Malaysia is expected to press ahead with fiscal consolidation in its upcoming Budget 2026, even as the economy faces moderating growth, according to a budget preview analysis by CIMB Treasury and Markets Research.
The bank projects GDP growth of 4.1% in 2026, down from an earlier forecast of 4.5%, citing weaker external demand, softer consumption, and subdued investment sentiment in a post-Trump trade environment. Despite these headwinds, the government is expected to narrow the fiscal deficit to -3.6% of GDP from -3.8% in 2025, in line with its long-term fiscal discipline.
Revenue and Expenditure Trends
Federal revenue is projected to rise 4.0% year-on-year to RM353.3 billion, supported by higher tax collections from the expanded sales and service tax (SST), the rollout of e-invoicing, tighter compliance, and potential hikes in “sin taxes.” A gradual introduction of a carbon tax, beginning with the iron and steel industry, is also on the cards from 2027.
Operating expenditure is expected to grow 3.9% to RM348.1 billion, partly due to Phase 2 of the civil service salary adjustment in January 2026, which adds RM8 billion to the wage bill. Subsidy rationalisation will continue, with savings from a new RON95 fuel subsidy mechanism and electricity tariff reforms expected to be redirected towards cash transfers and social assistance programmes.
Cash aid under Sumbangan Tunai Rahmah (STR) and SARA credits is projected to reach RM17 billion in 2026, up from RM15 billion this year, providing targeted relief for B40 and M40 households.
Development Spending and Growth Priorities
Development expenditure is set at RM87 billion, slightly higher than 2025, as the first year of the 13th Malaysia Plan (13MP) ramps up spending on infrastructure, digitalisation, and green transition initiatives. Key projects include the LRT Mutiara Penang, the Johor–Singapore Special Economic Zone, and major flood mitigation works.
The budget is also expected to support affordable housing through expanded rent-to-own schemes and build-then-sell models to address the property overhang. Tourism is set for a boost with Visit Malaysia Year 2026, while industrial upgrading will continue under the NIMP, NETR, and NSS masterplans.
Petronas Dividends and Oil Revenues Dip
Petronas is projected to contribute RM30 billion in dividends in 2026, slightly lower than the RM32 billion in 2025, due to softer global crude oil prices at USD65–70 per barrel. This underscores Malaysia’s reliance on tax reforms and subsidy rationalisation to offset lower oil-related revenues.
Policy Outlook
CIMB noted that Malaysia has historically widened its fiscal deficit only during major crises, such as the global financial crisis and the Covid-19 pandemic. Absent such shocks, the government is likely to stay the course on consolidation while using monetary policy as a buffer.
“With growth moderating, the heavier lifting will fall on Bank Negara Malaysia,” the bank said, adding that it sees scope for an Overnight Policy Rate (OPR) cut in 1Q26 if growth risks materialise.
