The Institute for Democracy and Economic Affairs has welcomed the government's third budget (Budget 2025), which showed a concerted effort to promote equitable growth, responsible fiscal management, and sustainable development while addressing key socio-economic challenges.

The institute however calls for attention towards the implementation and evaluation of the key initiatives to ensure the budget's intended outcomes are met, particularly in fiscal consolidation efforts and governance reforms.

Fiscal Responsibility and Consolidation

The government's continued effort towards fiscal consolidation is reasonable. The reduction of the fiscal deficit from 5% in 2023 to 4.3% in 2024 and a further projected 3.8% in 2025 reflects a serious effort toward reducing Malaysia's debt burden. The Public Finance and Fiscal Responsibility Act (PFFRA) will serve as a critical framework to guide prudent fiscal policy, which IDEAS supports. However, we are concerned about the increasing debt burden, as the debt service charges are projected to increase by 7.7%, reaching RM54.7 billion. As a result, we are spending more to service our debt, from 15.8% of the operating expenditure currently (2024) to a projected 16.3% in 2025.

IDEAS has stressed that further reforms are needed to address Malaysia's low tax revenue-to-GDP ratio, which, at a projected 12.4% in 2025, remains lower than upper middle-income countries of 18.8%. This is also a small increment from 12.3% in 2024 and lower than 12.6% in 2023. The government's cautious approach to revenue generation has resulted in relatively minor tax measures, such as the expansion of the sales and services tax to include non-essential items (that were previously exempted) and a 2% dividend tax for individual shareholders with annual dividend income exceeding RM100,000. While these changes are steps in the right direction, they are unlikely to boost government revenue significantly. While the deficit level is projected to decrease from 4.3% to 3.8% of GDP, the midterm fiscal framework sets a soft target of an average 3.5% deficit from 2025 to 2027 – to some distance from the below 3% target set in the PFFRA.

"Given our strong economic performance, with a GDP growth rate of 5.9% in Q2 2024, low inflation, robust wage growth, and a low unemployment rate, this is an ideal time for the government to implement broader revenue-raising measures or substantially reduce subsidies. The minor tax adjustments and modest subsidy rationalisation represent a missed opportunity and raise concerns about the government's ability to achieve its PFFRA-mandated fiscal targets," said Aira Azhari, Acting CEO of IDEAS.

Business and Trade

The reframing of incentive measures through the New Investment Incentive Framework aligns with policy shifts toward high value-added sectors like IC design and advanced technology. Measures to encourage private institutions to equip students with future job market skills are commendable, but a feedback loop with the industry is essential to ensure course relevance.

Budget 2025 also emphasises equalising regional development disparities with the formation of state-level economic clusters and tax incentives for six less developed states. Additional efforts to promote local supply chain linkages, improve industrial parks, and strengthen the Johor-Singapore Special Economic Zone (JSSEZ) will further support this goal. For the JSSEZ, the allocations for incentives and the facilitation centre can help both countries assist companies in expanding operations and addressing challenges like skilled talent shortages and bureaucratic hurdles.

With MSME exports in Malaysia standing at just 12.2% in 2023—well below the RMK-12 target of 25% for 2025—there is a need to enhance export opportunities for MSMEs. Recognising that a firm's size significantly impacts its internationalisation potential, the targeted allocation of RM1 billion under the Mid-Tier Companies Programme would help bridge this gap by specifically supporting companies that have the capacity and resources to export. However, implementation is key to ensuring a high uptake and utilisation rate of these funds. It is essential to accurately identify eligible firms using existing tools to pinpoint those best positioned to successfully export and fully benefit from this program. Evaluating current gaps in utilisation—such as reducing processing barriers and addressing a lack of awareness—will be important to maximise the effectiveness of this initiative.

Climate Change and Sustainability

The institute has welcomed the proposal to pilot carbon pricing in the iron and steel industry, as these sectors are challenging to decarbonise and will be affected by the upcoming EU Carbon Border Adjustment Mechanism (CBAM). With the EU being a major trading partner for Malaysia and significant export flows tied to machinery and industrial sectors, the urgency is heightened as Malaysia is projected to triple its steel production capacity and quadruple GHG (Greenhouse Gas) emissions from this sector by 2030.

Implementing this pilot carbon pricing mechanism would incentivise industries to decarbonise, supporting Malaysia's goals of reducing carbon intensity by 45% by 2030 and achieving net-zero emissions by 2050. It allows Malaysia to test its approach in steel and other high-emission industries, ensuring compliance with local regulations and international trade demands while addressing the challenges of carbon taxation.

Additionally, the 2025 Budget increases funding for Ecological Fiscal Transfers (EFTs) by 25%, from RM200 million to RM250 million, with half of the allocation contingent on the performance of state government expenditures. This incentivises states to preserve natural habitats while moving away from reliance on revenue from mining and logging. In the long term, we also advocate for a review of revenue sharing between the federal and state governments to promote sustainable land use policies.

Governance and Democracy

The governance agenda is a priority in Budget 2025. IDEAS has commended the government's plans to reform statutory body governance and merge overlapping entities, such as the Malaysian Aviation Commission (MAVCOM) with the Civil Aviation Authority of Malaysia (CAAM) and the Malaysian Investment Development Authority (MIDA) with InvestKL, to enhance public service delivery.

Successful institutional mergers require strong political will, so the newly formed coordinating office (Pejabat Penyelaras Badan Berkanun Persekutuan) needs a solid mandate for these reforms. Transparency is also vital, and we urge the government to keep Parliament and the public informed throughout this process.

Budget 2025 increases funding for oversight activities, with the National Audit Department's budget rising by 10.2% from RM 167 million to RM 184 million. Furthermore, the Parliament's allocation increased by 7.3%, from RM 166 million to RM 180 million, strengthening the Public Accounts Committees and Parliamentary Special Select Committees. This funding could support expert advice, research and reporting, and public consultations necessary for effective oversight. However, we urge the government to expedite the reinstatement of the Parliamentary Services Act (PSA) to grant Parliament greater institutional, administrative, and financial autonomy from the Executive branch.

Overall, Budget 2025 presents positive steps toward fiscal discipline and governance reform, but IDEAS said its success will depend on the government's ability to deliver on these commitments with urgency and transparency. Ensuring true institutional independence for Parliament remains a key concern, particularly in strengthening its oversight functions.

"While Budget 2025 sets the right direction, the real challenge lies in ensuring that our revenue base is widened, especially considering the low tax revenue-to-GDP ratio. It is important to remember that the amount of money needed to provide for the people's basic needs is significant, and there will be a time when the government will need to introduce new taxes to sustain its spending," added Aira.