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

Malaysia’s Budget 2026 marks a notable shift in public investment strategy. For the first time since 2020, the government’s development expenditure (DE) is set to decline, even as the economy continues to recover and the state positions itself for a high-income transition. The timing has raised an important policy question: is this reduction in development spending a sign of responsible fiscal discipline or a strategic misstep that could weaken the country’s long-term capabilities?

The answer is not one-sided. There are coherent reasons why the cut is not immediately alarming but also poses structural risks that make it a legitimate concern.

We see a shift from government-driven developments towards public private partnership (PPP)-oriented projects. PPP Master Plan (Pikas) 2030 guides this shift, restructuring the way development is financed. PPPs are being elevated as the main vehicle for delivering major projects, including infrastructure, high-growth industries and digital transformation.

There are rational advantages to this shift. First, it delivers fiscal prudence by shifting the capital burden away from the federal balance sheet to the private sector. Instead of the state borrowing or reallocating public funds to finance infrastructure and development assets, it uses contractual structures to mobilise private capital. This directly reduces the rate at which government debt accumulates and allows deficit targets under the Public Finance and Fiscal Responsibility Act (FRA) 2023 to be met without halting physical development.

Second, the PPP model introduces an efficiency filter that traditional public spending does not. PPPs force market discipline into project selection. Projects must pass commercial viability tests to attract private financing. This has the effect of eliminating politically driven or low-return projects that previously could be pushed through solely on the basis of public allocation. This aims to reduce capital misallocation and increase the probability that approved projects are financially and operationally sustainable over their lifetime.

Third, the model enables scalability of the development pipeline beyond what the annual budget ceiling would allow. Public budgets are finite and are tightened further under the FRA. Private capital, when crowd-in is successful, does not face the same statutory limits. By anchoring projects through PPP structures, the government is able to continue building infrastructure even as recorded development expenditure shrinks on paper.

These arguments would be sufficient if Malaysia were already structurally mature but it is not. This is where the concern begins.

Even if the government maintains that PPP will replace public capital, the mechanical reality of a development spending cut is that projects without commercial returns are the first to be deprioritised. The private sector will not build the kinds of assets whose benefits are social, intergenerational or diffuse, such as education, health infrastructure, research capacity, skills formation, new development areas and public services. These are precisely the domains that depend on state funding.

Budget 2026 reflects some of these concerns. Development allocation for education and training has been trimmed from RM15 billion in 2025 to RM14.4 billion. This directly reduces the government’s capacity to upgrade facilities, build training infrastructure or fund critical training programmes. 

The timing is particularly counterproductive: Malaysia’s own industrial strategy under the New Industrial Master Plan (NIMP) 2030 identifies a talent bottleneck as one of the primary constraints holding back the transition into high-value, high-growth sectors. Advanced manufacturing, semiconductor packaging, artificial intelligence (AI) deployment, robotics, aerospace services and precision engineering cannot scale without a deep pipeline of technically competent labour.

The misalignment is sharper in strategic sectors that are supposed to be national priorities. Agriculture, which has been identified as a priority industry towards agritech, food security, climate resilience and import substitution, suffered the deepest proportional cut, with development funding collapsing by nearly 80% to under RM500 million. Early-stage strategic industries cannot attract large-scale private capital without state derisking and anchor investment.

There is chronic underspending in the development budget. Year after year, a significant share of allocated development funds goes unused. For 2025, the estimated development outlay was revised downwards by RM6 billion. This pattern can be interpreted in two ways. One interpretation is that, if funds routinely go unused, perhaps less public development spending is needed. 

The alternative interpretation points to underspending as a symptom of structural execution failures. If the former is true, then trimming allocations is a logical adjustment. If the latter is true, then cutting the budget merely conceals a delivery failure by reducing funding instead of fixing the underlying machinery.

The evidence points to the second interpretation. Underspending is not episodic in Malaysia’s government. It is chronic and it recurs in the same ministries. 

In the Ministry of Education alone, there have been years in which more than 80% of certain development allocations remained unutilised. Common failure points include delayed procurement, inadequate project preparation, gaps in ministerial delivery capacity, administrative and inter-agency bottlenecks and additional layers of compliance and approval drag. Cutting the developmental budget does nothing to correct these failures.

When allocations are reduced in response to execution problems, two damaging outcomes are locked in simultaneously. 

First, institutional capacity remains weak because the pressure to reform delivery systems is removed. Second, the national investment effort is structurally scaled down, not because Malaysia needs less development but because it failed to convert planned spending into realised outcomes.

In such a setting, the rational policy solution is not to contract public finance but to repair the delivery architecture so that development allocations translate into actual economic capability on the ground. Cutting the budget treats a capacity failure as a justification for abandoning the investment objective, rather than fixing the machinery that failed to deliver it.

What Budget 2026 signals is more consequential than what it allocates. If the cut in development expenditure represents a deliberate and well-sequenced transition towards a PPP-anchored development model, then it could mark an evolution in fiscal maturity. But if it represents a retreat before the substitute architecture is mature, then the country risks entering a period of under-investment masked as prudence and discipline.

Why are we cutting development expenditure when Malaysia is not yet a developed economy and still depends on public-led investment to build its next stage of capacity? The FRA mandates fiscal prudence and a lower debt-to-gross domestic product path but fiscal ratios are not national goals in themselves; they are constraints to be managed in service of development. Reducing development allocations is difficult to justify when the country still urgently requires sustained investment in its labour force, infrastructure backbone, technological capability and industrial development.

Development spending should be anchored to national transformation objectives. Outcome-based budgeting, introduced in 2010, must not remain a procedural label but be enforced through stronger delivery systems, real performance tracking and consequence management. PPP should operate as a complement, not a substitute, to public investment. Private capital can extend the frontier but it is the public sector that must first push the frontier forward.

Doris Liew is an economist specialising in Southeast Asian development

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