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The research institute has called on the government to broaden its revenue base, strengthen fiscal transparency and accountability, and channel more spending into productive investment under Budget 2027.
The Institute for Democracy and Economic Affairs (IDEAS) has set out a series of recommendations for Malaysia’s Budget 2027, covering fiscal policy, public spending, investment, social protection, sustainability, and institutional reform.
The recommendations follow the three key priorities of the fifth MADANI Budget: raising the ceiling for national growth, raising the floor for people’s living standards, and driving Reform in governance.
IDEAS said the proposals are intended to contribute to wider public discussion on Malaysia’s fiscal and reform priorities, while supporting constructive engagement with the Ministry of Finance, ministers and relevant ministries.
It also welcomed further engagement on the proposals, particularly those relating to Malaysia’s performance in the Open Budget Survey (OBS) and efforts to strengthen transparency, accountability and governance across the public sector.
Accountable governance
IDEAS said a better Budget should begin with a process that people can understand, scrutinise, and contribute to.
Malaysia scored 51 out of 100 for budget transparency in OBS 2025, below the 61-point benchmark for informed public debate. Its public participation score was 20, compared with 33 for Indonesia and 28 for Thailand.
For Budget 2027, IDEAS said gaps should be addressed across every stage of the budget cycle.
The Executive’s Budget Proposal should provide Parliament and the public with a fuller account of extra-budgetary funds, government financial and non-financial assets, contingent liabilities, and planned expenditure beyond the budget year.
It should also provide greater visibility over the longer-term sustainability of public finances. The Enacted Budget should similarly make clear what Parliament ultimately approved.
One practical approach proposed by IDEAS is to include the relevant Executive’s Budget Proposal documents in the approved legislative package or formally reference them in enacted legislation. This would link detailed proposed allocations to the appropriations ultimately authorised.
The Mid-Year Review, it added, should explain material changes to expenditure, revenue assumptions and programme implementation.
Meanwhile, IDEAS added, the Year-End Report should compare plans with actual results, including estimates against actual outcomes for borrowing, debt, macroeconomic forecasts and non-financial outcomes.
IDEAS also called for more structured opportunities for public participation during Budget formulation. It noted that Malaysia’s declining public participation score coincided with a move away from topic-specific Public Consultation Papers (PCPs) towards broader open submission and engagement mechanisms.
For Budget 2027, it proposed combining both approaches by maintaining open channels for anyone wishing to contribute, alongside PCPs setting out specific policy questions and options for informed feedback.
The Ministry of Finance should then publish a summary of the main inputs received and explain how they informed the final Budget, IDEAS said.
Build fiscal resilience for future crises
Budget 2027 should respond to immediate pressures from the West Asia energy shock while leaving Malaysia better prepared for future crises, according to IDEAS. This would require stronger fiscal buffers, more predictable revenue sources and sufficient investment in infrastructure and capabilities that can reduce Malaysia’s exposure to future shocks.
Firstly, IDEAS said Malaysia needs a broader and more sustainable revenue base. Malaysia’s federal tax revenue was approximately 12.8% of GDP in 2025 and is projected at 12.7% in 2026, based on Malaysia’s own fiscal data.
For internationally comparable regional data, the OECD’s latest harmonised figures for 2024 put Malaysia’s tax-to-GDP ratio at 13.0%, compared with 18.1% in the Philippines, 17.2% in Viet Nam, 17.1% in Thailand and 13.4% in Singapore.
Budget 2027 should therefore set out a credible pathway towards holistic tax reform, taking into account consumption, wealth, capital, property and income taxes.
IDEAS said reintroducing the strongest elements of the goods and services tax (GST), including a broad base, effective input-tax credits, fewer distortions between goods and services, and stronger digital administration, could be beneficial.
However, it said consumption tax reform alone cannot be expected to resolve Malaysia’s fiscal sustainability challenges.
Any reform should be based on a transparent assessment of its impact on affected stakeholders, particularly to ensure greater progressivity through better-targeted relief for lower-income households and small businesses.
Secondly, IDEAS called for a more predictable and transparent framework for PETRONAS dividends.
In Budget 2026, PETRONAS dividends were estimated at RM20bn for 2026, while total petroleum-related revenue was projected at RM43bn, or 12.5% of federal revenue.
These estimates were made before the escalation of the West Asia crisis, which subsequently pushed crude oil prices above US$100 per barrel. Actual petroleum-related revenues may therefore be higher than originally projected.
