Fiscal goals on track

The Star

22-07-2025

PETALING JAYA: Malaysia appears to be on track to achieve its fiscal deficit target of 3.8% this year, in spite of the various external challenges that are on the horizon.
Economists surveyed by StarBiz were in agreement and point to various measures that have been embarked on by the government on both the revenue and expenditure side that would help the country to stay on track in its fiscal goals in the bigger picture.
These include the various subsidy rationalisation moves such as the egg subsidy cuts, diesel subsidy re-targeting and the planned RON95 petrol subsidy removal.
While on the revenue side, the government had also announced various measures to increase the tax base, which includes the expansion of the scope of the sales and services tax (SST) and the 2% tax on dividends for individuals earning over RM100,000 in dividend income.
There is also the rollout of e-invoicing by the Inland Revenue Board, which is being done in phases at this point in time.
Perhaps, the coming Budget 2026, which is scheduled to be tabled in less than three months on Oct 10, will detail these initiatives further and reveal if any potential new ones are in the pipeline.
Socio-Economic Research Centre executive director Lee Heng Guie said he is confident the fiscal deficit target set for this year will be met, although there may be ongoing concerns that the revenue side will be impacted by lower oil prices at the moment.
'Malaysia will definitely not miss the fiscal deficit target set earlier.
'The government is intent and moving forward with the subsidy rationalisation.
'Oil-related revenue will be impacted by lower oil prices now but at the same time also the subsidy bill for RON95 petrol will be lower as well, if leakages are plugged,' Lee told StarBiz.
'The government has always met these targets, unless there is a major shortfall in revenue or overspending.
'So far, they have already booked in everything, for example the rise in civil service salaries is being covered by the SST scope expansion and SST rate increase for some categories,' he added.
Lee said these initiatives will help the country meet these fiscal targets but in any case if the target isn't met, there could be a risk whereby rating agencies have to re-rate the country.
Commenting on the country's national debt, Lee said the total outstanding debt is still high, although the new debt figures have seen a decline in recent years.
Kenanga Research, in its May report noted that government total current liabilities rose to a record high of RM1,277.3bil in the first quarter of financial year 2025 (1Q25) this year compared with RM1,247.6bil in 4Q24.
'Based on our calculation, the government debt to gross domestic product (GDP) ratio in 1Q25 expanded to 65.5% from 64.6% in 2024. This is higher than the government's calculation of 62.6%,' Kenanga Research said.
The research house anticipates that government debt is projected to rise to RM1,330.6bil or 65.9% of GDP in 2025, which is higher than its previous forecast of 64.7%, amid slower growth and potential delays in fiscal reforms.
'The higher debt projection also reflects our fiscal deficit forecast of 4.1% of GDP, based on a revised GDP growth forecast of 4.3% from 4.8% previously.
'This accounts for downside risks such as lower oil prices, potential subsidy reforms delays and ongoing external uncertainties, driven by the unfolding US tariffs,' it said.
Meanwhile, UOB Kay Hian Wealth Advisors' head of investment research Mohd Sedek Jantan said Malaysia is firmly on track to meet its fiscal deficit targets.
'Malaysia is on track to achieve a fiscal deficit of 3.8% in 2025, underpinned by the Fiscal Responsibility Act (FRA) 2023, which institutionalises fiscal discipline through enhanced parliamentary oversight.
'Concurrently, tax reforms — including broadening the revenue base and implementing the e-invoicing system to strengthen compliance — supports fiscal consolidation.
'These measures align with sound public finance principles, fostering sustainable growth, promoting inclusivity and reinforcing governance for improved socio-economic outcomes.'
Mohd Sedek said further it would be a good move if the government prioritises continued debt reduction at the national level since lower borrowings would alleviate crowding-out pressures, support private investment and preserve macroeconomic stability.
'Anchored by the FRA and ongoing tax reforms, this trend expands fiscal space, bolsters policy credibility and lowers sovereign risk — key to sustaining investor confidence and economic resilience.
'It also cushions Malaysia against external shocks, particularly amid global trade policy uncertainty and potential growth slowdowns,' he added.
CGS International Research head of economics Ahmad Nazmi Idrus said it is still premature to say if the government will miss or meet its fiscal deficit targets for this year.
'As of May, we see fiscal data still on track and there are a few reasons I think the fiscal numbers can still be achieved - the rise in collections from the SST adjustments, electricity tariff reforms, and subsidies removal.
'While GDP is expected to weaken amid the tariff scuffle, I think the domestic economy could stay resilient amid wage reforms, the stronger ringgit, and high tourism numbers which could support tax collections.
'We already have good momentum from last year. If you recall, the 2024 fiscal deficit was targeted at 4.3% of GDP, but the audited result showed that the government managed to get it lower to 4.1%.
'This year's deficit target was designed under the assumption that the deficit last year was 4.3% and not 4.1%, so we started off on a better footing,' he added.
Ahmad Nazmi noted that any new debt incurred would tie strongly with the fiscal deficit target as a better fiscal deficit forecast should mean lesser new debt issuance.
Moreover, since the government is targeting a fiscal deficit at 3.8% of GDP this year from 4.1% last year, that would mean debt issuance should be lesser, he said.
'Also the overnight policy rate cut will cause the Malaysian Government Securities yield to fall so it will be slightly cheaper for the government to finance its debt, so that's a plus,' Ahmad Nazmi said.
He also said any miss in fiscal targets would have to be evaluated based on its circumstances.
'But as long as the government is committed to fiscal consolidation, any near-term deviations are acceptable.'