KUALA LUMPUR (Oct 10): Malaysia is counting on stronger revenue collection and steady economic growth to shrink the budget gap, as the government plans to raise spending further next year.
Fiscal deficit, which means the government will spend more than it earns, is expected to come in at 3.5% of the economic output in 2026, according to a Ministry of Finance (MOF) report. That is a tad below the median estimate of 3.6% in a The Edge survey of economists and this year’s projected 3.8%.
“This gradual consolidation path demonstrates the government’s steadfastness in balancing support for growth and maintaining fiscal discipline,” the MOF said.
Malaysia has been trying to close a long-running budget deficit that stretches back more than two decades to the Asian Financial Crisis. The aim is to narrow the gap between income and expenditure to 3% of gross domestic product (GDP) by 2028.
Keeping a close eye on the progress are global rating agencies that determine Malaysia’s prized investment-grade sovereign credit ratings. A downgrade would threaten the confidence of lenders and investors, leading to higher borrowing costs for the government.
Still, Malaysia cannot afford any drastic austerity at a time when the economy faces external threat from US’ sweeping tariffs dragging on global trade.
Next year, government expenditure is expected to increase 1.7%, but outpaced by revenue growth of 2.7%, according to the Fiscal Outlook and Federal Government Revenue Estimates report. The economy, meanwhile, will grow steadily at 4.0%-4.5%, versus 4.0%-4.8% this year.
“In this complex environment, fiscal policy must evolve beyond broad-based stimulus and embrace a more strategic approach,” the MOF said in the report.
As the first annual spending plan under the five-year 13th Malaysia Plan, Budget 2026 will focus on strengthening domestic economic drivers and promoting private investments, the report added.