(Oct 22): If you run a small business in Malaysia, Budget 2027 has handed you two things at once — a lighter tax bill and a heavier wage bill. Whether that trade works in your favour depends on a question no budget can answer on its own. Will the people you employ produce more value next year than they did this year?

That question sits beneath almost every line of the RM510 billion envelope the government has just tabled.

Credit first, because it is due. Growth is projected at 4.2% to 5.2% in 2027, and the fiscal deficit is set to narrow from 3.6% to 3.3% of gross domestic product (GDP). Supporting growth, cushioning households and consolidating the public finances are goals that rarely sit comfortably together. Pursuing all three amid global uncertainty is no trivial achievement, and the Malaysian civil service deserves recognition for it.

But Malaysia has become remarkably good at surviving shocks. The next test is generating sustained productivity growth. Resilience keeps us in the game. Productivity is how we win it.

Start with capital. Research recently presented by two Bank Negara Malaysia economists at an Asia School of Business seminar finds preliminary evidence that expanding bank lending to the corporate sector, particularly to small and medium enterprises (SMEs), can translate into measurable gains in GDP. This is consistent with an International Monetary Fund working paper (2015) on emerging markets, which estimates that a 10-percentage-point positive shock to corporate credit's contribution to overall credit growth is associated with an increase of approximately 0.3 percentage point in real GDP growth. The implication is straightforward. Make it attractive for banks to lend, and for SMEs to put that money into productive projects aimed at markets well beyond our own postcode.

In the mid-2010s, I was involved in a study that helped inform what eventually became Singapore's Variable Capital Companies (VCC) Act of 2018. We estimated that US$500 million (RM2.04 billion) in investment funds could generate about US$1.2 billion in additional GDP and create between 900 and 3,400 high-value jobs. Today, Singapore has more than 1,400 VCCs comprising over 3,400 sub-funds, while its asset management industry has grown to a record S$6.7 trillion (RM21.4 trillion). These figures are not a direct measure of the VCC's contribution, but they show what well-designed regulatory architecture can help support.

Malaysia could pursue similar ambitions in Islamic finance, with Kuala Lumpur as the hub of an Islamic international financial centre and Penang, Johor and Labuan as complementary spokes.

Then there is targeting. I am probably among the least deserving people in my postcode to receive a diesel subsidy, yet I could if I wished. Subsidies should reach those who need them, not those who can afford to go without. That is not only sound economics. It is good governance.

The same logic applies to the social floor. Budget 2027 raises the minimum wage, increases individual tax relief and lowers selected middle-income tax rates. These are welcome measures, as money placed in the hands of lower- and middle-income households moves through the real economy faster than relief for those already comfortable. In the longer term, retirement income security, including inflation-indexed life annuities through the Employees Provident Fund (EPF), deserves sustained attention.

Yet we cannot raise wages indefinitely without raising the value of what workers produce. If productivity does not follow, businesses, particularly smaller ones, face hard choices on prices, margins, hiring and investment. Malaysia's MSMEs employ more than eight million people, nearly half the workforce. This Budget's tax cuts and incentives give them breathing room. What they need next is the capacity to innovate, adopt technology, improve management, move up the value chain, and expand their market.

Here, the government deserves credit. Malaysia runs one of the more proactive state-backed training agendas in Asia, from AI and digital transformation to TVET and agritech upskilling. Budget 2027 continues that with RM8 billion for TVET initiatives.

Having worked much of my adult life in Boston and New York, I can say that Malaysia does not lack hardworking or talented people. What it lacks are enough opportunities for those people to become dramatically more productive.

Which brings me to AI. It is an extraordinary opportunity, but technology without talent is just expensive equipment. AI will not automatically make Malaysia more productive. Malaysians who know how to deploy it intelligently, with sound judgement about where the machine ends and the human begins, will. That means rethinking how we educate, manage, govern and make decisions. 

The next generation of leaders will be those who combine technological fluency with analytical rigour, entrepreneurial instinct and ethical responsibility.

A budget is ultimately an allocation of resources. It is not, by itself, an economic transformation. That part is on all of us — government, business and educators alike — and there is a great deal of work still to do.

So spend wisely. Invest boldly. Execute relentlessly. And measure outcomes and milestones, not giddy announcements, blueprints and launches.

Joseph Cherian is the president, dean and distinguished professor (finance) of the Asia School of Business in Kuala Lumpur. He previously served as the global head and chief investment officer of the Quantitative Strategies Group at Credit Suisse Asset Management in New York, and has advised governments and think tanks internationally on asset management, pension systems and capital market reforms.