Insights
Economic Focus: Budget 2026: Building on a strong foundation
13 October 2025
- Prudent Budget 2026 allocated RM419bn to achieve Madani Economy goals
- Fiscal reforms firmly on track for long-term sustainability and inclusive growth
- Government projects 4.0%-4.5% GDP growth with lower budget deficit of 3.5% for 2026
Sustained fiscal consolidation
Budget 2026 entails a higher total expenditure of RM419bn, which is 1.7% higher than the revised Budget 2025 estimate of RM412bn, as Malaysia strives to achieve its socioeconomic goals under the Madani Economy Framework. 2026 development expenditure is expected to remain relatively unchanged y-o-y while operating expenditure is projected to increase by 1.8%, which is slower than the projected revenue growth of 2.7% in 2026. It is noteworthy that the relatively stronger revenue growth comes on the back of tax revenue broadening measures despite PETRONAS dividend falling significantly to a 9-year low of RM20bn in 2026 from RM32bn in 2025. Meanwhile, 2026 budget deficit will fall to the lowest since 2019 at 3.5% (vs 3.8% in 2025). As at Dec 2024, government debt accounted for ~65% of our gross domestic product (GDP), and it is likely to hover around the same level by end-2025 and 2026.
Balancing fiscal reforms with Rakyat's well-being
As Budget 2026 continues to deliver on the government's reform initiatives, the government continues to strengthen its financial assistance for low-income earners. Allocation for direct cash assistance under the Sumbangan Tunai Rahmah and Sumbangan Asas Rumah programs will be boosted by 15% to a record high of RM15bn (vs RM13bn in 2025), benefitting 9m recipients. Interestingly, a one-off RM100 cash assistance for 22m Malaysian adults has been included and will be disbursed in Feb 2026, possibly due to the savings from the government's successful subsidy rationalization efforts. Meanwhile, civil servants will benefit from Phase 2 of the Public Service Remuneration System, which includes a 7% salary increase effective Jan 2026. In addition, various income tax reliefs on healthcare, education and insurance have been increased/extended to mitigate the impact of rising living cost. These measures will ensure domestic consumption remains robust in 2026.
Emphasis on high value-added industries
The long-term strategies under the National Energy Transition Roadmap (NETR) and the New Industry Masterplan (NIMP) 2030 are featured in Budget 2026 as well. Major projects such as Madani Submarine Cable (RM2bn), Sovereign AI cloud (RM2bn) and Large-Scale Solar 6 (RM6bn) reflect the government's focus to drive high-value investments in advanced technology and renewable energy. In addition, various investments and financing are directed to high-impact sectors, which are set to uplift Malaysia's technological capabilities. Meanwhile, Budget 2026 makes no mention of highly-anticipated mega projects such as MRT3 and KL-SG HSR but prioritizes critical maintenance/repairs and essential infrastructure in Sabah/Sarawak with a RM12.9bn allocation (vs RM12.6bn in 2025), illustrating its strong commitment for prudent fiscal policy.
Resilient economic landscape
The government projects its 2026 GDP growth at 4.0%-4.5%, which is in line with our in-house forecast of 4.0%. Fundamentals remain strong as Malaysia's economy continues to take comfort from its resilient domestic demand, underpinned by sustained household spending. Private investment is expected to benefit from improved external environment and positive response to the NETR and NIMP 2030 while the government continues with its expansionary fiscal policy to drive economic growth.