IDEAS noted that the Ministry of Finance has also highlighted the importance of reducing exposure to volatile commodity-based revenue.
Rather than determining the dividend primarily on an annual basis, IDEAS proposed a public, rules-based framework in which a base dividend is determined against PETRONAS’ profitability and a multi-year benchmark for oil prices.
Supplementary dividends could then be made available during periods of exceptional profitability.
The methodology, assumptions and any departures from the framework should be clearly disclosed in Budget documents, it said.
Third, IDEAS said fiscal resilience requires greater productive development expenditure, rather than stronger revenues alone.
Federal development expenditure has declined from RM90bn, or around 4.5% of GDP, in Budget 2024, to RM86bn, or 4.1% of GDP, in Budget 2025 and RM81bn, or 3.8% of GDP, in Budget 2026.
IDEAS said this downward trend sits against the scale of Malaysia’s future investment needs.
Energy transition is one area requiring sustained development expenditure. The National Energy Transition Roadmap (NETR) estimates that RM1.2tn to RM1.3tn of investment will be required by 2050, including investment in renewable generation, grid infrastructure and green mobility.
IDEAS said greater investment in domestic renewable energy, grid capacity and other transition infrastructure could also reduce Malaysia’s exposure to volatile global fossil-fuel prices, which can increase domestic energy and production costs and add to inflationary pressures.
Budget 2027 should therefore reverse the decline in productive development expenditure and prioritise investments that strengthen Malaysia’s resilience and support existing national strategies, including the NETR, New Industrial Master Plan 2030 (NIMP 2030) andNational Semiconductor Strategy.
Public spending cannot finance these ambitions alone, IDEAS said, but it has a role in providing infrastructure and catalytic investment to attract private capital.
Finally, subsidy rationalisation should respond to energy-market conditions rather than be pursued mechanically regardless of oil prices.
IDEAS pointed to Malaysia’s monthly fuel subsidy bill, which rose from around RM700mn in January and February 2026 to as high as RM7.5bn in April 2026.
As a result, total fuel subsidy spending in 2026 could reach RM40bn, more than double the RM15bn initially allocated in Budget 2026.
Budget 2027 should establish a more predictable, sustainable and transparent framework that links subsidised prices and quotas to movements in global oil prices.
If the Government maintains fuel-specific subsidies, IDEAS proposed a managed float against global oil prices to cushion exceptional price shocks without completely removing price signals or transferring the full risk to the Budget.
Targeted programmes such as Sumbangan Tunai Rahmah (STR) and Sumbangan Asas Rahmah (SARA) could instead be expanded to direct assistance towards households most in need, it said.
Any savings generated from subsidy rationalisation should also be transparently reported.
Greater clarity and accountability around government, GLC and GLIC expenditure
IDEAS also called for greater clarity over how investments by government-linked companies (GLCs), government-linked investment companies (GLICs), and other public entities are presented in the Budget.
Budget 2025 presented RM86bn in federal development expenditure alongside RM9bn in Private Finance Initiative (PFI) spending and RM25bn in GLIC domestic direct investment.
Budget 2026 went further by presenting RM470bn in overall public expenditure, including RM50.8bn in GLIC investments, public-private investments, and investments by Federal Statutory Bodies and MOF Inc. companies.
IDEAS said GLC and GLIC investments should not be treated as conventional Budget expenditure.
It said combining these investments with taxpayer-funded expenditure could blur the Government’s underlying fiscal position and weaken the distinction between public finances and the balance sheets of commercial entities.
Budget 2027 should therefore clearly distinguish conventional federal expenditure from investment undertaken by GLCs, GLICs and other public entities, rather than combining them within a single headline spending envelope.
At the same time, if the Government increasingly relies on GLCs, GLICs, Federal Statutory Bodies and MOF Inc. companies to mobilise investment and deliver national policy priorities, IDEAS said the arrangements governing these investments should meet higher standards of transparency and accountability.
Budget 2027 should disclose which institutions are providing funds, the programmes and investments being supported, financing arrangements, expected economic and social outcomes, and subsequent performance against those commitments.
It also called for stronger governance safeguards, including transparent and merit-based appointments, clear ownership rationales, published performance objectives, annual public reporting and stronger parliamentary scrutiny.
Strengthen fiscal decentralisation through fairer federal-state transfers
Malaysia’s fiscal system remains highly centralised, according to IDEAS.
Its latest harmonised cross-country comparison found that state governments raised only around 10.4% of total government revenue in 2022.
