Key Points

• Past fiscal reforms provide a timely buffer against the oil shock. Stronger revenues and RM15.5bn of annual subsidy savings should help cushion higher energy costs, allowing fiscal consolidation to slow rather than reverse.

• Budget 2027 should remain fiscally disciplined, with the focus shifting from new reforms towards execution. On revenue, stronger tax collection and SST broadening reduce the need for another major tax overhaul, putting greater emphasis on compliance and collection efficiency. On spending, consolidation should rely more on better targeting and efficiency than broad austerity.

• Household relief will remain necessary, but a return to blanket subsidies is unlikely. We expect support to remain targeted through BUDI MADANI, STR/SARA and other measures, cushioning the cost-of-living shock without structurally raising expenditure.

• Protecting development spending will be key to turning the investment boom into a productivity upcycle. We expect Budget 2027 to maintain or increase development spending, with priorities around human capital, connectivity, digital and industrial infrastructure, and energy capacity, helping translate investment into domestic value-add, productivity and higher real wages.

• Fiscal credibility should provide an anchor for MGS and MYR amid global volatility. If higher subsidies remain a temporary response to the oil shock while fiscal reform and productive investment stay on track, the Budget should reinforce the structural case for Malaysian bonds and the ringgit.