Malaysia's Budget Strategy for 2025

By Danial Azhar

KUALA LUMPUR – Malaysia is set to implement further subsidy cuts and new taxes in its upcoming budget to improve its fiscal situation amid declining government revenue.

Prime Minister Anwar Ibrahim will unveil the government's spending plan for 2025 in parliament on Friday. The focus is on balancing fiscal consolidation and economic growth while addressing rising living costs.

Expected announcements include a tax on high-value goods and a tax on sugar-sweetened beverages, as suggested in the previous budget. However, a broad-based goods and services tax is unlikely to be reinstated, according to analysts, as the government anticipates lower dividends from national energy company Petroliam Nasional Berhad (Petronas).

Petronas, a primary revenue source for the government, may see reduced petroleum-related income due to dropping crude oil prices. In the 2024 budget, Petronas is expected to contribute 32 billion ringgit ($7.45 billion) in dividends, lower than the 40 billion ringgit from 2023.

"Given that crude oil prices are likely to stay lethargic, it could be quite challenging for Petronas to maintain a sizeable dividend payout to the government," noted Mohd Afzanizam Abdul Rashid, chief economist at Bank Muamalat Malaysia.

The government may also adjust its economic growth projection for 2024 to between 4.5% and 5.1%, up from the previous range of 4% to 5%. Mohd Afzanizam anticipates a 5% growth in 2025.

The central bank forecasts 2024 growth at the higher end of 4% to 5%, with inflation rates expected to remain below 3%. The economy grew by 5.9% in Q2, the fastest rate in 18 months.

Expected subsidy changes for RON95 petrol, sugar, and domestically produced white rice will be announced in the 2025 budget, following this year’s removal of blanket subsidies on diesel, electricity, and chicken. The government is shifting to a targeted subsidy model benefiting low-income households.

Additionally, pay raises and salary restructuring for 1.6 million civil servants will start on Dec. 1, aiming to raise wages to match living costs.

Analysts expect the fiscal deficit to narrow to between 3.5% and 3.9% of GDP from an estimated 4.3% this year due to subsidy cuts.

($1 = 4.2970 ringgit)