KUALA LUMPUR (Oct 7): Development spending allocation in Budget 2027 may be higher than markets currently expect, as stronger revenue collection and lower fuel and electricity subsidy costs may give Putrajaya greater fiscal flexibility, according to Macquarie Equity Research.

The research arm of Macquarie Group Ltd said its estimates point to potential additional spending in development expenditure.

It expects government revenue to expand by 8% in 2027, helped by continued economic growth, firmer tax collection, and higher contributions from Petroliam Nasional Bhd (PETRONAS), which could increase to RM36 billion from RM20 billion under Budget 2026.

This combination could allow the government to increase spending without derailing its deficit reduction path. Macquarie estimates the fiscal deficit to be brought down to 3.5% of GDP in 2027.

“Given the fiscal space that we see being created in 2027 from higher revenues and lower fuel/electricity subsidy costs, the ability for the government to spend on emoluments, cash handouts and development now matches more with their willingness to spend in what is essentially an Election Budget,” said Macquarie in a note on Tuesday (Oct 6).

Macquarie’s view contrasts with the broader market expectation that fiscal constraints — due to sustained spending on subsidies and cash handouts such as Sumbangan Tunai Rahmah (STR) and Sumbangan Asas Rahmah (Sara) — will limit fiscal flexibility.

Macquarie expects the government to raise development expenditure to RM85 billion next year, from RM81 billion for 2026. The allocation is expected to cover areas including energy and food security, reform-related initiatives and smaller infrastructure projects.

Spending on fuel and electricity subsidies, however, is expected to ease as oil prices moderate, it said. Macquarie's base case assumes Brent crude at US$80 per barrel in 2027 — down from the estimated average of US$90 per barrel for 2026, but still higher than the US$60-65 per barrel baseline assumed in Budget 2026.

Macquarie also expects more support for households ahead of the next general election, including higher civil servant pay and an additional RM3.7 billion for cash assistance under the STR and Sara programmes.

The more optimistic fiscal outlook differs from the assessment economist Dr Muhammed Abdul Khalid shared during a pre-Budget 2027 discussion hosted by Macquarie on Oct 6. Muhammed, who served as economic adviser to former prime minister Tun Dr Mahathir Mohamad in 2018-2020, is currently a research fellow at the Institute of Malaysian and International Studies of Universiti Kebangsaan Malaysia.

While both Macquarie and Muhammed expect Budget 2027 to be geared towards household support while avoiding imposing new taxes on businesses, Muhammed assumes a higher oil price of US$90 to US$100 per barrel next year. This would leave less room for higher development spending, which he expects to remain at around RM80 billion.

Among sectors, consumer stocks could benefit from higher household assistance and civil servant remuneration, while plantation companies could gain from measures to ease land and development approvals, Macquarie said.

It also sees potential benefits for banks from stronger household finances and for companies exposed to energy security and infrastructure spending.