Socio-Economic Research Centre executive director Lee Heng Guie
THE government has struck a tough balancing act in delivering a budget package that will keep the economy on an upward growth trajectory without derailing its medium-term fiscal stability pact.
Budget 2025 addresses continued fiscal repairs and policy reforms to build a stronger foundation for growth, business and investment opportunities; cost of living pressures; enhancing the investment climate for sustaining domestic direct Investment and foreign direct investments; strengthening domestic enterprises’ capabilities and manpower skills development; and building long-term sustainability goals.
Development expenditure allocations and the budget deficits are largely in line with our predictions. What’s still missing is a clear plan to ensure a sustainable revenue stream.
Instead, the Ministry of Finance is relying on incremental revenue measures such as enhancing the scope of the sales and services tax to include higher sales on pricey imported non-essential items, commercial service transactions between businesses, and imposing taxes on share dividends.
The budget measures are expected to generate a net revenue gain of RM4.4bil in 2025.
We have been supporting the position that the goods and services tax is a more effective, efficient and transparent regime given its broad consumption tax base. We are concerned the tax on share dividends would dampen investors’ sentiment in the equity market.
There are lingering concerns that more capital income will be taxed as investors could perceive it as an extension of the capital gains tax on unlisted shares.
The budget delivered on the task of tightening the structural deficit through continued subsidy rationalisation, overlapping expenditure cuts and combatting wasteful spending amid lower development expenditure.
The fiscal deficit will be reduced further to 3.8% of gross domestic product (GDP) at about RM80bil in 2025 from estimated 4.3% in 2024 or about RM84.3bil. We expect the government to remain on track meeting its medium-term fiscal deficit target of below 3% of GDP in the next three to five years as mandated by Public Finance and Fiscal Responsibility Act 2023.
Federal revenue is projected to increase by 5.5% to RM339.7bil in 2025 in tandem with a better economic outlook.
Tax revenue
With a narrowed tax revenue base of 12.4% of GDP in 2024, the government needs to expand the tax base through a consumption tax, reviewing tax incentive leaks, tackling incidences of evasion and avoidance through einvoicing and simplifying filing processes.
Total expenditure will mark a new record high of RM421bil in 2025, an increase of 3.3% from RM407.5bil in Budget 2024.
This is solely due to higher operating expenditure (OE) rising 4.2% to RM335bil while development expenditure (DE) is maintained unchanged at RM86bil.
This expansionary spending stance is via OE (through pay hikes) to support domestic demand.
OE is budgeted to increase by 4.2% or RM13.5bil to RM335bil in 2025 with the OE-revenue ratio dropping to 98.6% compared with an average of 99.1% in 2010 to 2023.
The increase is mainly due to higher emoluments (up RM6.2bil to RM105.9 bil) for the implementation of the Public Service Renumeration System (SSPA) with salary adjustments between 7% to 150%, higher retirement charges for 950,000 pensioners (plus RM6.1bil to RM40.5bil) and debt service charges (up RM3.9 billion to RM54.7bil).
As expected, subsidies and social assistance will be slashed further by 14.4% or RM8.8bil to RM52.6bil for two successive years (down 14.6% to RM61.4bil in 2024), for the implementation of electricity subsidy rationalisation and targeted fuel subsidy.
The RON95 petrol subsidy rationalisation will be implemented in June 2025 for foreigners and the wealthiest top 15% of Malaysians to save RM8bil.
In 2024, the government embarked on price-control reforms and subsidy rationalisation, including the electricity tariff retargeting, the floating of chicken prices, and diesel subsidy rationalisation.
It is an opportune time to rationalise RON95 fuel subsidies given softening global crude oil prices, with 2025 price forecast at US$75 to US$80 compared with US$80 to US$85 in 2024 and improved ringgit exchange rate. We estimate the fuel subsidy for RON95 is about 65 sen per litre.
The subsidy removal will have transitory effects on the economy, businesses and consumers through an increase in the cost of production, impact on output and consumption, and a rise in inflation.
Allocation of resources
Small price increases are easier to swallow and make it possible for the people to adapt to the new price situation over time.
Nevertheless, the dampening effects on macroeconomic indicators will be partially offset by the reallocation of subsidies savings to productive sectors, and also through mitigating measures such as cash transfers to targeted households.
It is a step in the right direction to rationalise the roles and functions of federal statutory bodies, thereby reducing wastage, improving government service delivery and allowing some fiscal space to consolidate its resources.
DE for 2025 is budgeted at RM86bil or 20.4% of total expenditure and 4.1% of GDP, the same level of RM86bil for 2024. This brings total DE allocation to RM403.9bil, which makes up 97.3% of the 12th Malaysia Plan (2021 to 2025) target of RM415bil.
We are not overly concerned about lower Budget 2025’s DE allocation as what matters most are the expenditure priorities and composition of DE as well as good governance of the spending to achieve better outcomes.
Approximately 2,000 new projects and programmes have been approved with an estimated cost of RM58.6bil.
The economic and social sectors have a lion’s share of total DE allocation or RM69.9bil or 81.3% in 2025, compared with RM69.6bil in 2024.
The funds are mainly for transportation, environment, focusing on construction of bridges and roads, the widening of highways, and ongoing projects such as Pan Borneo Highway Sabah and Sabah-Sarawak Ring Roads as well as climate change and floods mitigation projects.
