Budget 2026 points to a steadying of the fiscal ship. The government doubled down on fiscal consolidation, with the aim of narrowing the fiscal deficit to 3.5% of GDP in 2026 from 3.8% of GDP in 2025. This is in line with our expectations and underscores our view that the pace of fiscal consolidation will be modest, balancing various policy priorities. 

The economic assumptions underlying revenue growth are fairly realistic, with real GDP growth pegged at 4-4.5% (OCBC: 3.8%) and headline inflation expected within the range of 1.3-2.0% (OCBC: 1.5%). Tax revenue collections are expected to grow broadly in line with nominal GDP growth, while non-tax revenues are expected to contract reflecting a drop in global commodity prices and reduced dividends from Petronas. 

The increase in revenue collections will also be supported by some new tax measures. The government announced higher excise duties on cigarette products and alcoholic beverages, effective November 2025. It will also increase introduce a carbon tax for specific sectors such as iron, steel and energy sectors. Both in line with our expectations. 

Central government expenditures are forecast to rise modestly in 2026, with the bulk of the increase coming from emoluments and pensions. The government remains focused on subsidy rationalisation, which we view as positive. Subsidy and social assistance expenditures are forecasted to drop by 14.2% YoY in 2026. Even so, the government continues to focus on supporting households with cash assistance through the Rahmah Cash Contribution and Sumbangan Asas Rahmah to help mitigate cost of living pressures.

Budget 2026 also emphasised the other priorities of the government, to which will help bolster medium-term growth prospects. These include supporting small and medium enterprises looking to expand into new markets, promoting local tourism, supporting regional growth in Johor, Sabah and Sarawak and enhancing support for higher value-added activities along the supply chain in sectors such as electronics. 

As such, although the fiscal support to economic growth from Budget 2026 is largely neutral, Budget 2026 affirms the governments’ commitment to pushing ahead with reforms and building domestic economic resilience to counter building external headwinds.