THE Federal Government expenditure is expected to reach a historic high of RM430.3 billion in 2026, propelled by growth in both operating and development spending, according to a forecast by Kenanga Investment Bank Bhd.
In a briefing released ahead of next week’s Budget 2026 announcement, Kenanga indicated that operating expenditure will rise moderately by 2.6 per cent year-on-year to RM342.3 billion, reflecting the government’s aim to uphold fiscal discipline while continuing social support efforts.
Development expenditure is anticipated to increase by 2.3 per cent to RM88.0 billion, underscoring the government’s dedication to economic transformation, resilience enhancement, and inclusive development over the long term.
“The government is expected to prioritise spending optimisation, focusing on programmes that enhance economic resilience, improve social protection, and support inclusive growth,” the bank’s note explained.
“These measures are designed to boost disposable income, encourage employment, and sustain domestic demand, which are critical to sustain growth momentum amid global economic uncertainty.”
Kenanga further anticipates that Budget 2026 will deepen Malaysia’s reform agenda under the 13th Malaysia Plan and advance the MADANI Economy framework while building long-term resilience.
Key priorities will include attracting high-value investments, expanding targeted assistance, and modernising public services.
Strategic focus areas will address industrial transformation, inclusive social protection, and governance reforms to secure sustainable, inclusive growth.
The bank projects the government’s 2026 GDP growth target at 5.0 per cent, in line with its own forecast of 4.2 per cent.
“Despite global uncertainties, resilience should hold, supported by sustained domestic demand and a strong services sector, alongside subsidy reforms and structural measures,” Kenanga noted.
A fiscal deficit of 3.7 per cent is forecast for 2026, with tax and governance reforms deemed essential for fiscal sustainability. Revenue growth is expected to slow to 3.6 per cent as weaker oil-linked income offsets gains from expanded Sales and Services Tax (SST) and e-invoicing initiatives.
Kenanga also forecasts the federal government’s debt-to-GDP ratio to rise slightly to 66.5 per cent in 2026, up from 66.0 per cent in 2025, reflecting moderate economic growth and continued borrowing.
Debt servicing charges as a proportion of revenue are predicted to increase to 16.8 per cent, exceeding the 15.0 per cent threshold. - October 2, 2025
