Malaysia is expected to introduce additional subsidy reductions and new taxes in its budget for next year, according to analysts and economists, as the country seeks to improve its fiscal standing in the face of anticipated declines in government revenue.

Prime Minister Anwar Ibrahim is set to unveil the government's 2025 spending plan in parliament on Friday, focusing on balancing fiscal consolidation with economic growth while addressing the rising cost of living, Reuters reports.

He will likely implement a tax on high-value goods, initially proposed in the previous budget, as well as a tax on sugar-sweetened beverages, analysts said.

However, the government is unlikely to reintroduce a broad-based goods and services tax, dismissing suggestions to boost revenue in light of expected lower dividends from the national energy company, Petroliam Nasional Berhad (Petronas).

Petronas, a key revenue contributor for the federal government, could face reduced petroleum-related income this year due to falling crude oil prices, potentially impacting its financial contributions.

In the 2024 budget, Petronas is set to contribute 32 billion ringgit ($7.45 billion) in dividends to the government, a decrease from the 40 billion ringgit provided in 2023. 

“Given that crude oil prices are likely to stay lethargic, it could be quite challenging for Petronas to maintain a sizeable dividend payout to the government,” said Mohd Afzanizam Abdul Rashid, chief economist at Bank Muamalat Malaysia.

The government is expected to adjust its 2024 economic growth forecast to a range of 4.5% to 5.1%, up from the previous estimate of 4% to 5%, according to Mohd Afzanizam, who anticipates 5% growth in 2025.

The central bank projects growth at the higher end of the 4% to 5% range for 2024 and does not foresee headline or core inflation exceeding 3%. The economy grew by 5.9% in Q2, marking its fastest expansion in 18 months.

Furthermore, the government has also announced widespread pay increases and salary restructuring for its 1.6 million civil servants, effective from 1st December, to help align wages with the rising cost of living. 

Analysts forecast the fiscal deficit will likely shrink to between 3.5% and 3.9% of GDP, down from an estimated 4.3% this year, largely due to the subsidy cuts.