27-05-2025
Calls for decisive policy adjustments
PETALING JAYA: Malaysia's fiscal consolidation drive is set to encounter stronger headwinds in 2025 as weaker economic momentum and delays in structural reforms weigh on revenue performance and widen fiscal risks, says TA Research.
The government had aimed to narrow the deficit to 3.8% of gross domestic product (GDP) next year, but emerging pressures suggest the target may be elusive without decisive policy adjustments, according to the research house.
It has revised its fiscal deficit forecast for 2025 to 4% of GDP, up from its earlier estimate of 3.8% of GDP.
'This level remains an improvement over the 4.1% deficit recorded in 2024 and marks the lowest fiscal deficit ratio since 2019,' it noted in its latest report.
The revision reflects a series of downside risks to both revenue and expenditure.
TA Research projects nominal GDP growth at 4.6% in 2025 – a marked reduction from the earlier 8% estimate – in line with weaker global trade activity, geopolitical tensions, and soft external demand.
'The official GDP growth forecast of 4.5% to 5.5% will be adjusted downward, reflecting increased risks from escalating geopolitical tensions in the Middle East and rising global trade uncertainties, including the potential implementation of new US tariffs,' it explained.
Revenue is expected to decline by 1.6% to RM319.3bil, significantly lower than the Finance Ministry's projection of RM339.7bil.
'The downgrade reflects expected softness in both direct and indirect tax collections, in line with a weaker economic outlook,' TA Research said.
The reseach house added that petroleum-related income is also expected to fall, with the average Brent crude oil price assumption cut to US$65 per barrel, well below the government's forecast of US$70 to US$80.
Meanwhile, total government expenditure is set to breach RM400bil again in 2025, with operating expenditure revised upwards to RM321.6bil.
'Despite the expected implementation of fuel subsidy rationalisation in the second half of the year, operating expenditure is forecast to rise.
'Total subsidies are projected to exceed RM60bil for the year,' the research house stated.
TA Research expects savings of RM4bil in 2025 from subsidy reforms, assuming implementation begins in July as planned.
On the tax front, delays in the expansion of the sales and service tax (SST) and the implementation of e-invoicing for small and medium enterprises are further limiting revenue gains.
'Assuming enforcement begins on July 1, the expanded SST is projected to contribute only RM2.46bil in additional revenue; falling RM2.54bil short of the initial full-year projection,' the research house said.
Despite the revised deficit, TA Research did not foresee immediate credit rating downgrades.
'A fiscal deficit of 4% of GDP in 2025 would slightly exceed Malaysia's official target of 3.8%, but it is unlikely to trigger immediate sovereign credit rating downgrades provided the government maintains its commitment to fiscal consolidation,' it explained.
Looking ahead, the upcoming tabling of Budget 2026 and the 13th Malaysia Plan will be crucial in signalling the government's medium-term fiscal strategy, particularly on reforms to broaden the tax base, enhance revenue resilience and promote higher value-added economic growth.
