significant gap from the RM131,038 that Kuala Lumpur chalked up in the same year.

This difference could be explained by the fact that the population of Selangor, at 7.21 million, is more than three times that of Kuala Lumpur’s two million.

In 2023, Kuala Lumpur’s GDP totalled RM249.3 billion, accounting for 15.9% of national GDP, representing the second-largest contribution.

Like for all the states and federal territories in Malaysia, the services sector was the largest economic segment for Selangor and Kuala Lumpur in 2023. Selangor’s services sector provided 61% of the state’s GDP or a total of RM247.7 billion while for Kuala Lumpur, this sector accounted for 92.4% or RM230.4 billion of its GDP.

Manufacturing was the second-largest economic contributor for Selangor, providing RM119.6 billion or 29.4% of the state’s GDP, followed by construction at RM20.1 billion or 4.9% of GDP, agriculture (RM4.6 billion or 1.1% of GDP) and lastly mining (RM0.8 billion or 0.2% of GDP).

For Kuala Lumpur, the construction sector came after the services sector in terms of economic contribution but this was significantly smaller at RM11.1 billion or 4.5% of GDP. Next was manufacturing (RM6.4 billion or 2.6% of GDP) and mining (RM0.2 billion or 0.1% of GDP).

It is worth noting that for Penang, which had a GDP of RM116 billion in 2023 and a GDP per capita of RM72,586, the manufacturing sector contributed as much as the services sector, given the state’s position as Asean’s electrical and electronics (E&E) manufacturing hub.

The state’s services sector contributed RM55.7 billion or 48% to its economy in 2023 while the manufacturing sector contributed RM53.9 billion or 46.5%.

Having said that, Penang’s total trade was the largest among that of all the states in the country, at RM697.7 billion, in 2023. It is no surprise that its exports, totalling RM447.4 billion, consisted of manufactured goods related to the E&E sector. Its imports amounted to RM250.3 billion in 2023, with the main items being manufactured goods related to the E&E sector.

Still, despite being the region’s E&E manufacturing hub, the state’s average income in 2023 was far below that of Selangor and Kuala Lumpur, according to the socioeconomic report by DoSM.

Penang’s average household income stood at RM8,267 while its top 20% (T20) households had an average income of RM15,524.

In comparison, Selangor’s average household income stood at RM12,233 while that of its T20 households was RM21,410. Kuala Lumpur’s average household income clocked an even higher number at RM13,325 with its T20 population’s average household income coming in at RM22,343.

It was a similar situation in Johor, which contributed 9.5% to the country’s economy in 2023, making it the third-largest contributor with RM148.2 billion.

The southern state’s total trade was also large, amounting to RM561.6 billion. Exports came in at RM290 billion while imports stood at RM271.5 billion. Johor’s main exports were refined petroleum products, integrated electronic circuits and other E&E goods.

Johor’s top three economic activity contributors were the services sector at RM80 billion (54% of GDP), followed by manufacturing at RM44.2 billion (29.8%) and agriculture at RM17.2 billion (11.6%).

Its average household income was on a par with Penang’s at RM8,517 while its T20 household income was RM15,404.

In terms of inflation, among Selangor, Kuala Lumpur, Penang and Johor, Selangor had the highest inflation of 2.9%, followed by Johor at 2.5%, Penang at 2.2% and finally Kuala Lumpur at 2.1%.

However, the state with the highest inflation in 2023 was Sarawak with 3.1%, contributed by food and beverage. Rich in natural resources, this state was the fourth-largest contributor to the country’s economy, providing RM142.4 billion or 9.1% in 2023.

Compared with the other states, Sarawak’s economic sector contribution was evenly distributed. The services sector contributed RM54.5 billion or 38.3% to its GDP, followed by manufacturing with RM37.7 billion or 26.5% and mining with RM29.6 billion or 20.8%. The agricultural sector was also an important contributor to the state’s economy with RM15 billion or 10.6%.

The state’s total trade amounted to RM142.4 billion in 2023 with exports totalling RM111.6 billion. The main exports were natural gas at RM53.8 billion, palm oil at RM13.9 billion and crude oil at RM9.9 billion.

Sarawak had a GDP per capita of RM72,411 — way higher than that of its neighbour Sabah with only RM31,147.

Sabah’s GDP stood at RM83.2 billion in 2023, making it the sixth-largest contributor to the Malaysian economy with a 5.3% share.

The state relied heavily on its services sector, which contributed 50.9% or RM42.4 billion to its GDP, and its mining sector which accounted for RM19.4 billion or 23.3%. Agriculture represented a significant portion of the state’s economic activity with RM12.6 billion or 15.2%.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.

Text Size