Malaysia eyes more subsidies, aid to tackle living costs in 2026 budget

KUALA LUMPUR: Malaysia will probably spend more on public subsidies and social assistance as part of its budget for next year amid rising living costs, economists said, even as the government seeks to boost its revenue and strengthen its fiscal position.

Prime Minister Anwar Ibrahim, who is also finance minister, is set to announce the government's spending plan for 2026 in parliament on Friday, aiming to fine-tune the policies of his last three budgets and align economic goals with a five-year plan announced in July.

While Anwar was unlikely to introduce new broad-based taxes, he could raise excise duties on alcohol and tobacco, as well as provide details on implementing a proposed carbon tax, analysts and economists said.

"Much of the heavy lifting has been done over the past several years, and the government is likely to ride on these reforms for its fiscal consolidation efforts. As such, we expect no major tax surprises," CGS International economists said in a research note last month.

Malaysia has been implementing fiscal reforms to boost revenue this year, including an expanded sales and services tax, and a long-awaited adjustment to fuel subsidies.

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The 2026 budget will focus on strengthening social protections and investments in key sectors such as semiconductors and energy transition, the government has said.

Government revenue growth however may slow in 2026, CGS economists said, with state energy firm Petronas IPO-PETO.KL expected to contribute between 20 billion ringgit to 25 billion ringgit ($4.7 billion to $5.9 billion) in dividends, down from 32 billion ringgit this year, amid weaker oil prices.

Petronas is a significant source of revenue for the federal government but its profits have fallen this year.

The government could further increase spending in 2026 - to 430 billion ringgit from a record 421 billion ringgit this year - prioritising higher outlays for targeted subsidies, social assistance, and public services, UOB economists said.

UOB expects the economy to grow 4% this year, at the lower end of the central bank's forecast of between 4% to 4.8%, and down from 5.1% in 2024. UOB estimates a 4.5% expansion in 2026.

The central bank lowered its 2025 growth forecast from an initial estimate of 4.5% to 5.5% due to trade and tariff uncertainties. The United States has imposed a 19% tariff on most of Malaysia's exports to the country.

Malaysia's economy grew 4.4% in the first half of the year.

The fiscal deficit in 2026 is likely to narrow to 3.4% to 3.6% of gross domestic product from an estimated 3.8% this year, analysts said.