The Institute for Democracy and Economic Affairs (IDEAS) said the government is still being careful with spending and wants to reduce the national deficit to 3.5% of GDP next year.

It said this target is part of a long-term plan to bring the country’s finances under control, but cautions that the government has few ideas to raise more money.

This limits how much the government can spend on new schools, hospitals, and other infrastructure.

“The government faces a structurally rigid budget that constrains development spending,” IDEAS said in a statement today.

It noted that most of the government’s spending still goes to paying civil servants’ salaries, pensions, and debts, which make up more than 60% of the total operating budget.

“While efforts to improve tax compliance and curb leakages are commendable, the 2026 budget lacks substantial reforms to diversify and deepen the tax base that would increase fiscal space,” it said.

IDEAS said Malaysia is relying less on Petronas’s dividends, which are now half of what they were two years ago, and because of that, the country’s revenue growth is slowing down compared to the economy’s overall size.

It said development spending has also stayed the same at RM81 billion, or under 4% of GDP., with most of the money already committed to projects such as East Coast Rail Link, MRT3, RTS Link, and the Pan Borneo Highway.

The country’s debt remains high at 64.7% of GDP as of June, it said, leaving little room to borrow more if the economy slows.

“The Act requires the government to table a fiscal adjustment plan should it be unable to reach its 60% to GDP target, which appears unlikely under current conditions,” the think tank said, referring to the Public Finance and Fiscal Responsibility Act.

Simply cutting wasteful expenses or reprioritising spending is not enough to fix the problem.

“The government’s measures such as expenditure reprioritisation, reducing leakages, and employing GLC and GLICs in public programmes are weaker contributors to the fiscal buffer, compared to much needed revenue raising measures,” it said.

IDEAS said the budget “manages immediate pressures”, but lasting progress depends on the government’s ability to turn fiscal restraint into reform.

“Expanding the revenue base, improving spending efficiency, and strengthening institutions must take priority to ensure the country’s stability evolves into sustainable growth,” it said.