Malaysia is set to introduce extensive fiscal reforms in 2025, expanding its sales and services tax (SST) and restructuring fuel subsidies, as the government gears up for record-breaking budget spending. Announced by Prime Minister Anwar Ibrahim on Friday, the fiscal measures aim to tighten the country’s deficit while managing rising public sector costs and boosting revenues.

With a proposed budget expenditure of 421 billion ringgit ($98 billion), the Malaysian government is striving to balance robust spending with strategic fiscal reforms aimed at reducing its deficit. In his announcement, Prime Minister Anwar emphasized the importance of widening the tax base and making subsidies more targeted, especially for low-income households. These reforms are a continuation of his government’s efforts since taking office in 2022 to reduce public spending while maintaining social welfare programs.

Aiming for Fiscal Responsibility

Malaysia has faced growing fiscal challenges over the years, including high subsidies and limited tax revenues. The government is now on track to narrow its fiscal deficit to 3.8% of Gross Domestic Product (GDP) in 2025, down from an estimated 4.3% in 2024. This is part of a broader medium-term plan to trim the deficit to 3% of GDP, a goal that reflects Malaysia’s need for fiscal responsibility amid global economic uncertainty.

Prime Minister Anwar highlighted the aggressive nature of these fiscal reforms: “Next year, the fiscal reforms will be more aggressive and inclusive, with the progressive expansion of tax revenue and the targeting of subsidies for those most in need.”

Expanding Tax Revenues

The proposed expansion of the SST is one of the cornerstones of the 2025 budget. The tax, currently applied to certain goods and services, will now be expanded to cover a broader range of sectors. Commercial services, luxury goods, and premium imports such as salmon and avocados are among the items that will be subject to the expanded tax. The new SST regulations are scheduled to come into effect in May 2025.

According to the fiscal outlook reports accompanying the budget, this move is projected to increase revenue by 5.5%, from 322.1 billion ringgit in 2024 to 339.7 billion ringgit in 2025. This rise in revenue will be crucial in helping the government finance its planned social assistance programs and development initiatives.

In addition to expanding the SST, the Malaysian government plans to introduce a global minimum tax by 2025, in line with global efforts led by the Organisation for Economic Co-operation and Development (OECD) to establish a minimum corporate tax rate. This reform aims to curb tax avoidance by multinational corporations, ensuring that they pay their fair share of taxes.

Restructuring Subsidies

Another key element of the fiscal reform plan is the restructuring of Malaysia’s fuel subsidy program. Since taking office, Anwar’s government has made efforts to phase out blanket subsidies, which have historically placed a significant burden on the nation’s budget. This year, subsidies on diesel, electricity, and chicken have already been cut.

The government is now turning its attention to RON95, a commonly used transport fuel in Malaysia. The new policy, which will come into effect in mid-2025, will phase out blanket subsidies for RON95, making it a targeted subsidy aimed at those most in need. By focusing subsidies on lower-income groups, the government hopes to reduce the strain on the national budget while ensuring that essential goods and services remain affordable for vulnerable households.

The fiscal outlook reports show that 52.6 billion ringgit has been allocated for subsidies and social assistance in 2025, representing a 14.4% decrease from the 2024 budget. This reduction is in line with the government’s goal of shifting from blanket subsidies to targeted assistance programs.

Record Budget Spending

While the government is cutting subsidies, it is simultaneously increasing overall spending to support Malaysia’s long-term development goals. The 2025 budget of 421 billion ringgit marks a 3.3% increase from the previous year’s budget of 407.5 billion ringgit. This includes 335 billion ringgit for operating expenditure, which will go toward paying public sector wages, maintaining government services, and addressing immediate social needs.

Operating expenditure, which accounts for nearly 80% of the total budget, will rise by 4.2% in 2025, largely due to a planned restructuring of Malaysia’s public service sector. The restructuring will involve salary adjustments and pay hikes for the country’s 1.6 million civil servants. This increase in public sector wages is seen as a necessary step to retain talent and maintain an efficient bureaucracy, though it also presents challenges in terms of balancing the budget.

Development expenditure for 2025 is set at 86 billion ringgit, with the bulk of the funds directed toward infrastructure projects, education, and healthcare. The government aims to strengthen the country’s economic foundation by investing in sectors that will drive future growth, such as technology and green energy.

Steady Dividends from Petronas

Malaysia’s state-owned oil company, Petronas, continues to be a key source of revenue for the government. Petronas is expected to pay a dividend of 32 billion ringgit in 2025, the same amount as in 2024. However, this dividend is projected to remain steady as the company anticipates a decline in petroleum-related output and revenue.

Petronas has been instrumental in supporting the Malaysian economy, particularly in times of economic downturn. Nevertheless, the government’s reliance on Petronas for revenue is seen as a potential vulnerability, particularly given global trends toward reducing dependence on fossil fuels and transitioning to renewable energy sources.

Economic Growth and Inflation Projections

Malaysia’s economic growth is expected to remain strong in 2025, with a forecasted growth rate of 4.5% to 5.5%. This represents a slight decrease from the revised growth forecast for 2024, which is now projected to be between 4.8% and 5.3%. The country’s economic outlook is buoyed by steady domestic consumption, a rebound in exports, and strong performance in the services sector.

Headline inflation is projected to be manageable in 2025, with estimates ranging from 2% to 3.5%. This is slightly higher than the revised inflation estimate for 2024, which is between 1.5% and 2.5%. The government has expressed confidence that inflationary pressures will remain under control, aided by targeted subsidies and prudent monetary policy.

Federal Debt and Monetary Policy

Malaysia’s federal government debt-to-GDP ratio is expected to remain stable at around 64% in 2025. While this is considered a relatively high level of debt, the government has maintained that it is manageable and necessary to support the country’s development agenda.

The government’s monetary policy will continue to be guided by domestic considerations, according to the budget reports. Despite the global trend of central banks easing interest rates, Malaysia’s central bank, Bank Negara Malaysia (BNM), has kept its benchmark interest rate steady at 3.00% since May 2023. Analysts do not expect any changes to the interest rate until at least 2026, as BNM focuses on supporting economic growth while keeping inflation in check.

Conclusion

Malaysia’s 2025 budget represents a delicate balance between ambitious spending plans and necessary fiscal reforms. By expanding the tax base, targeting subsidies, and maintaining a steady dividend from Petronas, the government aims to reduce its fiscal deficit while continuing to invest in the country’s long-term development.

As Prime Minister Anwar Ibrahim’s administration moves forward with these reforms, the success of the budget will depend on the government’s ability to execute its plans effectively and manage potential challenges, such as inflationary pressures and global economic uncertainties. Nonetheless, the 2025 budget lays the foundation for Malaysia’s fiscal sustainability and continued economic growth in the coming years.

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Photo source: Google

By: Montel Kamau

Serrari Financial Analyst

22nd October, 2024