Government announced MyKad and driver’ license will be used to limit subsidised Ron 95 petrol to 300 litre per month commencing September 30th. Beyond 300 litre, the petrol price will not be subsidised.
Rafizi, who was adamant against the use of IC and insistent on targetted subsidy using his RM85 million spent PADU database, voiced his scepticism to the MOF-preferred system that allows subsidy to all Malaysians. And naturally, there will be others who will raise various issues, including claims 300 liter is not enough.
Be that as it may, cutting subsidy is one of the many option to elevate the primary fiscal problems which include high public debt-to-GDP ratio (64.6% for 2024) and over-reliance on petroleum revenue, limited tax base and increasing public expenditure for public services.
Growing the economy is another possible option, but it is dependent on the various factors to produce the desired fiscal outcome and is a discussion by itself.
A historical overview of Malaysia’s fiscal situation would certainly help to understand how its revenues, expenditures, deficits, and debt evolved since independence, and what was the patterns that shaped public policy.
In the post-Independence and early nation-building years of 1957 to the 1970s, Malaysia relied on commodity exports such as rubber, tin, later palm oil and petroleum.
Public finances were used for nation-building, rural development, and infrastructure under the early Malaysia Plans. Deficits were modest, mainly for development expenditure. With petroleum revenues from Petronas (established in 1974), the state gained a new fiscal pillar. Debt remained manageable at <40% of GDP.
Then came Mahathir’s first era for industrialisation through 1981–1990s. It was characterised by ambitious industrialisation and mega-projects. The period was identified with heavy industries, privatised highways, Proton, KLCC, and Putrajaya new administrative centre.
However, during the 1980s, there were a crash in the commodity market and it hit revenues hard, thus pushing deficits above 10% of GDP in 1982–83. Government had to cut spending and privatised State-owned Enterprises (SOEs) to stabilise finances by the late 1980s. By the 1990s, rapid export-led growth boosted revenues. There was near balance budget and even small surpluses by 1993–1997.
Towards the end of Mahathir’s premiership, Malaysia was hit with the Asian Financial Crisis in 1997–1999. The crisis caused economic contraction, lower trade revenues, and capital flight. Government adopted expansionary budgets for economic stimulus, corporate bailouts, and development spending. Fiscal deficit widened to 5–6% of GDP and debt began to rise but remained sustainable.
After the crisis and throughout the 2000s, Malaysia never returned to budget surpluses and faced persistent deficits due to ballooned fuel subsidies (especially after oil price hikes post-2003), growing civil service wage bill, and continuous infrastructure projects.
Deficits averaged 4–6% of GDP throughout the decade. Debt climbed from around 35% (2000) to approximately 50% of GDP by late 2000s. During Najib era (2008-2018), there was a global financial crisis and deficit peaked in 2009 at 6-7% of GDP as Malaysia pumped fiscal stimulus to the tune of RM60 billion.
Subsequently, Najib introduced GST in 2015 to broaden the tax base and reduce reliance on petroleum revenue. Blanket fuel subsidies were removed in 2014–2015, replaced by managed float and BR1M cash transfers.
Deficit fell steadily from 6.7% (2009) to about 3% (2017). Debt ceiling was formally capped at 55% of GDP, but often tested. Fiscal consolidation progress was real, but politically costly to Najib because GST was unpopular and PH gained political mileage.
Then the political upheaval which saw the end of the BN government and taken over by a PH government led by Mahathir, the Prime Minister that ironically got Malaysia into the fiscal constrain and Najib’s attempt to address the problem over threw the government.
In 2018, GST was repealed and replaced with SST which resulted in revenue losses of about RM20 billion annually. Subsidies partially reintroduced such as fuel price caps.
Then came the COVID-19 pandemic in 2020, a fiscal shock and Muhyiddin announced a massive stimulus of over RM300 billion, in which part of it is off-budget. Deficit surged to about 6.2% (2020), 6.4% (2021). Debt ceiling raised (from 55% to 60%, then 65%). Fiscal space narrowed, and reliance on Petronas dividends grew again.
