KUALA LUMPUR: Malaysia’s plan to keep its debt low while simultaneously spending big over the next five years as part of its development roadmap requires a confluence of favourable factors for the huge undertaking to succeed, say analysts.

They add that geopolitical tensions could seriously challenge the Anwar administration’s fiscal and economic targets and it would need to find ways to boost revenue while addressing spending wastages and leakages efficiently.

Anthony Dass, executive director at the Malaysian Institute of Economic Research, said that the 13th Malaysia Plan as laid out by Prime Minister Anwar Ibrahim was “ambitious but only moderately realistic”.

The plan seeks to reduce Malaysia’s national debt by 2030, targeting a fiscal deficit of below three per cent of gross domestic product (GDP) while also keeping debt under 60 per cent of the GDP.

And while the Malaysian government has stated its commitment to fiscal prudence, it has laid out a five-year investment strategy worth a record RM611 billion (US$144.3 billion), of which RM430 billion will be allocated directly from the government's budget.

Another RM120 billion will be raised from government-linked firms or government-linked investment companies, while the remaining RM61 billion will come from the private sector through private-public partnerships.

From the RM611 billion budget, some RM67 billion will go to the education sector, while RM40 billion will be allocated to the health sector, for instance.

“The dual objective (to reduce debt but increase spending) is achievable in theory, but fragile in practice. It will require consistent economic momentum, accelerated reforms, and tight execution to avoid underdelivery or fiscal backsliding,” said Dass.

He added that the plan - as laid out by Anwar in parliament on Jul 31 - was built on the assumption of a relatively stable global environment, but warned that several external risks factors such as rising geopolitical tensions, ongoing supply chain disruptions, and the threat of trade protectionism or energy market volatility, could affect its success.

“Any of these factors could dampen our export performance, reduce foreign direct investment (FDI) inflows, and create revenue shortfalls at a time when development spending and deficit reduction plans require steady economic momentum,” he said.

Meanwhile, executive director of the Socio-Economic Research Centre Malaysia Lee Heng Guie believed that the targets set out by the Anwar administration were “conservative” barring extraordinary events such as the COVID-19 pandemic, for instance.

He said that the fiscal deficit, for one, has reduced from 6.4 per cent of the GDP in 2021 to 4.1 per cent last year. In 2025, it is expected to further drop to 3.8 per cent.   

“I think they can reduce their deficits as stated in the plan. Over five years, they can achieve their target and in fact do better than that. 

“Of course, a plan is only as good as its implementation,” he said.

"FORCED TO ACCEPT REALITY"

During the tabling of the plan, Anwar said that his coalition government inherited a mountainous debt exceeding RM1 trillion when it took power in November 2022.

He further warned that as long as the national budget remained in deficit, the total debt would continue to increase.

“What options did the government have? We were forced to accept the reality and act with courage and caution, addressing past excesses without harming the interests of the majority of the people,” said Anwar.

As of March this year, Malaysia’s debt stood at RM1.3 trillion, up from RM1.25 trillion at the end of 2024, Deputy Finance Minister Lim Hui Ying had told Parliament in June. 

Meanwhile, the country’s nominal GDP in 2024 was valued at RM1.93 trillion, according to the Department of Statistics. 

The 13th Malaysia Plan - which sets the stage for the country’s economic future over a five-year period until 2030 - is the first such plan put forward under Anwar’s coalition government, made up of four main coalitions and 18 political parties.

The prime minister said that the government’s commitment from the very beginning was to firmly undertake fiscal reform in phases by increasing revenue and optimising spending through measures like retargeting subsidies.

It has already raised the statutory debt limit - also known as the debt ceiling - twice in recent years, from 55 per cent to 60 per cent of the GDP during the COVID-19 crisis and once more to 65 per cent in 2021.

This refers to the maximum amount of money the government is legally allowed to borrow in order to pay for things it has pledged to spend money on.

After 2019, Malaysia's debt-to-GDP ratio rose significantly, from 52.5 per cent to 62.01 per cent in 2020, as the government increased spending to combat the economic effects of the COVID-19 pandemic.

As of 2024, the country’s debt-to-GDP ratio stood at 64.6 per cent, following a gradual increase over the years. Malaysia's fiscal deficit on the other hand was 4.1 per cent in 2024, continuing a downward trend from a peak of 6.4 per cent in 2020.

A deficit occurs when spending exceeds revenue over a specific period, while the debt-to-GDP ratio measures a country's public debt as a percentage of its GDP.

WHAT MALAYSIA NEEDS TO DO

Anwar - who is also Malaysia’s finance minister - said that the government has firmly expressed its commitment to fiscal prudence through the Public Finance and Fiscal Responsibility Act (FRA) that was enacted in 2023.

The law caps the government's debt limit at 60 per cent of the GDP.

When the law was enacted, the debt limit was above 60 per cent. The law then states that the government must achieve a prudent debt level in the medium term, defined as a period of between three and five years.    

For economist Nungsari Ahmad Radhi, the FRA is the centrepiece for government fiscal reforms as it has legislatively imposed defined limits on spending, deficits and borrowing.

He told CNA that the legislation limits the finance minister’s discretion, which not only improves governance to prevent occurrences such as the 1Malaysia Development Berhad (1MDB) scandal, for example, but also increases the involvement and oversight of parliament as a whole.

“The FRA forces the government to decide on trade-offs; a smaller deficit requires either higher revenues or less expenditure, or some combination that obtains the targeted deficit,” he said.

Separately, Dass said that while the FRA signals Malaysia’s commitment to long-term fiscal sustainability, its effectiveness hinges on robust enforcement and independent oversight.

