This article first appeared in The Edge Malaysia Weekly on September 14, 2026 - September 20, 2026

THE federal government’s fiscal consolidation agenda faces new challenges in 2026. Heightened external uncertainties are adding pressure to the adminstration’s finances, particularly as higher energy prices drive up the fuel subsidy bill. Domestically, growing concerns about measures such as e-invoicing and the broader scope of the sales and service tax (SST) have prompted revisions. Nonetheless, the government remains committed to fiscal consolidation.

“We remain committed to our targets. We believe we are still on track to reach a fiscal deficit of 3% by 2028,” Treasury secretary-general Tan Sri Johan Mahmood Merican said at The Edge-HSBC Pre-Budget 2027 Roundtable.

Putrajaya budgeted RM15 billion for fuel subsidies this year. Johan said that figure could now reach RM40 billion, with about half of the increment covered by additional public revenue and the remainder requiring a reprioritisation of public expenditure. Brent crude is above US$100 at press time.

“What the government has done — trying to shield the economy where possible, allowing the economy to demonstrate its resilience — has proved effective,” HSBC Bank Malaysia Bhd CEO Datuk Omar Siddiq Amin Noer Rashid said at the roundtable.

“So, no doubt that, currently, we see some small or micro industries being affected. [But] we have not seen as much of a negative fallout as other countries.”

On the bright side, Malaysia is confronting these external shocks from a position of relative economic strength.

The country’s GDP growth accelerated from 3.6% in 2023 to 5.1% in 2024 and 5.2% in 2025. It strengthened to 5.4% in the first quarter of 2026 (1Q2026) and 6% in 2Q2026.

Even Putrajaya was surprised by the 6% quarterly growth, said Johan, noting that the macro numbers spoke for themselves, with unemployment at 3%, inflation below 2% and investments being “very strong”.

Earlier efforts to target electricity, diesel and RON95 subsidies have provided a fiscal buffer. Johan estimated that targeted subsidies saved more than RM15 billion in 2025 while curbing leakages to businesses, smugglers and other unintended beneficiaries. Without those reforms, maintaining support for households at current energy prices would have been much more difficult, he said.

Putrajaya narrowed its fiscal deficit to 3.7% of GDP in 2025, from 5.5% in 2022, with the government targeting 3% by 2028 under the Public Finance and Fiscal Responsibility Act 2023.

“We took the position that, yes, it is important to return to a more sustainable fiscal position, but we would do it gradually to ensure there continues to be sufficient fiscal support for the economy and expenditure that is important to the rakyat,” said Johan.

Professor Yeah Kim Leng, director of economic studies at the Jeffrey Cheah Institute on Southeast Asia, commented that seeing growth and fiscal consolidation as competing objectives is a “false dichotomy”.

With private-sector growth holding up, Yeah sees little need for a large government stimulus while stronger economic activity should itself generate additional tax revenue.

“Fiscal consolidation can remain on track,” said Yeah, estimating that organic revenue growth could provide a meaningful buffer against higher subsidy spending.

“We are not too overly concerned if the fiscal deficit were to miss the target slightly because it’s going to be a one-off. As long as we can sustain the trajectory of fiscal consolidation towards 3% by 2028, a one-year deviation, I think, can be seen as less threatening.”

It is a positive that Putrajaya remains committed to fiscal consolidation but fiscal discipline could also constrain policy options if external shocks intensify. This will put the government’s balancing act to a tough test. 

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