This analysis examines the structural pressures shaping Malaysia’s public finances ahead of Budget 2026. It highlights five interlinked issues: weak revenue mobilisation, an expenditure mix skewed towards administration rather than development, persistent underinvestment in healthcare, limited commitment to green transition spending, and high fiscal centralisation.

Together, these trends point to the need for fiscal and tax reforms to strengthen resilience and ensure public spending is aligned with Malaysia’s long-term development priorities.

Malaysia’s revenue intake is not growing as fast as the economy. Tax responsiveness relative to GDP (buoyancy) has remained below 1 in most years, implying that revenue growth persistently lags the economy. Temporary factors such as oil-price surges or exceptional PETRONAS dividends account for most buoyancy spikes, rather than improvements in the underlying tax base. Even during the GST period (2015-2017), buoyancy stayed below 1, highlighting the system’s limited ability to capture economic gains.

Over the past decade, Malaysia has operated with a revenue base that is structurally weak and volatile and near-term projections point to continued weakness. Federal revenue is expected to reach only 16% of GDP in 2026, which is low for an economy seeking high-income status while grappling with growing expenditure obligations.

Without broader and more resilient revenue sources, Malaysia risks chronic underfunding at a time when demands on public spending are expanding across healthcare, education, infrastructure, digitalisation and climate adaptation.

Reforming the tax system is therefore essential to strengthening  fiscal resilience and ensuring the government can sustainably meet the growing demand for public services.

Most expenditure is locked into funding the government instead of Malaysia’s development. More than 60% of government operating expenditure (GOE) or 10% GDP, goes to civil service salaries, pensions, and interest payments on federal debt leaving limited fiscal space for investment in priority sectors that support long-term growth.

Government development expenditure (GDE) is projected to fall below 4% of GDP in 2026, despite urgent needs in transport, education, healthcare, climate adaptation, and digital infrastructure. Persistently low development spending risks constraining productivity growth and slowing Malaysia’s progress toward high-income status.

The current expenditure mix appears misaligned with the country’s development objectives. Malaysia needs to streamline Putrajaya’s footprint and strengthen its revenue capacity so that more resources can be directed toward development instead of administrative overhead. Absent a shift in fiscal priorities, Malaysia’s ability to support economic transformation and build long-term resilience will remain constrained.

Malaysia’s allocation for health expenditure has scarcely grown over the past decade, remaining close to 2% of GDP. Such persistent underallocation limits the system’s ability to expand capacity or respond to increasingly complex healthcare needs. Taxes on cigarettes and alcoholic beverages, which are estimated to account for less than half of total excise revenue are among the few health-related tax instruments used to promote healthier behaviour while supporting health financing, yet their fiscal contribution remains modest. Total excise revenue has also been softening over time, pointing to deeper weakness in Malaysia’s revenue base.

A stronger and more diversified fiscal foundation will be needed to lift health allocations, particularly as demographic ageing and epidemiological shifts place greater pressure on the health system.

Malaysia’s healthcare spending remains low relative to peers. Although per capita health expenditure increased by roughly 40% between 2015 and 2022, the pace of expansion has lagged behind that of other upper middle income economies or with similar development levels. At the same time, healthcare costs have been rising faster than GDP, reducing the real value of each ringgit spent.

Strengthening fiscal commitment to health is important to maintain service quality and prevent widening disparities in access and outcomes, particularly as demographic ageing and advances in medical technology increase the complexity and cost of care.

Green transition budgeting remains overshadowed by fossil fuels. Malaysia’s budgetary allocation for renewable energy and environmental programmes remains modest, at below 0.5% of GDP. In 2023, petrol and diesel subsidies were roughly five times larger than allocations for green investments, a disparity that continues to tilt incentives toward fossil-fuel consumption.

Although the Budi95 reforms end the blanket subsidy and raise pump prices for higher-income groups, they still preserve relatively low effective fuel prices for most households through targeted transfers. As a result, the overall price incentives continue to favour fossil fuel consumption over cleaner alternatives.

The very low level of government allocation for renewable energy and environmental initiatives indicates that clean-energy investment remains modest relative to Malaysia’s stated climate and energy ambitions. Malaysia will need to rebalance spending priorities if it is serious about accelerating its green transition.

Malaysia is a highly centralised federation, with the federal government controlling more than 90% of total revenue and expenditure, roughly double the concentration seen in more fiscally balanced federations. Federal dominance is so pronounced that grants to statutory bodies consistently exceed transfers to state and territory governments.

This pattern reflects deeper structural imbalances in the fiscal system. Excessive centralisation weakens accountability, limits state and local governments’ ability to respond to community needs, and biases national budgets toward constituencies favoured by the federal centre.

Malaysia needs an independent, system-wide review to rebalance fiscal responsibilities and strengthen the foundations of shared governance to ensure resources are allocated in ways that better reflect local needs and national development priorities.