Allocations for industry include RM200mil for the New Industry Master Plan 2030, RM306mil for the National Energy Transition Roadmap, the Johor-Singapore Special Economic Zone (JS-SEZ) Infrastructure Facilitation Fund and the development of Silver Valley Technology Park in Kinta, Perak.
The government debt stood at RM1.23 trillion or 63.1% of GDP as of June 2024, an increase of 4.7% from RM1.17 trillion as of end-December 2023.
Government debt is estimated to rise to RM1.26 trillion by end-December 2024, with debt to GDP ratio at 64.7%.
Added with the committed government guarantees and other liabilities, overall debt and liabilities amounted to RM1.60 trillion or 82% of GDP as of end-June 2024.
Debt service charges as a percentage of total OE is expected to climb higher to 15.8% in 2024 and further to 16.1% in 2025 compared with 14.1% in 2022.
Under the Public Finance and Fiscal Responsibility Act 2023, overall debt should not exceed 60% of GDP in the medium-term.
Hence, the government needs to further intensify its efforts in rebuilding a strong operating surplus, reducing the overall fiscal deficit to help cut net borrowing while growing the economy.
The efforts include the continuation of revenue enhancement, expenditure rationalisation and retargeting of expenditure to minimise wastage and leaks of public resources.
As for the economy, the Finance Ministry remains optimistic about continued expansion in domestic demand and exports.
It revised 2024’s real GDP growth to 4.8% to 5.3% (mid-point at 4.9%) from 4% to 5% while projecting firm growth of 4.5% to 5.5% (mid-point of 4.8%) in 2025.
The Socio Economic Research Centre of Malaysia’s (SERC) estimate for 2024 is 5.4% and 5% for 2025.
We caution that there remain downside risks to our estimates given the lingering external risks and the impact of domestic policy measures.
With domestic demand still holding the fort, private consumption (61.1% of total GDP in 2024) is projected to grow by 5.9% in 2025 (estimated 5.5% in 2024) while private investment (16.4% of GDP) will expand strongly by 8.9% in 2025 compared with an estimated 11.1% in 2024.
Consumer spending will be supported by stable employment conditions with estimated unemployment at 3.1% in 2025 and 3.2% in 2024, and increases in real wage growth; higher cash handouts through the RM13bil Bantuan Tunai Rahmah initiative; average salary increment between 7% and 15% for 1.7 million civil servants (10.2% of total employment) to be implemented in two phases in December 2024 and January 2026 costing RM10bil; continued tapping on the Employee Provident Fund Flexible Account 3; an increase of 13.3% in minimum wage to RM1,700 per month from RM1,500; and the Progressive Wage Model.
The anticipated implementation of subsidies rationalisation for RON95 fuel in June 2025 is expected to temper spending somewhat amid inflationary risk.
We strongly believe that private investment remains firmly on an upcycle estimated between 10% and 13.5% from 2024 to 2026, underpinned by on-going implementation of multi-year infrastructure projects and realisation of some approved investments in 2021-2023 and in 2024.
Between 2021 and 2023, on average, more than 85% of approved manufacturing projects have been implemented.
Total approved investment amounted to RM906.6bil in 2021 to 2023 and RM160bil in the first half of 2024 (1H24) including RM120bil in GEAR-uP programmes by six leading government-linked investment companies to spur domestic direct investments in high-growth high-value industries such as the energy transition, semiconductors, start-ups, and venture capital to mid-tier companies.
The expected finalisation of the JS-SEZ agreement this year will also be a game changer to support investment growth going forward.
The projected GDP expansion in 2025 is broad-based with almost all economic sectors registering positive growth.
The construction sector will register the highest growth rate (9.4% in 2025 compared with 14.1% in 2024), followed by the services (5.5% in 2025 against 5.3% in 2024), manufacturing (4.5% in 2025 compared 4.1% in 2024), agriculture (1.9% in 2024 versus 2% in 2025).
The mining sector will decline by 1% in 2025 compared with 2.2% growth in 2024.
With exports already growing by 5.2% in the first nine months of 2024, the Finance Ministry expects exports to grow by 5.6% in 2024 and will grow by 3.9% in 2025, compared with SERC’s forecast of 6% in 2024 and 4.5% in 2025.
Underpinning exports are higher external demand, global tech upcycle and firmer commodity and energy prices.
Headline inflation, which registered an average increase of 1.8% in January to September 2024, will increase by 1.5% to 2.5% in 2024 and 2% to 3.5% in 2025. SERC’s estimate is for 2% in 2024 and 2.5% to 3% in 2025.
The risk to inflation in 2025 are spillovers from subsidy rationalisation and price controls, volatile global commodity prices and higher inputs cost amid ongoing geopolitical risks, weather disruptions and policy changes after the US presidential election.
We expect Bank Negara to keep its overnight policy rate steady at 3% in 2024 and in 1H25, keeping a close watch on any signs of inflation risk, which could come from the public-sector employees’ salary revision and higher minimum wage.
While our baseline remains positive, we have to be mindful of downside risks to the global economy and its spillover effects on the domestic economy.
Inter-related risks and issues include conflict in Ukraine and the Middle East escalating into wider regional conflicts, trade tariffs among the advanced economies, recessionary fears in the US economy and bumps on China’s recovery and persistent inflation amid volatile commodity prices and weather disruptions.
Lee Heng Guie is Socio-Economic Research Centre executive director. The views expressed here are the writer's own.
