Extra household support could add 0.4 percentage points to GDP growth: RAM

The 2027 Malaysian Budget is anticipated to inject an extra 0.4 percentage points to GDP growth next year, according to RAM Ratings. This projected growth increase is attributed to factors such as higher minimum wages, expanded tax reliefs, and larger cash assistance programs. RAM sees the budget as expansionary, while maintaining the government's fiscal consolidation path amidst external uncertainties and geopolitical risks.

The total household support measures will amount to around RM80 billion, encompassing sustained fuel subsidies, increased cash transfers, higher government pensions, and broader individual income tax reliefs. These measures are expected to boost disposable income and sustain domestic consumption. A 0.18 percentage points boost to GDP growth is forecasted from minimum wage hikes, whereas personal income tax reliefs and rate reductions could contribute up to 0.15 percentage points.

The additional 0.07 percentage points to GDP growth is expected from larger cash transfers and assistance, as stated by RAM. The government anticipates GDP growth to range between 4.2% and 5.2% in 2027, somewhat higher than the 4.0% to 5.0% range predicted by analysts. Government revenue is expected to grow by 4.7% to RM380.8 billion, driven by stronger tax collections and increased dividends from Petronas and Bank Negara Malaysia.

However, tax reliefs and lower income tax rates may reduce direct tax revenue by approximately RM2.96 billion. The budget projects operating expenditure at RM376.8 billion, with development expenditure increasing by 2.5% to RM83 billion, supporting infrastructure projects in Sabah and Sarawak, rural projects, and water initiatives.

The fiscal deficit is forecasted to narrow to 3.3% of GDP in 2027 from the estimated 3.6% this year. Nevertheless, government debt is projected to remain high at 63.7% of GDP, surpassing the 60% limit set by the Public Finance and Fiscal Responsibility Act. Fuel subsidies will continue to be a significant commitment, amounting to about RM40 billion, which will contribute to total subsidies and social assistance spending of RM72.7 billion.

RAM warns that broad-based subsidies could hinder fiscal consolidation unless they are more targeted. Micro, small, and medium enterprises will benefit from a one percentage-point tax rate reduction, expanded financing and guarantees, and incentives for digitalization and productivity improvements. The national minimum wage will be raised by RM300 to RM2,000, while graduates and semi-skilled workers could receive a minimum wage of RM2,500.

Although these measures may increase business costs, they could encourage investments in skills, technology, and productivity. RAM suggests that further subsidy targeting, revenue reforms, and productivity gains would be crucial for strengthening Malaysia's fiscal resilience and sustaining growth.