Malaysia is a resource-rich country with a smallish population of around 30 million. This means it produces more commodities (petroleum, palm oil, etc.) than it can consume, and exports the surplus. These exports generate revenue for the state through taxes and royalties, as well as through public ownership of the oil and gas company Petronas, which pays the government a yearly dividend.
But that is a risky fiscal model over the long term, as natural resources become depleted and the market price of export commodities is volatile and can rise and fall quickly. In recent years, for instance, the Malaysian government has seen big revenue windfalls thanks to sky-high commodity prices. The 2023 budget recycled some of this into infrastructure investment and energy subsidies. But they know they can’t count on that revenue every year.
In the 2024 budget, the first full-year budget since Anwar Ibrahim became prime minister, the message is clear: Malaysia is looking to pivot away from petroleum as a major source of state revenue. Instead, they want to develop a diversified tax base that can fund the government over the long term regardless of whether global commodity prices are high or low.
Total revenue is expected to increase only 1.5 percent in 2024, but the revenue structure will, if things go according to plan, shift significantly. Taxes accounted for 71 percent of revenue in 2022, and planners believe that figure will rise to 79 percent in 2024. Investment income (which is mostly dividends paid to the state by Petronas) is set to shrink from 20 percent of state revenue in 2022 to 13 percent in 2024. The plan is clearly to move toward a more tax-based rather than petroleum and export-based revenue model.
Corporate income tax alone is expected to bring in RM 106 billion ($23 billion) in 2024, more than a third of total revenue for the year. For this plan to be successful, it is essential that the Malaysian economy continues growing. Growth in 2024 is projected at between 4 and 5 percent, which is about the same pace as 2023.
But more important than headline GDP figures will be what is driving that growth. You may recall that the Malaysian economy was red hot in 2022, growing by 8.7 percent thanks to booming commodity exports. The government wants more balanced growth in the future, anchored by investment and business activity as well as more consumer spending. That’s the kind of growth that will give them a more diversified and sustainable tax base.
Of course, most policymakers would like to see their economies anchored by investment and consumption-led growth, rather than commodity exports. The million-dollar question is how to make that happen. And in Malaysia’s case, at least based on the 2024 budget, it won’t be accomplished through big public spending.
Total government expenditure is projected to decrease slightly next year, with the fiscal deficit shrinking to around 4.3 percent of GDP. With inflation moderating, subsidies and social assistance to cushion high prices are also being scaled back as the government looks to run a tighter fiscal ship and reduce its debt burden. It looks like investment and consumption will need to come from somewhere else.
That is probably why we have seen Anwar making trips to China and other countries stumping for foreign investment, and courting firms like Tesla. The minimum wage was raised in 2022, and the government is toying with more progressive wage schemes to increase consumer purchasing power. Certain sectors have been identified as priority growth areas and targeted for accelerated development, such as Islamic finance, technology, and clean energy. Malaysia is looking, for instance, to expand its role in semiconductor supply chains.
The 2024 budget signals that Malaysia wants to rebalance the economy away from petroleum exports and make investment, consumption, and business activity more prominent engines of growth. Then again, this is not a new idea in Malaysia. It is something they and many countries at similar stages of economic development aspire to do. Whether and how they can translate this plan into economic reality, and whether next year’s fiscal plans really do anything to help that transition, will be the real story to watch in 2024 and beyond.