Budget 2026 To Reinforce Govt Commitment To Strengthen Fiscal Space - MBSB IB

KUALA LUMPUR, Oct 3 (Bernama) -- Budget 2026 will reinforce the government’s commitment to strengthening fiscal space, said MBSB Investment Bank Bhd (MBSB IB) today.

In a research note, the investment bank highlighted that since 2021, the fiscal deficit has narrowed by more than two per cent of gross domestic product (GDP), providing greater room to introduce counter-cyclical stimulus measures during future downturns. 

In the forthcoming budget, which will be tabled on Oct 10, MBSB IB estimated that the government might allocate slightly more for Budget 2026, at around RM430 billion compared to RM421 billion in Budget 2025.

“We estimate the size of fiscal deficit will decrease to RM78 billion in 2026, pushing down the deficit-to-GDP ratio to -3.6 per cent against a forecast of -3.8 per cent in 2025, assuming that economic growth remains moderate at 4.0-4.5 per cent,” the bank said. 

Expansion of current taxation

MBSB IB said the fiscal strategy in the forthcoming budget would focus on the expansion of current taxation, driven by the need to offset rising operating expenditure and the projected contraction in petroleum-related revenue for 2026.

It noted that in the past four budget cycles, policymakers had pursued revenue increases by either introducing new progressive taxation schemes or by extending the coverage of existing direct and indirect tax regimes. 

“This strategy directly supports the fiscal objectives codified under the Fiscal Responsibility Act (FRA). We think that the government may consider announcing a new tax or expanding current tax measures to increase revenue,” MBSB IB said.

Possible measures under Budget 2026 include higher personal income tax for the high-income bracket, further expansion of the sales and services tax, the expiry of import and excise duty exemptions for completely built-up electric vehicles, as well as subsidy targeting and rationalisation.

Petroleum-linked fiscal revenue

MBSB IB noted that petroleum-linked fiscal revenue would depend on oil price movements and expects Petronas’ dividend to the government could be further reduced in 2026.

Based on its in-house assumption, Brent crude oil prices are expected to remain stable, averaging between US$65 and US$70 per barrel in 2026.

“Despite the stability, there is, however, downside bias to the 2026 oil price forecast, partly due to potential oversupply in the global oil market. On top of that, we expect Petronas’ dividend to the Malaysian government to be reduced further for 2026 from an estimated RM32.0 billion in 2024 and 2025, respectively,” it said.

The bank pointed out that challenges faced by Petronas, particularly over control and revenue-sharing of resources in Sarawak, could affect its capacity to pay dividends.

Adding to the pressure, it noted that the outlook suggests cuts in other petroleum-linked earnings next year, specifically revenue from oil royalties and the Petroleum Income Tax.

“Weaker global demand and tighter trade rules could continue to constrain the mining sector's export outlook. The decline in petroleum exports, for example, has been weighing down on Malaysia’s external trade performance this year,” MBSB IB added.

-- BERNAMA