PM Anwar hits the brakes on new taxes and subsidy cuts in Malaysia’s 2026 budget

KUALA LUMPUR – Prime Minister Anwar Ibrahim hit the brakes on unpopular new taxes and subsidy cuts when unveiling Malaysia’s Budget 2026 on Oct 10, appearing to have landed on a comfortable balance between fiscal discipline and populist concerns.

Datuk Seri Anwar, who is also finance minister, framed Budget 2026 as expansionary, even though the Treasury’s

proposed spending of RM419.2 billion

(S$128.7 billion)

was smaller than Budget 2025’s RM421 billion.

To achieve this, his administration has included contributions by government-linked and state-owned bodies. They are expected to pour in RM50.8 billion for a final tally of RM470 billion allocated for 2026, compared with RM452 billion in 2025.

Mr Anwar announced several new revenue streams, such as raising the excise duty on cigarettes by 2 sen per stick, and an increase of 10 per cent on liquor. However, he also vowed not to add any more financial burden on the public to fund infrastructure and aid.

At the same time, he announced continued financial assistance, such as yet another RM100 one-off cash aid for 22 million Malaysians above 18 in February 2026, ahead of Ramadan and Chinese New Year. Gig workers will also get matching contributions of up to RM600 a year for their retirement savings scheme.

“We reject the culture of reckless debt accumulation, we fight against leakages and corruption, and we despise the lavishness of the elite, paid for with the people’s suffering,” Mr Anwar said while tabling the budget in Parliament.

Since 2023, his government has

cut subsidies to various items

, especially energy – including electricity, diesel, natural gas and most recently RON95 petrol, the most widely used transport fuel – alongside an expansion in taxes, most notably the

sales and service tax (SST)

.

“The building blocks were set out from last year’s budget so it builds on an existing structure,” said banking group CIMB’s regional economic and market analysis head Nadia Jalil.

These existing measures have allowed Mr Anwar to propose less spending for the first time since coming to power in 2022, even though Budget 2026 comes with only small increases in “sin” and luxury taxes and no new subsidy cuts.

By earmarking just RM419.2 billion in spending – the first time in five years that Malaysia’s federal budget has not increased – alongside a huge 6.7 per cent jump in tax revenue despite slowing economic growth, the fiscal deficit is expected to narrow to 3.5 per cent in 2026.

This continues a steady decrease from 4.1 per cent in 2024, and a projected 3.8 per cent for 2025.

“After all the tightening measures that needed to be reviewed time and again to minimise political pain, Anwar is now limiting the margin for policy error and political miscalculation,” advisory firm Viewfinder Global Affairs’ managing director Adib Zalkapli told The Straits Times. Any further reforms would likely come only after a general election due by early 2028, he added.

Malaysia’s gross domestic product growth eased to 4.4 per cent in the first half of 2025, below the government’s earlier estimates of 4.5 per cent to 5.5 per cent for the year. This compares with a better-than-expected 5.1 per cent growth in 2024, amid what the Premier described as “global economic uncertainty and geopolitical and geoeconomic strife” driven by the

United States’ “tariff war”

.

The government’s forecast for 2026 is for the economy’s expansion to moderate to between 4 per cent and 4.5 per cent.

Although Mr Anwar had tabled Malaysia’s

fifth consecutive record budget

when proposing Budget 2025 in October 2024, the final tally for the year’s expenditure is estimated to come in at RM412.2 billion. This is in large part due to development expenditure coming up to RM80 billion instead of the initially proposed RM86 billion.

Budget 2026 allocates a small bump to RM81 billion for development expenditure, despite longstanding concern about public transport, healthcare, and education assets. This would help the Treasury stick to its vow of narrowing the budget deficit and reining in debt.

The government’s liabilities spiralled to RM1.5 trillion after the Covid-19 pandemic, and are expected to hit RM1.7 trillion in 2026, leading to interest payments on debt taking up 17 sen out of every ringgit spent by the Treasury on operating expenses.

Operating expenditure will also tick up by just 1.8 per cent in 2026, bucking the 3.3 per cent hikes in the previous two years. This will largely be due to a 14.1 per cent decrease in direct subsidies and social assistance to RM49 billion.

Subsidy cuts have been an unpopular but necessary reform. But after widespread backlash over SST increases implemented in July – which saw the government making various concessions such as on imported food items – a

promised retargeting of RON95 subsidies

excluding the richest 15 per cent of Malaysians failed to materialise.

Instead, pump prices were reduced to RM1.99 per litre from RM2.05 for Malaysians with driving licences while all foreigners will have to

pay a full float

currently at RM2.60.

All in all, Mr Anwar said the retargeting of subsidies under his government is set to save RM15.5 billion annually, meaning “more funds for welfare, addressing cost of living and more investment in quality public infrastructure”.

“The retargeting of subsidies into more aid for the poor means the government still believes in budgets that lean towards social welfare with an underlying objective of winning votes,” Kenanga Investment chief economist Wan Suhaimie Saidie told ST.

“This budget is to spruce up the balance sheet for 2027 where bigger outlays are expected ahead of the general election.”

With Sabah

headed for polls by December

and Sarawak’s legislative term expiring in early 2027, the two Bornean territories saw the biggest-ticket items allocated to various states in the federation.

Development allocation for Sabah is set to grow to RM6.9 billion in 2026 from RM4.4 billion in 2022, while Sarawak will receive RM6 billion, more than double the RM2.9 billion in 2022.

A slew of infrastructure projects in the two states for

electricity and water supply

, but especially improving roads, will also cost over RM50 billion to federal coffers. An undersea cable spanning some 3,190km from Johor to Sarawak and on to the easternmost Sabah to improve digital connectivity is expected to cost another RM2 billion.

Sabah and Sarawak’s political landscape are largely dominated by local parties, unlike the national coalitions that are ubiquitous in Peninsular Malaysia. Hence, “the use of infrastructure spending to bolster his popularity in the eastern states is in keeping with the narrative that being on the same side as the federal government has its benefits”, according to Mr Adib.