Malaysia is set to allocate a record RM421 billion for government spending in 2025, according to official reports. This budget increase is driven by efforts to boost the incomes of civil servants and strengthen the country's retirement fund, all while pursuing further reforms in the areas of taxation and subsidies. The goal of these reforms is to enhance revenue generation and ensure long-term fiscal sustainability.
The government aims to reduce its fiscal deficit to 3.8% of gross domestic product (GDP) in 2025, down from the projected 4.3% deficit for 2024. Economic growth is expected to remain strong, with forecasts ranging between 4.5% and 5.5% for 2025, compared to a slightly narrower range of 4.8% to 5.3% in 2024. These projections come as part of broader economic and fiscal outlooks released in conjunction with the new budget announcement.
Prime Minister Datuk Seri Anwar Ibrahim, who took office in 2022, has been leading initiatives to cut Malaysia’s high subsidy bill and reduce the fiscal deficit. As part of these efforts, the government plans to enhance its revenue collection systems, which include the implementation of a global minimum tax starting in 2025. Additionally, more targeted subsidy reforms are on the horizon, which would reduce the blanket subsidies currently in place for essential goods such as diesel, electricity, and chicken. These blanket subsidies are set to be replaced by a more focused approach that mainly benefits lower-income households.
Revenue is expected to increase by 5.5%, with government earnings projected to reach RM339.7 billion in 2025, up from RM322.1 billion in 2024. In his economic outlook report, Anwar emphasized the importance of prudent debt management and the shift to targeted subsidies as key elements of Malaysia's fiscal reform strategy, which aims to place the nation on a more sustainable financial footing.
The 2025 budget allocation marks a 3.3% increase over the RM407.5 billion spent in 2024. This includes RM86 billion set aside for development expenditures and RM335 billion allocated for operating expenditures. Public service restructuring is a significant factor behind the rise in operating expenses, which will increase by 4.2% in 2025. This restructuring includes pay hikes and salary adjustments for the country’s 1.6 million civil servants.
One of the notable changes in the budget is the reduction in allocations for subsidies and social assistance, with RM52.6 billion earmarked for 2025, down from RM61.4 billion this year. As the government moves towards a more targeted subsidy model, widely used items like RON95 fuel will also be subject to reforms, aimed at directing benefits to those who need them most.
In addition to tax and subsidy reforms, Malaysia's state-owned energy company Petronas will continue to contribute to the country’s finances with an expected dividend of RM32 billion in 2025, the same as this year. This comes amid declining petroleum output and revenues, which are anticipated to impact future government earnings.
The government expects inflation to remain manageable in 2025, with estimates ranging between 2% and 3.5%, slightly up from this year’s revised forecast of 1.5% to 2.5%. Meanwhile, Malaysia's debt-to-GDP ratio is projected to remain steady at around 64%.
Despite global economic uncertainty, Malaysia's central bank, Bank Negara Malaysia, is expected to maintain its benchmark interest rate at 3.00%, a level unchanged since May 2023. Analysts predict that this rate will remain in place until at least 2026, as Malaysia's monetary policy continues to be guided by domestic economic considerations rather than global trends.
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