“While the Act lays the foundation for greater accountability, its impact will depend on political will, public scrutiny, and the establishment of institutions capable of monitoring and enforcing its provisions,” he said.

“To ensure credibility, Malaysia must pair the Act with a culture of transparency and a commitment to results-based budgeting.”

Meanwhile, economists whom CNA spoke to agreed that the Malaysian government needs to boost revenue by broadening its revenue base and increasing its percentage compared to the GDP. 

Nungsari said that Malaysia’s fiscal resources are limited and that the total revenue collected by the government - through tax and non-tax revenues - is sufficient to just cover operating expenditures.

This also meant that almost every ringgit spent on development expenditures has to be borrowed.

He noted that Malaysia’s debt servicing expenses in 2023 was RM46.3 billion, larger than the RM37.8 billion in total personal income tax collected that year.

“The revenue side needs to be looked at. (There would be a need to) broaden the government revenue base as well as increasing it as a percentage of the GDP. It is too narrow and small,” said Nungsari.

He noted that the share of total federal government revenue compared to the GDP last year was 16.5 per cent, down from the 17.3 per cent in 2023. This year it is projected to be 16.3 per cent. 

Nungsari added that in order to increase revenue, the government would have to look at indirect taxes such as sales taxes where the “broadening” can happen.

This is because, he said, Malaysia is in a “unique position” where revenue from indirect taxes - such as a goods and services tax (GST) - is less than direct taxes as it has been avoided by the government due to its broad base.

Anwar has previously said that bringing back GST would unfairly burden the lower-income. 

The GST was first introduced in April 2015 during the Najib Razak administration at a rate of 6 per cent, although the tax was not imposed on several things such as basic food items, agricultural products, water, fuel and several services.

When Anwar’s Pakatan Harapan coalition won the general election in May 2018, the GST was removed and replaced with the sales and services tax (SST) three months later. 

The SST is a single-stage tax applied either at the stage of manufacturing or at the level of consumption of goods and services while the scrapped GST was a multi-stage tax levied at every stage of the supply chain of a product or service.

More recently, the Malaysian government has introduced several new taxes and expanded existing ones to broaden its revenue base, including expanding on the SST in July of this year.

It has also moved away from blanket subsidies to a more targeted approach. In June 2024, the government implemented a targeted diesel subsidy programme in Peninsular Malaysia.

Next month, the government will announce its long-awaited plan to remove blanket subsidies on the widely used RON95 transport fuel. Other measures to boost revenue include increased electricity tariffs on heavy power users.

Dass, meanwhile, believes that the government's revenue base can be expanded further by creating new economic activities and formalising the informal economy, such as the gig and micro-business sectors.

“They will provide sustainable income to the economy without over-relying on volatile oil-related revenues,” he said.

But while the government works to expand its revenue, experts stress that spending must be efficient, and it needs to address wastages and leakages.

Sunway University economics professor Yeah Kim Leng said that it is important for Malaysia - classified as a middle-income country by the World Bank - to spend wisely on productive investments that expand its production capacity for instance.

He cited the Johor Bahru-Singapore Rapid Transit System (RTS) Link train system connecting Johor Bahru and Singapore - scheduled to start operating in Dec 2026 - as an example, noting that it would boost connectivity and have a multiplier effect by improving business activities across both countries.

"Efficient spending is necessary, especially if it contributes to upgrading the economy," he said, adding that any reduction in spending has to be incremental so that the growth is not severely impacted. 

Yeah further noted that besides cutting wastages and leakages in spending, the other strategies to cap borrowing and reduce debt size include privatisation and partnerships between the public and private sectors.

He said that an accelerated shift to the private sector-led growth would harness entrepreneurship, competitive spirit and innovation drive.

“If private consumption and investment growth is sustained through rising confidence, the government will be able to collect more taxes that will enable the government to narrow the fiscal deficit and reduce borrowing,” he said.

CONCERNS IF DEBT GROWS

While Malaysia’s debt is still manageable at current levels, economists expressed concerns if the debt-to-GDP ratio rises towards or goes beyond 70 per cent due to the need to fund the country’s development plans, as this could trigger credit rating downgrades and raise borrowing costs.

“We risk entering a ‘debt trap’ scenario where borrowing is increasingly used to service existing obligations rather than fund productive investments,” said Dass. 

He noted that interest payments already consume over 17 per cent of government revenue and this reduces resources for essential services like for education, healthcare, social protection, and infrastructure. 

“In effect, future-oriented spending is constrained by the cost of past borrowing, limiting the government’s ability to respond to new social and economic challenges,” Dass said, adding that critical social assistance programmes - such as cash aid - could be scaled back just as cost-of-living pressures rise.

According to Yeah, while there is no single optimal debt level, a broad range of 60 per cent to 80 per cent of GDP was considered optimal for a developing country like Malaysia.

“The higher the level of your debt, the more you would be vulnerable to economic shocks such as unintended consequences of the Trump tariffs or supply chain issues,” he said, adding that a rise in debt could cause a downgrade in sovereign ratings.

A sovereign credit rating is an independent assessment of the creditworthiness of a country or sovereign entity. 

Meanwhile, Nungsari stressed that Malaysia could not continue on its existing trajectory without risking a sovereign downgrade, adding that economic reforms, while painful, are necessary.

“This fiscal consolidation will be painful. That’s why it has been delayed. People make all kinds of noise if expenditures are cut, even reallocated, and they make noise when new revenues are introduced,” he said. 

“Constraints force creativity and productivity. That’s what we need to be competitive. Find new things to do. Better things to do.”