KUALA LUMPUR (April 30): Malaysia's fiscal transfer system lacks a clear formula for distributing revenue to states, with most allocations left to federal discretion — a gap that experts say undermines fairness and long-term planning.
At the launch of the IDEAS report “Balancing the Federation - Federal-State Transfers and Fiscal Capacity in Malaysia: Assessing Equalisation Effects”, panellists at a discussion titled “Fiscal Transfers, Equity and the Future of Federal-State Relations” warned that the absence of a transparent, rules-based mechanism makes it difficult for states to predict funding or hold the federal government accountable.
"One of the biggest problems with our fiscal system in Malaysia is that there is no formula — when we talk about how much money goes back to the states, most of it is discretionary," said Gooi Hsiao Leung, chairman of the Penang select committee on federal-state relations.
The constitutionally mandated transfers — mainly the road maintenance grant and a capitation grant tied to population — do not reflect differences in economic capacity or development needs, according to IDEAS senior fellow Sri Murniati Yusuf.
The latest available data cited in the think tank’s report showed that Malaysia’s intergovernmental transfer system does little to reduce disparities in revenue-raising capacity between states.
Although Malaysia is a federal system, it remains highly centralised, with the federal government collecting about 90% of revenue and states only around 10%.
“Out of the 90% that the federal government collects, the states [only] get less than 3% — that shows how huge a difference it is,” Gooi stressed. The imbalance is compounded by issues such as states being responsible for certain expenditures for their own development, but having limited authority to raise their own revenue, he added.
In states such as Terengganu, Kelantan and Perlis, own-source revenue covers only about half of expenditure, leaving them heavily reliant on federal transfer, IDEAS’ report noted. Meanwhile, states like Perlis, Kedah, Negeri Sembilan and Perak even depend on the transfer for more than 70% of their revenue.
"There is no evidence that the system of federal transfers is actually based on need or what we call equalisation — a concept of fairness," said IDEAS research director Stewart Nixon.
The reliance on ad-hoc decisions, rather than a predictable formula, has left poorer states like Kelantan and Kedah receiving less than their fiscal circumstances would suggest, while resource-rich states such as Sarawak receive higher per capita transfers, the report found.
Panellists, which included ISEAS-Yusof Ishak Institute senior fellow Dr Francis Hutchinson, called for reforms that introduce a transparent, needs-based distribution model — one that accounts for demographic composition, development levels and location-specific requirements — alongside stronger institutions to oversee federal-state fiscal relations.
The report comes as more states call for a larger share of revenue and greater fiscal autonomy. Sabah and Sarawak are seeking higher entitlements under the Malaysia Agreement 1963, while Johor and Penang want a bigger share of the revenue they generate.