Budget 2027 – Goodies galore

IN the fourth year of administration, and as the Madani government presented its fifth, and likely final budget before the next general election, Budget 2027 was expansionary yet disciplined in its projections.

Without a doubt, it was a budget for all, covering every Malaysian citizen with handouts, goodies, higher minimum wages, and tax reliefs. With a total allocation of RM459.8bil, the Malaysian budget hits yet another record high.

On target

Headline economic growth is now projected between 4.8% to 5.3% for 2026 before easing to 4.2% to 5.2% next year.

The forecast is within our estimates of a gross domestic product (GDP) growth of 5.3% this year and between 4.5% to 5% next year.

Overall revenue for 2027 is now estimated to grow to RM380.8bil, up 4.7% from the revised revenue forecast of RM363.6bil for this year and 11% from the original forecast of RM343.1bil.

The revised fiscal estimates for 2026 are in line with our estimates for this year. Still, the surprise comes from higher revenue and expenditure estimates for 2027, which are 7% and 6.7% above our earlier estimates.

Drilling down, the government’s revenue will rise as direct and indirect tax collection increases, driven by improved economic activity and stronger compliance.

E-invoicing, which has improved tax compliance and enforcement, and the stamp duty self-assessment system, starting in January 2027, are expected to boost government coffers.

Higher petroleum-related revenue, including dividends, will also continue to drive government revenue.

The government expects direct tax collection to rise by RM8.9bil, mainly driven by RM4.9bil in corporate income tax and RM3bil from individuals, while indirect tax collections are expected to increase by RM7.4bil, of which RM6.3bil will come from higher sales and service tax (SST) collection.

On SST, Budget 2027 did not address the improved SST mechanism the government wanted to implement to reduce the cascading impact of multi-stage taxation on businesses. Perhaps the government may introduce it when the timing is right, after a detailed study.

Despite the higher tax collection, the government’s tax revenue as a percentage of GDP is expected to remain steady at 12.8% in both 2026 and 2027.

In essence, direct tax collection is expected to rise in line with nominal GDP growth, which is an achievement, especially without any new taxes.

Surging expenditures

On expenditure, the government expects 2027 operating expenditure to increase by 3.8% to RM376.8bil from the revised RM363.1bil estimated for this year. Compared with the original forecast of RM338.2bil, the government’s expenditure is expected to jump by 11.4% or RM38.6bil.

The increase mainly comes from the fuel subsidy bill, which is expected to remain at RM40bil next year. Although overall subsidy and social assistance total expenditure is expected to dip to RM72.7bil in 2027 from RM74.5bil in 2026, it is due to a higher base effect from this year’s revised budget, which jumped by RM19.2bil, or 34.7%.

The nation’s debt service charges (DSC) are expected to increase to RM61bil in 2027 from RM57.3bil this year and RM53.7bil in 2025. As a percentage of GDP, the nation’s DSC will rise to 16.2%.

Fiscal discipline

On a positive note, the government’s fiscal journey remains on track, with the budget deficit expected to narrow to 3.6% this year and 3.3% next year, in line with our estimates.

Higher nominal GDP growth, compared with total debt growth, is expected to keep the government within the statutory debt and GDP target of 65% this year and next year.

Dividends

With higher global oil prices, Petroliam Nasional Bhd (PETRONAS) dividends are expected to rise to RM27bil in 2026, up from the earlier Budget 2026 estimate of RM20bil.

For 2027, the government now expects dividends from the national oil company to jump to RM32bil. This will help the government meet the fuel subsidy requirements.

As a percentage of revenue, petroleum revenue will make up just 15.1% of total government revenue in 2026 from 17.5% in 2025. However, the share will increase again to 16.1% in 2027.

Manageable

The government’s emoluments, DSC, and retirement charges are expected to increase by 2.9%, 4.2%, and 6.5%, respectively, in 2027.

The pace of increase will be slower than this year’s jump of 6.9%, 11%, and 6.7%, respectively.

The three key expenditures will make up 57.5% of total operating expenditure in 2026, down from 58.6% in 2025, while the government’s fixed expenditure will remain at 57.6% in 2027. Although these three items remain large expenditures for the government, they have now fallen below 60%, which is seen as positive.

Tax measures

Budget 2027 also proposed reducing the tax rate for micro, small and medium enterprises (MSMEs), while MSMEs with revenue of RM50mil or less will not be impacted by the new minimum wage of RM2,000 per month starting June next year, as they have been given a temporary exemption, taking into consideration the burden they face in managing overheads.

Another interesting angle is the introduction of a new minimum wage of RM2,500 for graduates and semi-skilled workers, which will help lift the income of new job entrants.

For individuals, the government increased the personal tax relief to RM12,000, which is seen as positive, and lowered the chargeable tax rate for those in the chargeable income band of RM70,000 to RM100,000 and RM100,000 to RM150,000 by one percentage point to 18% and 24%, respectively.

In addition, taxpayers with chargeable income over RM1mil will now be taxed at 30% instead of 28%.

Disappointingly, the budget did not address the narrow chargeable income bands or the large jump in the applicable tax rate when chargeable income moves from one band to another.

Currently, taxpayers in the RM50,001 to RM70,000 band who move to the next band of RM70,001 to RM100,000 face an eight-percentage-point jump from 11% to 19%, while those in the RM70,001 to RM100,000 band who move to RM100,001 to RM150,000 face another six-percentage-point jump from 19% to 25%.

In conclusion, as expected, Budget 2027 is a budget for all.

Despite no new taxes, the budget is pragmatic, forward-looking, and realistic, balancing the nation’s needs while remaining friendly.

Pankaj C. Kumar is managing director of Datametrics Research and Information Centre. The views expressed here are the writer’s own.