KUALA LUMPUR – Prime Minister Anwar Ibrahim unveiled Malaysia’s fifth consecutive record budget of RM421 billion (S$127.8 billion) on Oct 18, boosted by a RM13.5 billion increase largely driven by salary revision bonuses that will raise civil servant pay for the first time in over a decade.

       But there was no increase in development expenditure as Datuk Seri Anwar, who is also Finance Minister, eschewed large-scale projects in favour of infrastructure to support public well-being and industrialisation.

       “Now is not the time for mega projects,” he told Parliament, citing instead the need for flood mitigation works and the Rapid Transit System linking Johor and Singapore by 2027, as well as water supply and road transport facilities.

       Analysts believe the RM12 billion increase in income – which the Premier claims is the highest ever – for 1.6 million government employees and 900,000 pensioners will likely translate into continued momentum for private consumption, a key driver of 2024’s better-than-expected economic growth so far.

       The statutory minimum wage for the private sector will also be raised to RM1,700 monthly from RM1,500, with effect from February.

       Private consumption makes up about three-fifths of gross domestic product (GDP).

       “Civil servants’ salary hikes are set to positively influence Malaysia’s domestic consumption. This increase in disposable income is expected to drive demand for goods and services, particularly in key sectors such as retail, hospitality and consumer products,” Kenanga Investment’s head economist, Mr Wan Suhaimie Wan Saidie, told The Straits Times.

       By signing up, I accept SPH Media's Terms & Conditions and Privacy Policy as amended from time to time.

       However, Mr Suhaimie also warned that “the long-term success of this policy will depend on balancing wage increases with fiscal sustainability and addressing inflationary pressures that might emerge from heightened consumer demand”.

       The consumer price index is set to ease to 1.8 per cent in 2024, down from 2.5 per cent in 2023, but is expected to pick up again to between 2 per cent and 3.5 per cent in 2025, in part due to further subsidy cuts.

       In August, after Mr Anwar announced compounded civil service pay hikes of up to 43 per cent by 2026, AmInvestment Bank noted that it would automatically mean a better income-to-debt ratio for the workers and spur loan approvals for big-ticket items such as cars and houses.

       He also announced a RM500 bonus for all civil servants, and RM250 for pensioners to be paid in February.

       However, Budget 2025 saw development expenditure remaining flat at RM86 billion. Hence, the budget increase of RM13.5 billion expected to be spent in 2024 is purely due to operating expenses.

       Most of the increase in operating expenditure, from RM321.5 billion to RM335 billion, will be from the RM6 billion increase each for civil service wages and retirement payouts. Another RM4 billion will go towards government debt interest payments.

       These items alone will make up 60 per cent of the operating expenditure for 2025.

       Spending on subsidies and social assistance, however, is set to drop again by RM9 billion, or 14.4 per cent, despite cash transfers to the poorest 60 per cent of Malaysian adults rising to RM13 billion in 2025 from RM10 billion.

       Mr Anwar said that subsidies for the entry-level RON95 petrol will be slashed in mid-2025 for foreigners and the “ultra-rich” – or top 15 per cent of earners – who currently consume 40 per cent, or RM8 billion per year, of the fuel subsidies. The RM12 billion in subsidies for the other 85 per cent of Malaysians will be maintained.

       He also added that the government will look to exclude the top 15 per cent from subsidies that reduce fees by more than half at public higher learning institutes, as well as an undefined high-income bracket from heavily subsidised public healthcare.

       Despite the increased spending, the 2025 deficit is expected to shrink further to 3.8 per cent of GDP, down from 4.3 per cent in 2024, in line with the government’s aim to rein in liabilities that have spiralled to RM1.5 trillion after the Covid-19 pandemic.

       The improved fiscal outlook is supported by projected economic growth of 4.8 per cent to 5.3 per cent in 2024 and 4.5 per cent to 5.5 per cent in 2025, which will increase tax revenue, especially with a May 2025 expansion of sales and services tax on consumption.

       The Prime Minister did not offer details on what new items will be taxed, but said that basic food items would not be impacted, unlike imported premium products such as salmon and avocado.

       A new 2 per cent levy on dividend income that exceeds RM100,000 will also be introduced.

       Malaysia recorded 5.1 per cent growth in the first half of 2024, faster than the 4.1 per cent in the same period in 2023, and the disappointing 3.7 per cent for all of 2023.

       Private consumption growth accelerated to 6 per cent in the second quarter of 2024, with the full-year forecast at 5.5 per cent, up from 4.7 per cent in 2023.

       Projections are that private spending will continue to expand by 5.9 per cent in 2025, “mainly attributed to the improvement in disposable income... supported by sustained domestic economic activities... as well as the implementation of the Public Service Remuneration System”, the Finance Ministry said in its 2025 economic outlook report.