Budget 2026, due to be delivered on Oct 10, could be the last chance for Prime Minister Anwar Ibrahim to make a significant impact on voter perception before the next election.
Since being elected, Anwar has been relatively conservative in budget planning and has been successful in budget implementation, especially in reducing wastage, leakages and corruption. The savings from cutting the fat and rationalising subsidies have provided fiscal space but budgeting is now in a new phase as these options are used up.
The main fiscal priorities for Budget 2026 have to balance economic growth and fiscal responsibility with business and social welfare needs. As always, the big question is whether the government has the fiscal headroom to afford meaningful change.
Organic growth in taxes on incomes, profits and spending will rise relatively little due to economic headwinds and the cancellation of some ad-hoc taxes such as the high-value goods tax. Non-tax revenue may also be flat based on the performance of Petronas in the first half.
The biggest tax impact will be from the increase in SST which will add RM10 billion next year. I estimate this will help push net revenue up by only RM7 billion to around RM352 billion.
Given this, the main fiscal priority should be how the benefits of subsidy rationalisation can be used to raise incomes and promote rakyat well-being.
We now have an idea of the fiscal headroom created by subsidy savings which will be around RM17 billion. This comes from RON95, expected to be RM4 billion, diesel RM7.5 billion, electricity RM4 billion and others, including chicken price reform, RM1.5 billion.
There may be other areas of savings but they are more technical and will save less money. The trade-off is that by saving money through subsidy rationalisation it can be spent on other priorities and reduces the need for higher taxes.
As we reach the limit of subsidy savings the Groundhog Day discussion pushing for Malaysia to broaden its tax base through reintroducing GST will re-emerge. This is a non-starter for economic and political reasons.
The best way to broaden the tax base would be an electronic payments tax (EPT) which is a tiny tax on all e-payments. For example a 1% EPT can raise RM28.8 billion in revenue. Introducing an EPT at say 0.25% would raise RM7.2 billion and would provide a good pilot to see how to raise the rate slowly over time.
This would provide more space for reforms toward turning the SARA aid scheme into a monthly universal basic income, providing a non-contributory basic pension and moving toward free higher education.
This would make Budget 2026 a “people’s budget” ahead of possible election, but fiscal discipline must also be maintained to promote business confidence, investment, trade and productivity.
Fiscal responsibility is already in good hands at the ministry of finance but with limited new revenue, overall expenditure must be held in line with the rate of core inflation around 2% which is a challenge.
This helps to keep the deficit low so that the deficit ratio will fall as GDP rises which may be only around 4.0-4.5% next year. Holding development expenditure around RM86 billion as in the 13MP, will also keep the debt ratio under control.
A tough call but one that can be achieved.
The views expressed are those of the writer and do not necessarily reflect those of FMT.