States remain reliant on relatively narrow revenue sources and federal transfers, while major broad-based taxes are reserved for the federal government.
Federal grants have increased from RM8.1bn in 2022 to RM10.3bn in 2025, with RM10.5bn expected in 2026.
However, IDEAS said the transfer system does not sufficiently account for differences in states’ fiscal capacity, development needs and service-delivery costs.
The 25% increase in the capitation grant in 2026 was described as a step forward, but its real per-capita value remains below its 2002 level and its share of federal transfers has fallen substantially over time.
Budget 2027 should strengthen the equalisation role of federal transfers by allocating resources more systematically according to states’ fiscal capacity, development needs and differences in service-delivery costs.
Transfers should also become more rules-based, predictable and transparent.
IDEAS said most transfers currently lack publicly available formulas or clear legal foundations, while projected and actual disbursements can differ substantially.
In 2023, Sabah received nearly 50% more than projected, while Terengganu received only 45% of its estimated transfers.
Budget 2027 should therefore clearly set out the legal basis and allocation methodology for major transfers, publish state-by-state estimates, report actual disbursements against them and explain material deviations.
Competitive economy
Data centres have become a major source of investment in Malaysia, accounting for around 44% of approved investments in 1H 2026, IDEAS said.
A Data Centre Task Force (DCTF) has been established to manage the pace of expansion, while the Government has increasingly highlighted the need to balance data-centre growth with power and water capacity and tangible benefits for local supply chains.
IDEAS said Budget 2027 should strengthen the DCTF’s role beyond screening and approving projects towards monitoring outcomes after approval.
This would allow the Government to assess whether data centres are delivering expected investment, employment and local economic spillovers, alongside their electricity and water consumption and sustainability performance.
Greater emphasis could also be placed on strengthening links with Malaysian firms and MSMEs, including through local procurement and services.
The aim, IDEAS said, should be to ensure Malaysia captures wider economic benefits from data-centre investment while managing associated infrastructure and resource requirements.
Strengthen post-approval monitoring of investments
Malaysia introduced the New Investment Framework (NIF) for manufacturing on 1 March 2026, marking a shift from traditional activity-based incentives towards an outcome-based approach.
With the NIF entering implementation, IDEAS said Budget 2027 should focus on whether the framework is changing the quality and economic impact of investment, rather than simply increasing approved investment values.
Post-approval monitoring should track whether projects deliver on commitments relating to high-value jobs, wages, domestic procurement, technology transfer, R&D and productivity.
This monitoring could also help identify bottlenecks preventing approved projects from being realised, including land, utilities and talent constraints.
IDEAS said the emphasis should therefore move from “how much investment has been approved?” towards “what economic outcomes has the investment delivered?”
Make MSME support simpler and more outcome-driven
The Government already has a wide range of MSME financing, grant, digitalisation and capacity-building programmes.
Among the latest is the RM10bn BNM-CGC post-crisis guarantee scheme, which is intended to strengthen MSMEs’ access to financing, technology, talent, certification and larger-company supply chains.
IDEAS said the priority should not be to keep adding new schemes, but to improve the effectiveness and accessibility of existing support.
Budget 2027 could streamline overlapping grants and financing schemes, reduce application and compliance costs, and make it easier for firms to identify and access relevant support.
Greater emphasis could also be placed on productivity-enhancing digitalisation, including AI, cybersecurity, business software, automation and tools that reduce the cost of compliance and ESG reporting.
At the same time, financing support should extend beyond traditional grants towards mechanisms that help viable firms scale.
Stronger connections between MSMEs and larger domestic and foreign investors could also allow local firms to participate in higher-value supply chains.
Direct industrial-park investment towards regional economic diversification
The 13th Malaysia Plan places greater emphasis on developing economic activity beyond the country’s existing major investment centres and strengthening regional economic corridors.
It recognises the need to improve infrastructure and connectivity to support investment, while continuing to develop strategic industrial areas and economic corridors.
Major connectivity projects such as the East Coast Rail Link (ECRL), which is expected to improve connections between the East Coast and West Coast of Peninsular Malaysia, are also being developed during the 13th Malaysia Plan period.
IDEAS said Budget 2027 should increase the effectiveness of investment in industrial parks outside the Klang Valley, Penang and Johor, particularly where new transport infrastructure can unlock previously less-connected investment locations.
Rather than focusing only on increasing the number of industrial parks, allocations should prioritise the readiness and competitiveness of existing and strategic parks.
This includes reliable electricity and water, logistics, digital connectivity and other basic infrastructure required by investors.
