KUALA LUMPUR: Elevated global oil prices are expected to keep Malaysia’s fuel subsidy bill at about RM40 billion in 2027, as the government balances cost-of-living support with efforts to narrow its fiscal deficit to 3.3% of gross domestic product (GDP).
Treasury secretary-general Tan Sri Johan Mahmood Merican said the government is seeking to cushion households from higher living costs while strengthening public finances, following a surge in fuel subsidy expenditure amid the conflict in West Asia and rising global oil prices.
“Oil prices are still above US$100 (RM408) a barrel, and there is no sign of them receding anytime soon,” Johan said at a post-Budget 2027 briefing today.
He said the government’s policy of insulating the people from elevated oil prices meant fuel subsidies would remain high, with the bill expected to reach about RM40 billion by the end of this year.
“Our original budget was, of course, based on oil prices below US$70 per barrel. We budgeted only RM15 billion for petroleum-product subsidies, and our best estimate will probably be closer to RM40 billion by the end of the year. We expect a similar level next year as well,” he said.
The estimated RM40 billion bill represents a RM25 billion increase from the original 2026 allocation, highlighting the pressure higher global energy prices have placed on public finances.
However, the increase in gross subsidy expenditure does not translate directly into an equivalent rise in the fiscal deficit, which also depends on government revenue and other expenditure.
The government is targeting a fiscal deficit of 3.3% of GDP in 2027, down from a projected 3.6% this year and 3.7% in 2025.
Under the Fiscal Responsibility Act, the government aims to reduce the deficit to 3% by 2028.
Johan acknowledged that the 2026 deficit projection had slipped from the original target of 3.5%, but said the government remained committed to its medium-term fiscal trajectory.
“Against the backdrop of reducing the deficit from 5.5% in 2022 to 3.7% in 2025, this year we are projecting 3.6%. It is a slight slippage from our original budget of 3.5%, but it is still a reduction,” he said.
“We are committed to targeting 3.3% next year in order to remain on track to achieve the 3% commitment by 2028 under the Fiscal Responsibility Act.”
The government revised its 2026 deficit projection after the West Asia crisis affected fuel subsidies, according to the Budget 2027 speech.
The Finance Ministry’s Pre-Budget Statement said subsidy rationalisation had generated savings of around RM15.5 billion annually, helping the government absorb higher fuel subsidy costs.
Johan said the government had undertaken politically difficult reforms, including changes to electricity, petrol and diesel subsidies, as well as measures to widen the tax base through changes to the Sales and Service Tax.
“If you had told me in 2023 that we would be undertaking reforms on subsidies covering electricity, petrol and diesel, I would probably have said it was beyond my lifetime,” he said.
“But this is a government that was very conscious of the stretched fiscal position it inherited and understood that, if we were to transform the nation and take it to the next level, we needed to strengthen the nation’s finances.”
The reforms were necessary to rebuild the country’s fiscal position, although they were not necessarily popular, he added.
The government has introduced targeted subsidy mechanisms for electricity, diesel and RON95 petrol, aiming to reduce leakages and direct assistance to eligible recipients.
In his Budget 2027 speech, Prime Minister and Finance Minister Datuk Seri Anwar Ibrahim said total subsidies, assistance and incentives were expected to exceed RM80 billion next year, with fuel subsidies accounting for RM40 billion.
Anwar also said the allocation for Sumbangan Tunai Rahmah and Sumbangan Asas Rahmah would increase to RM16 billion in 2027 from RM15 billion previously, as the government continued to channel assistance to households.
Johan said savings from fiscal reforms had helped the government increase assistance to the people and allocations to states.
He said every state had received higher allocations, regardless of whether its administration was aligned with the federal government, adding that the Finance Ministry had engaged state governments to understand their priorities and reflect them in project selection.
Beyond the fiscal outlook, Johan said elevated global oil prices and supply disruptions arising from the conflict in West Asia had increased uncertainty over the economic outlook.
The government has revised its 2026 GDP growth forecast upwards to 4.8% to 5.3%, from the previous range of 4% to 5%, supported by exports and resilient domestic demand. However, it expects growth to moderate to between 4.2% and 5.2% in 2027 as external risks persist.
“With the ongoing uncertainties globally, we see more risks on the downside. Therefore, we see a slightly lower range for growth next year, at 4.2% to 5.2%,” Johan said.
“Notwithstanding that, we are still riding on strong domestic fundamentals, and the strength of the economic cycle appears to have more legs as we continue to see relatively strong growth going into next year.”
Inflation is expected to remain relatively contained, although supply disruptions could put upward pressure on it.
“We are nearing the end of the year with inflation forecast in the range of 1.5% to 2.5%,” Johan said.
“We expect employment to remain more or less at full-employment levels, although there may be a slight uptick in inflation because supply disruptions from the Middle East will have some knock-on effects, notwithstanding the measures taken to insulate the people.”
The government has projected inflation of 1.5% to 2.5% for 2026, while the 2027 outlook remains exposed to global energy and supply-chain developments.
Johan said the government would maintain an expansionary budget while ensuring spending remained within prudent fiscal limits. “At the end of the day, we still have an expansionary budget, but it is being implemented within what we would consider prudent and responsible fiscal management.”
Federal government expenditure is budgeted at RM459.8 billion in 2027, comprising RM376.8 billion in operating expenditure and RM83 billion in development expenditure. Federal revenue is projected to rise to RM380.8 billion.
Johan said the government’s broader spending and investment plans also included commitments from government-linked investment companies (GLICs), public-private partnerships, federal statutory bodies and companies under the Minister of Finance Incorporated.
“When you take into account public-private partnerships, GLICs and statutory bodies, the total comes to RM510 billion, which is a significant increase from RM470 billion,” he said.
The RM510 billion figure includes federal operating and development expenditure, as well as investment commitments from other entities, and should not be interpreted as federal government expenditure alone.
Johan also highlighted the distinction between operating and development expenditure, saying the government could borrow to finance development spending, while operating expenditure had to be funded through government revenue.
The government’s fiscal consolidation efforts are also reflected in its debt projections. Federal government debt is expected to decline from 65.2% of GDP in 2025 to 64% in 2026 and 63.7% in 2027, according to Budget 2027 estimates.
Johan said the government’s reforms were beginning to produce results, pointing to stronger economic growth, low unemployment and inflation below 2%.
“Despite strong growth and low unemployment, inflation is remarkably contained below 2%. Of course, that also links back to the subsidy policy the government has undertaken,” he said.
He added that Malaysia’s improved competitiveness ranking reflected the consistency of its policy framework and reform agenda.
“Certainly, this success is not accidental, but is the result of consistency and commitment to reform and the policy framework that has been set out.”
Johan said the next challenge was ensuring that strong macroeconomic performance translated into improvements felt by individual Malaysians. “We may seem to have all this success at the macro level, but it does not yet seem to translate, at least in terms of Malaysians being happy.”
He said Budget 2027 placed greater emphasis on implementation and inclusiveness to ensure that economic progress benefited people across different income groups and communities.
“We are still committed to reform, but with a special emphasis on implementation to ensure that success at the macro level is also felt at the individual level,” he added.