Malaysia’s Budget 2027 could see federal expenditure rise to a record RM440.9 billion, with higher development spending and targeted household assistance supporting growth while the government continues its gradual fiscal consolidation, according to MBSB Research.
The research house expects Budget 2027, scheduled to be tabled on Oct 9, to remain moderately expansionary as Putrajaya balances economic growth, household welfare and institutional reform in the second year of the 13th Malaysia Plan (13MP).
MBSB said Malaysia enters the budget cycle from a relatively strong position, with real GDP expanding 5.7% year-on-year in the first half of 2026, supported by household spending, exports, investment, electrical and electronics (E&E) manufacturing, natural gas production and the operationalisation of data centres.
Inflation has also remained manageable, giving the government some room to support domestic demand while pursuing fiscal reform. However, MBSB cautioned that higher energy costs and supply-chain disruptions arising from prolonged Middle East tensions remain key downside risks.
Development Spending Seen Rising To RM85–90 Billion
MBSB forecasts total federal government expenditure could increase from RM421.2 billion under Budget 2026 to around RM440.9 billion in 2027, reflecting higher operating expenditure, continued cost-of-living support and stronger development spending.
Development expenditure is projected to rise to between RM85 billion and RM90 billion, from RM81 billion in Budget 2026, as more projects under the 13MP move from planning and procurement into physical implementation.
Operating expenditure, meanwhile, is expected to increase to around RM355.7 billion, compared with RM338.2 billion under Budget 2026, as spending on emoluments, subsidies, social assistance and other commitments remains substantial.
MBSB said infrastructure spending could accelerate across areas such as flood mitigation, water infrastructure, rural roads and bridges, urban public transport, schools, hospitals, industrial infrastructure, grid connections, housing, ports, airports and logistics facilities.
It expects Sabah and Sarawak to receive meaningful allocations to address infrastructure and public-service gaps, including electricity and water access, telecommunications, healthcare, transport connectivity and flood protection.
The Johor-Singapore Special Economic Zone could also provide an additional source of infrastructure project flows, it said.
Fiscal Deficit Seen Narrowing To 3.3%–3.5%
Despite higher spending, MBSB expects Malaysia’s fiscal deficit to resume its gradual decline in 2027.
It estimates the deficit will remain around 3.7% of GDP in 2026, above the government’s original 3.5% target, partly due to higher subsidy costs and the slower implementation of some revenue-enhancement measures.
For 2027, however, MBSB expects the deficit to narrow to between 3.3% and 3.5% of GDP, keeping Malaysia on a gradual path towards the medium-term objective of a fiscal deficit of 3% or lower.
Federal revenue is projected to reach about RM365.1 billion in 2027, supported by continued economic growth, improved direct and indirect tax collection, wider e-Invoicing implementation, digitalisation of tax administration and the expanded Sales and Service Tax base.
Subsidy rationalisation will remain important, although higher oil prices have reduced the fiscal gains.
MBSB noted that subsidy targeting and the floating of chicken and egg prices have generated an estimated RM15.5 billion in annual savings, but these savings have been substantially absorbed by higher global energy costs. The fuel subsidy bill is estimated at RM35 billion to RM40 billion in 2026 amid elevated crude prices.
More Household Relief, But Broad New Tax Seen Unlikely
MBSB expects Budget 2027 to offer more visible household support, potentially including food assistance, healthcare relief, childcare support, public transport assistance and targeted energy subsidies.
It also sees scope for greater assistance to middle-income households, which continue to face pressure from food, housing, childcare, healthcare and education costs.
However, the research house believes the immediate introduction of a broad-based new tax is less likely. Revenue measures could instead focus on improved compliance and enforcement, reducing subsidy leakage, selected excise duties and environmental taxation.
Among possible measures, MBSB highlighted greater integration of e-Invoicing data between the Inland Revenue Board and Customs, digital tax stamps for contraband-prone products and potential refinements to SST to reduce tax cascading.
A phased carbon tax could also emerge as part of a longer-term green fiscal framework. MBSB estimated that an initial carbon price of RM10 per tonne of CO₂ equivalent could potentially raise around RM2.1 billion annually, rising to RM3 billion–RM5 billion annually if the rate eventually increases to RM15–RM20 per tonne.
Energy, AI And Data Centres Remain Key Themes
Energy security is expected to feature prominently as Malaysia’s semiconductor, data centre and industrial investments increasingly require greater generation capacity, transmission infrastructure and reliable grid connections.
Potential measures could include incentives for solar and battery storage, grid-upgrade funding, battery energy-storage tenders, renewable-energy procurement and incentives for local production of cables, inverters and transformers.
MBSB also expects the government to shift its AI agenda beyond simply attracting data centre construction towards enterprise AI adoption, domestic intellectual property, cybersecurity, semiconductor design and workforce productivity.
Possible measures could include grants for MSME automation, tax deductions for AI and cloud expenditure, cybersecurity incentives and financing support for chip design, advanced packaging and R&D.
Construction Seen As Clearest Budget Winner
From an equity-market perspective, MBSB said construction offers the clearest and most direct exposure to Budget 2027, particularly if development expenditure accelerates as expected.
Among the names highlighted were Gamuda, with a BUY call and RM5.60 target price; IJM Corporation, BUY at RM3.32; Sunway Construction, BUY at RM9.18; MRCB, BUY at RM0.40; and Malayan Cement, BUY at RM9.53.
Utilities and electrification are another major theme, with Tenaga Nasional identified as the principal listed beneficiary of higher grid and transmission investment. MBSB has a BUY call on TNB with a target price of RM16.31, while Pekat and Samaiden could benefit from additional solar and energy-storage opportunities.
Consumer staples and value retailers including 99 Speed Mart, MR D.I.Y., QL Resources and Leong Hup International could meanwhile benefit from continued targeted household assistance and food-security measures. Healthcare players could also gain if public spending and care-economy initiatives are expanded.
Overall, MBSB said the success of Budget 2027 should be judged less by the number of new initiatives announced and more by how quickly existing programmes move into procurement and construction, whether incentives generate Malaysian skills and intellectual property, and whether household support can be delivered without reversing fiscal reform.