The completion of the ECRL also provides an opportunity to reassess the investment potential of the East Coast and ensure infrastructure spending is matched by efforts to attract suitable industries and build links with local firms.
The Johor-Singapore Special Economic Zone should continue to receive support, IDEAS said, but this should be complemented by efforts to broaden investment capacity across other regions.
For the halal sector, the Government could consider reducing administrative and certification costs for smaller firms, including reviewing halal certification fees and processes.
Inclusive society
IDEAS said Malaysia must move from one-off, reactive Budget allocations towards sustained investment in public services, the healthcare workforce and social protection systems.
As the country approaches an aged society, Budget 2027 should establish foundations for managing demographic change, rising healthcare costs, labour shortages and the needs of vulnerable populations over the next decade.
Strengthen health system capacity and affordability
New treatments, including gene therapies, offer considerable promise but can place costs beyond the reach of households and the public healthcare system.
Budget 2027 should invest in local clinical trial infrastructure, biosimilar development, domestic pharmaceutical manufacturing and Health Technology Assessment (HTA) to support more affordable access, IDEAS said.
Public-sector health officials would also benefit from more structured training in health economics, cost-effectiveness evaluation and strategic procurement.
Building on Budget 2026 commitments such as assistance for Persons with Disabilities (PWDs), mobility vans and tax relief for early intervention, Budget 2027 should also mandate universal design by default across public transport, digital government portals and healthcare facilities.
IDEAS said these investments would benefit both PWDs and an ageing population.
Support athletes with disabilities beyond competition
IDEAS called for continued government support for athletes with disabilities after they leave the national programme.
The end of an athletic career can also mean the loss of a regular income, while rehabilitation and assistive equipment costs may continue.
The Government should provide a dedicated allocation for the National Sports Council to help athletes plan their next steps before leaving, including education, skills training and employment support.
Rehabilitation and essential equipment should remain available for a defined period afterwards.
The programme should be developed with athletes with disabilities and reviewed against their experiences of life after sport, IDEAS said.
Retain the healthcare workforce
The increase in the Ministry of Health’s allocation to RM46.5 billion in Budget 2026, alongside 13th Malaysia Plan targets to raise primary healthcare spending to 32% of total health expenditure, may not deliver the intended outcomes if system capacity continues to be constrained by brain drain, IDEAS said.
Budget 2027 should address working conditions, career progression, specialist training access and administrative burdens faced by health professionals to retain talent in the public sector.
While recent commitments to absorb contract doctors and nurses into permanent posts were acknowledged, IDEAS said broader retention incentives are needed to meet the demands of an ageing society and rising non-communicable disease rates.
Build institutional capacity and embed FPIC in Orang Asli development
Recent allocations, including RM412 million for Orang Asli development, planned amendments to the Orang Asli Act 1954 and RM155 million for rural road connectivity, demonstrate targeted government support, IDEAS said.
However, it added that policy implementation remains constrained by institutional gaps.
Budget 2027 should therefore pair direct capital expenditure with sustained investment in the institutional and organisational capacities needed to deliver these programmes effectively.
For interventions affecting Indigenous lands, livelihoods and education, including the expansion of the Chup Badui Sikulah programme, IDEAS called for mandatory cultural competency and Indigenous rights training for public officers, civil servants, contractors and corporate partners.
It also called for Free, Prior and Informed Consent (FPIC) processes to be institutionalised and funded before project design and implementation.
To support community participation and empowerment, funding for these training and monitoring programmes should be directly allocated to and executed by Orang Asli organisations and community leaders, IDEAS said.
Build an integrated legal and economic system for refugees
Malaysia’s investments in the Refugee Registration Document (DPP) system and centralised biometric data infrastructure demonstrate increased administrative control, according to IDEAS.
However, it said registration without legal inclusion leaves refugee populations vulnerable and economically sidelined.
At the same time, Malaysia faces persistent labour shortages in essential sectors.
IDEAS said only 352 local applications had been submitted through MyFutureJobs for thousands of unfilled 3D roles, while the Government continues to process 15,000 foreign worker applications and work towards reducing foreign worker dependency under the 13th Malaysia Plan.
Rather than treating registration as an administrative end in itself, Budget 2027 should use this data infrastructure to establish a structured, end-to-end refugee management and economic integration system.
IDEAS proposed creating formal and lawful pathways for refugees already residing in Malaysia to work legally.
It said this could help address labour shortages, reduce dependence on informal labour markets and generate economic returns through formal systems.
