The government is expected to allocate a higher development expenditure (DE) to RM94.5 billion in Budget 2025 from RM88.5 billion in 2024's forecast, to boost infrastructure play, Kenanga Investment Bank Bhd (Kenanga Research) said.

In a note today, Kenanga Research said transport is expected to continue holding the largest share of DE, primarily driven by the anticipated revival of the Mass Rapid Transit 3 project and the Kuala Lumpur-Singapore High-Speed Rail.

Other DE spending is likely to focus on enhancing agricultural resilience, boosting investments in education, healthcare and affordable housing, as well as national security amid regional tensions.

Kenanga Research also expects a higher operating expenditure (OE) of RM306.5 billion to be allocated in Budget 2025 compared to RM302.5 billion in the 2024 forecast despite the anticipated removal of the RON95 blanket fuel subsidy in the second half of 2025.

It anticipated that the savings would be redirected to targeted assistance, civil servant salary increases and progressive wage policy.

Kenanga Research said the government's revenue is projected to rebound by 4.3% to RM316.5 billion in 2025 against 3.6% (RM303.5 billion) forecast in 2024, or compared to the Finance Ministry's 2024 target of RM307.6 billion.

"This increase is expected to be driven by revenue-enhancing measures and a steady expansion in domestic economic activity," it said.

On the economic front, Kenanga Research maintains its 2025 GDP growth forecast of 4.8% versus the 5% forecast for 2024 amid heightened external risk.

It also projects a fiscal deficit of 4% of GDP in 2025 against a 4.5% forecast in 2024, as slower GDP growth projection next year may hinder efforts of reducing unnecessary spending and wastage.

"We also anticipate the government to set aside RM5 billion to RM10 billion in contingency funds as a buffer, potentially serving as a stimulus in case of a significant global downturn.

"We recommend that the government prioritise pro-growth policies by focusing on high-value projects with strong multiplier effects to stimulate the economy in this challenging environment," it said.

On tax collections, Kenanga Research said although a broad-based consumption tax is unlikely to return soon, the government is expected to focus on alternative measures such as fully implementing e-invoicing and introducing the Global Minimum Tax.

Kenanga Research also hopes the government prioritises income tax collection by simplifying the tax system and tackling tax evasion and exemptions to increase revenue.