Malaysia’s fiscal deficit could remain at 3.6% of gross domestic product (GDP) in 2027 despite efforts to narrow the budget gap, as elevated oil prices and continued cost-of-living support keep government expenditure high, according to OCBC Group Research.
In its Budget 2027 preview, titled Mind the Fiscal Gap, OCBC Senior ASEAN Economist Lavanya Venkateswaran said the government is expected to announce a narrower deficit target of 3.4% of GDP when the budget is tabled on Oct 9.
However, OCBC forecasts an actual deficit of 3.6%, unchanged from its projection for 2026 and wider than the approximately 3.2% implied for 2027 under the government’s Medium-Term Fiscal Framework.
Subsidy Spending Could Exceed Budget By RM30 Billion
OCBC expects Malaysia’s 2026 fiscal deficit to widen slightly from the government’s 3.5% target, primarily because higher subsidy and social assistance spending is likely to outweigh stronger tax collections.
The bank estimates that subsidies and social assistance could reach RM80 billion in 2026, compared with the budgeted RM49 billion.
It also projects the fuel subsidy bill at RM37 billion or more if oil prices average US$100 per barrel.
According to OCBC, Ministry of Finance estimates indicate that every US$1 increase in global oil prices generates approximately RM300 million in additional government revenue but raises subsidy expenditure by RM400 million to RM500 million.
This makes sustained high oil prices a fiscal burden despite Malaysia’s petroleum-related revenue.
No GST Return Expected In Budget 2027
OCBC expects the government to rely on improved tax collection, digitalisation and possible adjustments to selected excise duties rather than major tax reforms to increase revenue.
It does not expect the Goods and Services Tax (GST) to be reintroduced, although changes to the existing Sales and Service Tax framework remain possible.
The bank also anticipates limited further subsidy rationalisation in 2027, with the government likely to prioritise cost-of-living assistance while maintaining investment in medium-term development projects.
OCBC forecasts revenue growth of approximately 7% in 2027, alongside real GDP growth of 4.8% and average headline inflation of 2.1%.
Separately, OCBC expects Bank Negara Malaysia to raise the Overnight Policy Rate from 2.75% to 3.00% in January 2027, citing resilient economic growth and building price pressures rather than fiscal slippage alone.
