Malaysia faces fiscal deficit challenges from high subsidy costs

Malaysia faces challenges in reducing its fiscal deficit due to high subsidy costs, particularly if geopolitical tensions between the United States and Iran drive up energy prices. According to a review by BMI, a Fitch Solutions company, government spending may exceed projections if conflicts in West Asia persist.

Subsidies and social assistance are expected to reach RM72.7 billion by 2027, accounting for 19.3 percent of the government's operating budget, making it the second-largest expenditure component after emoluments. BMI projects the fiscal deficit will narrow to 3.4 percent of GDP by 2027, slightly higher than the government's 3.3 percent target.

To mitigate these pressures, Nurhisham Hussein, Economic Advisor at the Prime Minister's Office, noted that improving targeted subsidy mechanisms and curbing leakage and smuggling could generate savings between RM5 billion and RM10 billion. These savings could then be redirected to those most in need, helping the government balance development spending with social assistance and deficit reduction goals.