The present phase is the post-pandemic consolidation. There was a global commodity boom since 2022 and that lifted oil and oil palm revenue. However, subsidies reached a record high of aproximately RM80 billion and it swelled public spending. Deficit remained high at 5.6% of GDP.
For the 2023–24 budget, Prime Minister and Minister of Finance, Anwar Ibrahim introduced Fiscal Responsibility Act (FRA). He pledged gradual deficit reduction from 5% (2023) to 4.3% (2024), targetting less than 3.5% by 2026–27.
New tax measures explored such as Capital Gains Tax (2024), High-Value Goods Tax, and on-going debate for possible GST revival. The current measure is for targeted subsidy reforms (diesel in 2024, petrol for end of September 2025).
Despite that, debt ratio of 64% of GDP remain as one of the highest among ASEAN peers. Malaysia face the fiscal risk of an ageing population, high subsidy culture, dependence on commodities, and narrow tax base.
Historically since 1998, Malaysia has a structural deficit and never ran a budget surplus. It has a revenue vulnerability of heavy reliance on oil, gas, and Petronas dividends coupled with a weak tax base. There is a subsidy burden for fuel and food which consume 10–25% of annual expenditure in some years.
Debt has grow from 30% of GDP (1997) to 64% as of today. Every global/ regional crisis (1980s, 1997, 2008, 2020) is responded with widened deficits sharply. After each crisis, government tries gradual consolidation — but reforms often reversed due to political resistance.
Malaysia’s fiscal history is a cycle of stimulus during crises, consolidation afterward, but never fully achieving balance. Structural challenges — subsidies, narrow revenue base, and commodity dependence — mean the deficit has become a permanent feature.
Growing the economy out of the fiscal problem?
Today’s fiscal consolidation plan is the latest attempt to break this cycle, but political economy constraints remain significant. Is economic growth the solution to get out of the present fiscal quagmire?
Malaysia’s economic growth and its fiscal situation are strongly linked, but in a way, it create both opportunities and vulnerabilities.
Economic growth shapes fiscal health in which higher growth translates into higher revenue from corporate taxes, individual income taxes, SST/GST, and petroleum income taxes. Conversely, growth slowdown result in fiscal stress as exports, commodity revenues, and corporate profits shrink. Malaysia’s fiscal balance is procyclical, that is it worsens sharply when growth slows.
Fiscal policy affects growth too. Expansionary spending supports growth during crises. Infrastructure, subsidies, and transfers stabilised demand in 1998, 2009, 2020. Deficit spending boosts short-term growth, but at a cost of rising debt ratios and risk of crowding out private investment if deficits are persistently financed domestically.
In other words, Malaysia has used fiscal deficits as a counter-cyclical tool, but without returning to balance after recovery — leading to structural deficits.
Growth in Malaysia is partly tied to commodities (oil, gas, palm oil). When global prices rise, both GDP growth and fiscal revenues improve. When prices fall, both growth and fiscal balances deteriorate. Thus, Malaysia’s growth-fiscal link is amplified by commodities.
During high growth, governments often expand subsidies and wages, raising structural spending. When growth slows, subsidies are politically hard to cut, so deficits widen further. This creates a ratchet effect: expenditure rises with growth but does not fall proportionally in downturns.
Since 1998, Malaysia has never achieved a desirable surplus, despite periods of strong growth (5–7%). While growth improves the fiscal position, structural spending pressures in the form of subsidies, wages, and development spending prevented full consolidation.
Fiscal consolidation only happens if growth is strong and political will exists to reform subsidies or broaden the tax base such as the introduction of GST in 2015. If growth slows due to global trade shocks, current tariff wars, or structural slowdown, fiscal deficits may stay high at 4–5% of GDP.
Trump’s tariff shock together with the trend of narrowing trade surplus will result in a shrinking current account surplus and that will removes the cushion thus raising risk of twin deficits.
With high debt and ageing population, there is narrower fiscal space for future growth-supportive spending. The cycle of “stimulus in crisis, weak consolidation in recovery” means Malaysia’s fiscal health remains vulnerable to external growth shocks.
It means government need be innovative and creative to think beyond the usual solution to identify the growth path that does not come with the negativity of expansionary and structural spending.
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