Budget 2025 is a noble attempt at balancing economic priorities with political realities. The government remains committed to fiscal consolidation, targeting a narrower fiscal deficit of 3.8% of GDP from 4.3% of GDP in 2024, broadly in line with our expectations (3.5-3.8% of GDP). The GDP growth assumptions for 2025 are reasonable at 4.5-5.5%, similar to our forecast of 4.5%.

The decision to broaden the tax base by increasing the scope of the sales and services tax, taxing dividends by 2% above a certain threshold, and laying the groundwork to introduce a carbon tax in specific sectors, are steps in the right direction. Bolder reforms such as re-introducing GST, however, remained off the table at this juncture. Similarly, for RON95 rationalisation, the can has been kicked down the road to mid-2025, with the intention to introduce targeted subsidies rather than eliminate these subsidies completely.

Importantly, however, the Budget 2025 stuck to its medium-term commitments. The focus on infrastructure development was clear from large allocations for on-budget development spending, the public-private joint venture, domestic direct investments by GLIC and through GEAR-Up efforts. This in tandem with efforts to bolster wage growth through higher minimum wages along with clearer guidelines for starting salaries for all job sectors, underscores an all-of-government effort to raise the standard of living.

For the government to achieve its 2025 fiscal deficit target, follow through on RON95 rationalisation is crucial. More importantly, if targeted RON95 subsidy rationalisation does not yield the anticipated fiscal savings, the door should remain open to eliminating these subsidies altogether. On the tax front, GST remains the elephant in the room, and is likely required at some point for fiscal consolidation to be achieved in a credible manner over the medium-term.

Notwithstanding, the wider inflation forecast range of 2.0-3.5% for 2025 suggests inflationary pressure could rise on the back of some of the pipeline fiscal measures. The minimum wage increases announced in Budget 2025 taken together with the previously announced civil servants’ salary increases in two phases, the first of which is December 2024 will bolster spending, and to that extent be inflationary. We expect Bank Negara Malaysia will remain watchful of these inflationary pressures. We will continue to assess the risks around our base case expectation of BNM keeping its policy rate unchanged at 3.00% in 2024 and 2025.