Bold steps in budget, but proceed with caution

From Jamil A Ghani

Malaysia’s 2025 budget, with a record allocation of RM421 billion, is a bold attempt to build a more competitive and resilient economy.

Prime Minister Anwar Ibrahim has ambitious plans to drive economic growth while addressing longstanding concerns over fiscal sustainability.

However, navigating the balance between economic expansion and fiscal prudence will require careful management to avoid public discontent and potential overreach.

Mismanagement could derail initiatives 

The budget is focused on enhancing competitiveness through investments in technology infrastructure, renewable energy and human capital.

While significant funds are allocated to public health and education, RM3.8 billion is designated to support SMEs in their digital transformation and effort to boost productivity.

However, concerns about project mismanagement and cost overruns persists.

The Auditor-General’s 2024 report highlighted delays, with some projects exceeding timelines by over 1,000 days and incurring additional costs of RM6.15 billion. If inefficiencies are not addressed, the intended benefits could be undermined.

Necessary yet risky subsidy reforms 

One contentious budget measure is the shift from broad subsidies to a more targeted model. Malaysia spends RM20 billion a year to maintain the RON95 petrol price at RM2.05 per litre, also benefiting wealthier individuals and foreign nationals.

The restructuring of the petrol subsidy in mid-2025 will restrict subsidised fuel to Malaysian-registered vehicles, with the wealthiest 15% (T15) paying more, saving the government RM8 billion annually.

Economy minister Rafizi Ramli acknowledged that this may trigger a round of price increases and push inflation to a worst-case peak of 3.5%.

Despite Putrajaya’s efforts to explain the adjustments, the risk of growing dissatisfaction remains high, especially as inflationary pressures are expected to ease only after a 12-month cycle.

Another issue lies in the accuracy of income classification. This could disproportionately affect middle-income households, particularly those that may be wrongly classified under the T15 income group, given the uncertainty surrounding its definition.

Price manipulation after targeted diesel subsidy 

Malaysia’s recent experience with the removal of bulk diesel subsidies highlights the challenges of controlling price increases. Following the government’s decision to raise diesel prices to RM3.35 per litre in West Malaysia in June 2024, some sectors saw significant cost escalations.

Transport costs increased by approximately 25%, and the construction sector faced a notable 30% rise in overall project costs due to increased material prices.

To curb profiteering, the domestic trade and cost of living ministry launched Ops Kesan 2.0. It utilised the Price Control and Anti-Profiteering Act 2011 to monitor and investigate companies suspected of unjustified price increases.

However, the swift escalation of prices following subsidy removals underscores the urgent need for robust enforcement measures to prevent further price manipulation during transitions.

Civil service pay bump, balancing public expectations 

A key feature of the 2025 budget is a wage hike for civil servants, with a 15% raise for the executive group and a 7% increase for top management.

Alongside this, the government announced the Public Service Reform Agenda and Special Task Force on Agency Reform, aimed at improving service delivery and reducing bureaucracy. A Public Administration Efficiency Bill is also set to be tabled next year, alongside efforts to merge overlapping government entities.

However, concerns remain about accountability as these reforms will be overseen by the civil servants themselves.

Taxpayers funding these wage increases may remain sceptical about seeing real improvements in public service delivery without clear performance metrics — such as KPIs and monitoring systems — or external oversight, like a parliamentary committee.

This uncertainty could leave many feeling frustrated if services do not improve, further fuelling concerns about whether their tax contributions are being put to good use.

Will GST ever come back? 

While not mentioned in the budget, the return of the Goods and Services Tax (GST) looms large as a solution to Malaysia’s fiscal woes.

Economists have suggested reintroducing GST at a lower rate — 3% or 4% — to broaden the tax base without overburdening those in the lower-income groups.

Putrajaya could pair the GST with social assistance programmes and reforms like the Inland Revenue Board of Malaysia’s (LHDN) e-Invoice system to improve tax compliance and transparency.

However, the government must weigh the public’s trust deficit and previous backlash before deciding on its return.

Actions speak louder than words 

Ultimately, the success of these announcements will not be judged by fiscal metrics but by the tangible improvements they produce in the lives of Malaysian citizens.

Will these changes foster a more resilient, inclusive and prosperous nation, or will they create discontent?

The stakes are high, and the road ahead is uncertain; how Putrajaya navigates this balance will shape Malaysia’s economic future for years to come. - FMT

Jamil A Ghani is a PhD candidate at the S Rajaratnam School of International Studies, Nanyang Technological University, Singapore and an FMT reader.

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.