KUALA LUMPUR (Oct 8): The Ministry of Finance (MOF) is expected to present an expansionary budget in 2026 that would be bigger than the one in 2025 (RM421 billion), as the government finds ways to stay the course on fiscal reforms to narrow the deficit gap.

Most economists contacted by The Edge are anticipating another record-sized budget exceeding RM430 billion to be tabled in Parliament this Friday afternoon.

Budget 2026 marks the first year of the 13th Malaysia Plan (13MP) — the nation’s five-year economic development blueprint — and Prime Minister Datuk Seri Anwar Ibrahim’s fourth federal budget since taking office in 2022.

The operating expenditure (OE), which economists estimate to be around RM344.9 billion in 2026 (see table), will take up a big chunk of the budget as it did in the past.

Notably, development expenditure (DE) could remain around RM86 billion for the third year since 2024, based on the median of economists' forecasts. This means that the increment in the public expenditure will be for OE, such as civil servant emoluments and pensions, and not DE, which is for infrastructure developments that are essential for future economic growth.

For comparison, Budget 2025 allocated RM86 billion for DE and RM335 billion for OE. Phase 2 of the Public Service Remuneration System (SSPA) — involving salary increments of 3% to 7% — will take effect in January 2026, following the first adjustment in December 2024.

“With much of the heavy lifting done, we expect Budget 2026 to contain little surprises although the government should continue its reform momentum,” CGS International wrote in its latest report.

The consensus thus sees the fiscal deficit narrowing to between 3.4% and 3.8% of gross domestic product (GDP) under Budget 2026, only slightly above the government’s 13MP target of below 3% by 2030.

Overall, economists are projecting real GDP growth to stand at 4%, supported by resilient domestic demand, tourism recovery and ongoing infrastructure rollout.

Kenanga Research noted that this “clearly signalled a more cautious outlook, acknowledging that growth is likely to moderate amid global uncertainties”. Malaysia’s GDP grew 4.4% in the first half of 2025 (1H2025).

Economists concurred that major tax overhauls are off the table in Budget 2026, noting that the government should focus on administrative efficiency and digital enforcement to strengthen existing revenue channels.

The wider scope of the expanded sales and service tax (SST), effective July 1, 2025, and the nationwide rollout of e-invoicing will form the backbone of next year’s fiscal strategy. These initiatives are perceived to be “low-hanging fruit to raise fiscal capacity without political backlash” — particularly as the budget precedes a general election due by November 2027.

While the return of GST is unlikely, economists expect the government to refine existing instruments, including the global minimum tax, dividend tax adjustments and the long-awaited carbon tax.

“A carbon tax is likely to be introduced in phases from 2026, though the timeline remains unclear,” BIMB Securities Research said in its preview. Carbon tax, which was mentioned in Budget 2025, is designed to support Malaysia’s green-transition framework under the 13MP. UOB Global Economics & Markets Research noted that its initial rollout is likely to target large emitters, for instance the iron, steel and energy sectors.

Tourism-related levies are also expected to be tweaked in tandem with Visit Malaysia 2026, which aims to draw over 30 million visitors. “The government is well-positioned to capitalise on this momentum by revising the tax rate upward,” BIMB added, referring to the needs of higher imposition of levy for up to RM50 per room per night on foreign tourists, covering nearly all types of registered accommodation.

Malaysia’s tax-to-GDP ratio — at 12.4% in 2024 — remains one of the lowest in Southeast Asia. TA Securities suggested that Malaysia “should consider formally adopting a 15% tax-to-GDP target, in line with more prosperous periods, and over time aim for 18–20% comparable to upper-middle-income peers”.

Non-tax revenue, particularly dividends from Petroliam Nasional Bhd (Petronas), could ease slightly “as Brent softens and federal-state disputes over resources persist,” Kenanga Research opined. However, higher dividend contributions from other GLICs such as KWAP transfers may partially cushion the shortfall.

“Reliance on oil remains high, underscoring the need for subsidy rationalisation to reduce dependence on volatile oil-linked income,” Kenanga said.

Economists expect the savings of about RM4 billion-RM6 billion from fuel subsidy rationalisation to be re-channelled into social aid programmes, particularly Sumbangan Tunai Rahmah (STR) and Sumbangan Asas Rahmah (Sara) cash transfers for lower-income households.

However, CIMB Treasury and Markets Research cautioned that “inclusion and exclusion errors could undermine targeting precision, resulting in lower realised fiscal savings and smaller consolidation gains”.

“For Budget 2026, STR and Sara allocations are projected at RM17-RM18 billion, the highest level since the pandemic,” CIMB highlighted.

Anwar’s recent reforms follow earlier rationalisation phases since 2023, including adjustments to electricity tariffs, chicken subsidies and water rates.

CGS International noted “there are still loose ends”, such as diesel distribution inefficiencies in Sabah and Sarawak, as well as leakages in subsidised cooking oil and fisheries fuel schemes. In its research note, CGS International also called for a recalibration of sugar subsidies for manufacturers, aligning them with the government’s pro-health policy objectives.

As the first budget under the 13MP, the forecast range of RM84 billion-RM88 billion for development spending by economists is widely guided to prioritise infrastructure, flood mitigation, renewable energy and digital-economy projects, which align with the government’s long-term sustainability agenda.

Economists expect many of these projects to be implemented under public–private partnership (PPP) structures to ease fiscal burden and accelerate delivery.

“The government may announce the status and progress of the Kuala Lumpur–Singapore High-Speed Rail (HSR), likely revived via private funding. It will be positioned as a game-changer for regional integration, job creation, and urban development, particularly if linked to Bandar Malaysia,” Kenanga wrote.

Analysts from RHB and TA Securities are also anticipating new allocations for EV-charging infrastructure and a Green Technology Fund, reinforcing Malaysia’s low-carbon ambitions.

Housing schemes, meanwhile, are expected to feature prominently — with several research houses predicting enhanced affordable housing incentives, alongside more public–private collaborations. These initiatives, economists say, are aimed at tackling urban affordability while spurring construction-sector growth.

Spending on health and education is also set to rise in line with human-capital priorities, while defence and cyber security allocations are likely to see moderate increases to enhance national resilience.

Click here for all you need to know about Malaysia's Budget 2026.