Malaysia's New Fiscal Reforms

By Danial Azhar and Ashley Tang

KUALA LUMPUR (Reuters) – Malaysia will introduce several new taxes, reduce subsidies for a commonly used fuel, and raise the minimum wage starting next year, Prime Minister Anwar Ibrahim announced on Friday, unveiling a record budget spending plan of 421 billion ringgit ($98 billion).

Anwar stated that the government aims to narrow the deficit to 3.8% of gross domestic product (GDP) next year, down from an estimated 4.3% in 2024.

> "Next year, the fiscal reforms will be more aggressive and inclusive, with the progressive expansion of tax revenue and the targeting of subsidies for those most in need," Anwar, who also serves as finance minister, told parliament.

Since assuming office in 2022, Anwar has focused on trimming a substantial subsidy bill and boosting tax collections to decrease reliance on oil and gas revenues, with a medium-term goal of reducing the fiscal deficit to 3% of GDP.

This year, the government has cut blanket subsidies for diesel, electricity, and chicken, shifting towards a targeted approach that primarily assists the needy. This targeted policy will be extended to RON95 transport fuel in mid-2025.

On the revenue front, the government will progressively extend the sales and services tax starting next May, applying it to commercial services, non-essential goods, and premium imports like salmon and avocados.

A proposed 2% tax on dividend incomes above 100,000 ringgit, along with implementing a global minimum tax starting next year, was also disclosed. The excise duties on sugary drinks will increase in stages from January to help reduce national obesity and diabetes rates, and a carbon tax on the iron, steel, and energy industries will be introduced by 2026.

The savings from the tax and subsidy adjustments will be redirected towards education and healthcare, with cash aid for 9 million low-income individuals rising to 13 billion ringgit next year from 10 billion ringgit in 2024. Furthermore, broader tax relief measures for first-time homeowners, education, and health insurance premiums were announced.

Budget documents released prior to Anwar's speech indicated that 52.6 billion ringgit would be allocated for subsidies and social assistance in 2025, showing a 14.4% decrease from this year.

However, the government did not announce plans to reinstate an unpopular goods and services tax (GST), which some analysts have suggested is essential for achieving fiscal targets.

OCBC Senior ASEAN Economist Lavanya Venkateswaran noted that the GST "will likely be required at some point for fiscal consolidation," emphasizing that if the targeted RON95 subsidy rationalization does not yield expected fiscal savings, the option to eliminate these subsidies should remain open.

Progressive Wage Policy in 2025

Anwar also revealed plans to implement a progressive wage policy starting next year, increasing the minimum wage to 1,700 ringgit per month from 1,500 from February 2025.

The budget forecast indicates that federal revenue would rise 5.5% to 339.7 billion ringgit in 2025, up from 322.1 billion ringgit this year.

The planned spending for 2025 represents a 3.3% increase over this year's 407.5 billion ringgit, including 86 billion ringgit for development expenditure and 335 billion ringgit for operating expenditure.

Operating expenditure, which constitutes nearly 80% of the budget, is projected to rise 4.2% from 2024, largely driven by public service restructuring that will include pay increases for 1.6 million government employees.

The state energy firm Petronas is expected to pay the government a dividend of 32 billion ringgit in 2025, consistent with this year, as it anticipates declining petroleum-related output and revenue.

The government expects the economy to grow 4.5%-5.5% in 2025, with this year's growth forecast adjusted to 4.8%-5.3%, up from 4%-5% previously.

It is projected that headline inflation will remain manageable next year at 2% to 3.5%, compared to this year’s revised estimate of 1.5% to 2.5%.

($1 = 4.3070 ringgit)