PETALING JAYA: Malaysia’s plan to narrow its fiscal deficit to 3% of gross domestic product (GDP) by 2028 remains achievable, but economists said rising subsidy costs, volatile energy prices and uncertainty over revenue growth could complicate the government’s fiscal consolidation efforts.
Economists also said the government’s ability to meet its fiscal targets would depend on sustaining revenue growth, containing subsidy pressures and directing public spending towards investments that expand productive capacity, particularly if external shocks weigh on the economy.
They commented that Budget 2027 seeks to balance household support, economic growth and fiscal discipline, with its success depending on whether immediate relief measures and investment commitments translate into sustainable economic gains.
Bank Islam chief economist Imran Nurginias Ibrahim said the Budget’s immediate emphasis appeared to be on protecting household purchasing power while sustaining economic activity.
“The key challenge is ensuring that these supportive measures translate into sustainable growth without compromising fiscal discipline,” he told SunBiz.
The government has allocated RM16 billion for the Sumbangan Tunai Rahmah (STR) and Sumbangan Asas Rahmah (Sara) programmes, while raising the minimum wage to RM2,000 a month from June 2027.
However, Imran Nurginias said a prolonged geopolitical and energy-price shock could increase fuel subsidy requirements while weakening economic activity and tax revenue, complicating efforts to narrow the deficit.
The government projects federal revenue of RM380.8 billion in 2027, up 4.7% from RM363.6 billion in 2026. It aims to narrow the fiscal deficit to 3.3% of GDP next year, from an estimated 3.6% this year, before reaching 3% by 2028.
Imran Nurginias said the revenue target appeared attainable under the government’s baseline assumptions, supported by stronger tax collection and revenue-enhancement measures.
“However, delivery will depend on the resilience of domestic growth and non-petroleum revenue,” he said.
He added that sustained fiscal consolidation would require stronger structural revenue collection and disciplined expenditure management, rather than relying on higher petroleum receipts to offset rising subsidy costs.
IPPFA Sdn Bhd director of investment strategy and country economist Mohd Sedek Jantan said the 3% deficit target remained achievable, but the margin for error had narrowed.
He highlighted the pressure from RM72.7 billion in budgeted subsidies and social assistance, debt-service charges projected at RM61 billion and the government’s expected RM32 billion dividend from Petronas in 2027.
“The biggest risk is a prolonged geopolitical shock that keeps energy prices elevated, forcing the government to sustain fuel subsidies while weakening growth and tax revenue,” he told SunBiz.
Mohd Sedek said the projected 4.7% increase in revenue to RM380.8 billion was not unreasonable if domestic activity remained resilient, although the outlook was exposed to downside risks.
“Fiscal consolidation remains credible as a medium-term objective, but the trajectory is increasingly conditional on how the energy shock evolves and whether revenue gains translate into durable fiscal capacity.”
The government’s reliance on petroleum-linked income also highlights the challenge of strengthening public finances while containing subsidy costs, particularly if global energy prices remain volatile.
Beyond the fiscal outlook, Mohd Sedek said the Budget’s cost-of-living measures should be assessed against their ability to improve living standards over the longer term.
The higher STR-Sara allocation and RM750 million for Jualan Rahmah Madani and Jualan Agro Madani could support household purchasing power and access to lower-priced essentials.
However, he said cash assistance and discounted sales alone would not deliver structural improvements.
“Sustainable improvements require stronger wage growth, higher productivity and greater domestic supply capacity,” Mohd Sedek said.
He added that public spending should improve infrastructure, raise productivity and strengthen business confidence to attract private investment, rather than allow recurring assistance to add to fiscal pressure without expanding the economy’s productive base.
Juwai IQI global chief economist Shan Saeed said Malaysia’s economic fundamentals remained encouraging, with the economy expanding 5.7% in H1’26 and growth accelerating to 6% in Q2’26.
The Finance Ministry forecasts GDP growth of 4.2% to 5.2% in 2027, while Shan’s own more bullish working scenario puts growth at 5.3% to 6.5%, conditional on stronger investment execution, robust domestic demand and a supportive external environment.
He said consumption remained an important source of resilience, while manufacturing, semiconductors, information and communications technology and digital infrastructure offered avenues for expansion.
However, higher oil prices could benefit parts of the energy sector while increasing transport costs, production expenses and subsidy requirements, he said.
Shan said Malaysia should remain cautiously optimistic, stressing that investment commitments must translate into operating capacity, skilled employment and measurable productivity gains.
“The priority is not indiscriminate austerity. It is to raise the economic return on every ringgit spent, strengthen recurring revenue and direct public resources towards infrastructure, skills, innovation and projects that expand productive capacity,” he told SunBiz.
Lifestyle economist Dr Lalua Rahsiad said the Budget prioritised household welfare and wage growth over aggressive fiscal restriction.
She said the increase in the minimum wage to RM2,000, the proposed RM2,500 starting minimum wage for semi-skilled positions and graduates, changes to personal tax relief and the RM16 billion STR-Sara allocation were intended to give households greater financial breathing room.
However, she said the government’s fiscal trajectory remained exposed to geopolitical instability and further energy price increases.
“If global supply chains fracture or energy prices spike further, sustaining this level of domestic support will severely test our fiscal resolve,” Lalua told SunBiz.
She added that achieving the 3% deficit target by 2028 would require effective implementation of targeted subsidies and stronger domestic consumption.
