PETALING JAYA: Budget 2026 is fiscally conservative, as the government juggles limited fiscal space, investment in long-term capacity building and short-term cushioning for vulnerable sectors, according to economists.
BIMB Securities chief economist Imran Nurginias Ibrahim said the Budget comes across as a rather cautious and politically constrained plan.
“While the government highlights fiscal prudence and a modest narrowing of the deficit, the overall tone feels defensive rather than transformative,” he told SunBiz.
After missing opportunities to pursue deeper structural reforms in 2024 and 2025, Imran said, the government now faces tighter fiscal space and the pressures of impending elections, starting with Sabah later this year.
“As a result, the government has opted for a more cautious approach, adjusting development spending to keep the fiscal deficit within target.”
At its core, Imran said, the Budget attempts to balance maintaining growth momentum and managing fiscal discipline, but it lacks bold policy shifts or new growth catalysts. “The measures announced lean towards short-term social protection and continuity rather than strategic reforms that could lift Malaysia’s long-term competitiveness.”
OCBC senior Asean economist Lavanya Venkateswaran said Budget 2026 signals a steadying of the fiscal ship, with the government maintaining a cautious pace of consolidation while balancing social and economic priorities
“The government doubled down on fiscal consolidation, aiming to narrow the deficit to 3.5% of GDP in 2026 from 3.8% in 2025. This is in line with our expectations and reflects a modest pace of consolidation,” she said.
She noted that the government’s macro assumptions were “fairly realistic,” with real GDP growth projected at 4.0–4.5% (OCBC: 3.8%) and headline inflation at 1.3–2.0% (OCBC: 1.5%).
“Tax revenue collections are expected to grow broadly in line with nominal GDP, while non-tax revenues will likely contract due to lower global commodity prices and reduced dividends from Petronas,” she said.
New tax measures include higher excise duties on cigarettes and alcoholic beverages from November 2025 and the introduction of a carbon tax targeting iron, steel and energy sectors, both of which were anticipated, she added.
Central government expenditure is forecast to rise modestly next year, led by higher emoluments and pensions. Subsidy and social assistance spending is expected to fall 14.2% year-on-year in 2026 as the government continues rationalisation efforts, though cash aid programmes such as Rahmah Cash Contribution and Sumbangan Asas Rahmah will remain in place.
Lavanya said the Budget also highlights measures to bolster medium-term growth, including support for SMEs expanding abroad, regional development in Johor, Sabah and Sarawak, local tourism, and higher value-added manufacturing in sectors suh as electronics.
“As such, although the fiscal support to economic growth from Budget 2026 is largely neutral, Budget 2026 affirms the governments’ commitment to pushing ahead with reforms and building domestic economic resilience to counter building external headwinds,” she said.
Monash University Malaysia School of Business Senior Lecturer Dr Andrew Woon said although Malaysia’s 2026 budget is smaller in size, the government’s focus on human capital and high-technology industries underscored its intent to future-proof the economy.
He pointed out the allocation for Technical and Vocational Education and Training has been raised to RM7.9 billion from RM7.5 billion in 2025, reflecting efforts to strengthen skills in sectors such as electric vehicles, semiconductors and renewable energy under the New Industrial Master Plan.
“The Human Resource Development Corp will provide RM3 billion to fund three million training opportunities, while the Skills Development Fund Corp will offer RM650 million in financing for over 25,000 trainees,” Woon said.
He added that the Skills Development Department will receive RM34 million to roll out the Industry Academy Programme, aimed at reducing reliance on low-skilled foreign workers.
“Together, these measures reflect a cohesive strategy to build local expertise and strengthen Malaysia’s position in the global digital and green economy,” he said.
Meanwhile, economist Jason Loh Seong Wei said the government should offer temporary tax cuts to small and SMEs to cushion the impact of the expected Trump administration tariffs and China’s deflationary pressures.
China’s ongoing deflation, reinforced by weak oil and petrochemical prices, and softer US demand would expose export-oriented SMEs to “twin pressures” of reduced demand and stiffer competition, Loh told SunBiz.
Loh proposed lowering the 17% tax on chargeable income of up to RM600,000 for SMEs with paid-up capital of not more than RM2.5 million and annual sales below RM50 million to 14%.
For the same group, the 15% tax on the first RM150,000 should be reduced to 9%, while the 24% rate on income above RM600,000 should be cut to 20%, he said.
“The tax cuts should run for one year, from 2026-2027 and to be extended for another year if necessary (i.e., under Budget 2027),” he added.
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