The framework should also include structured access to basic education for children, language and civic orientation programmes, and clear operational guidelines across federal, state and local agencies.
Empower digital resilience and protect vulnerable workers
As digital ecosystems expand under the Online Safety Act 2025 and national AI frameworks, IDEAS said social protection and public empowerment must keep pace with technological and demographic shifts.
Budget 2027 should allocate targeted resources towards parent- and community-focused digital literacy and cyber safety programmes to empower families, protect children from online harms and build capacity alongside national AI and STEM education efforts.
Social protection should also reflect how Malaysians work today.
IDEAS called for Budget 2027 to expand routes to EPF and SOCSO coverage for informal, gig and care workers.
Targeted incentives for affordable, quality childcare and flexible work arrangements could also help more women enter and remain in the workforce while strengthening household resilience.
Advancing sustainability
To improve national preparedness for floods, extreme weather and climate change, IDEAS said the Federal Government needs to invest more in climate finance at sub-national levels.
It said RM3.91bn was allocated across national climate-related initiatives last year and called for this to increase to at least RM5.50bn.
The additional funding could support expanded Ecological Fiscal Transfers to state governments, direct local council drainage infrastructure upgrades and decentralised, district-level disaster preparedness mechanisms across all states.
Increase and improve transparency around green energy investment
IDEAS also called for larger and more transparent green energy investment allocations.
It noted that the Federal Government continues to deploy substantial resources towards fossil fuels through fuel subsidies, while green energy investments remain a relatively small share of spending.
Explicit allocations for renewable energy and environmental protection remain low, with the Ministry of Natural Resources and Environmental Sustainability receiving 0.1% of GDP compared with 0.4% in previous years, according to IDEAS.
It said green efforts are also increasingly being carried out through GLCs such as PETRONAS and TNB.
Relying on GLC budgets and green commitments makes it harder for Parliament and the public to track spending on climate mitigation and green infrastructure, IDEAS said.
Budget 2027 should therefore mandate clearer, standardised green budget tagging and comprehensive reporting to ensure climate-related expenditure is transparent and trackable.
This should be backed by direct public investment alongside corporate capital, it added.
Resilient democracy
IDEAS said institutional reform should not wait for another Budget cycle.
The Government should prioritise institutional reforms and ensure relevant agencies, including the Legal Affairs Division of the Prime Minister’s Department, Attorney-General’s Chambers, Malaysian Anti-Corruption Commission (MACC) and Election Commission (EC), have sufficient funding to conduct meaningful and inclusive stakeholder engagement and progress reforms.
Enact a political financing law
IDEAS said the Political Financing Bill is particularly relevant to Budget 2027 because proposed provisions on public funding, disclosure, oversight and enforcement would have direct funding implications.
It called for the Government to table a comprehensive Bill under the National Anti-Corruption Strategy (NACS).
The proposed legislation should include limits and prohibitions on private political donations, provisions for public funding, transparency and public disclosure requirements, as well as independent oversight and enforcement mechanisms.
Budget 2027 should provide the resources needed to consult on these provisions and prepare for their implementation, IDEAS said.
This comes as the Ombudsman Bill and Government-Owned Entities Bill were outlined in the pre-Budget statement.
Provide resources for the redelineation exercise
The redelineation exercise, which involves reviewing and redrawing electoral boundaries, is taking place in Sarawak.
IDEAS said Budget 2027 should provide adequate resources to the EC and other relevant stakeholders to facilitate the process.
This should include public engagement and consideration of representations from affected communities.
Review the Election Offences Act
The Government and EC should undertake robust stakeholder engagement on proposed amendments to the Election Offences Act (EOA), IDEAS said.
This should include reviewing candidate spending limits to reflect current economic realities and the increasingly digital nature of electoral campaigning.
Budget 2027 should support this engagement, as well as voter education and public awareness programmes to strengthen understanding of electoral rules and offences.
Support consultation on the AI Governance Bill
As deliberations continue on the proposed AI Governance Bill, IDEAS said Budget 2027 should provide adequate and sustainable resources for further stakeholder engagement.
Funding should also be made available for the institutions responsible for implementing the eventual framework.
Taken together, the recommendations cover a wide range of areas, from how Malaysia raises and spends public money to how it prepares for demographic, economic and climate-related pressures.
For Budget 2027, IDEAS’ proposals place particular emphasis on making public finances more transparent and resilient, while ensuring investment and public programmes are measured against their longer-term economic and social outcomes.
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Lead image / IDEAS
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