Commentary: The politics at play in Malaysia’s upcoming budget

KUALA LUMPUR: When Malaysian Prime Minister Anwar Ibrahim tables the government’s annual spending plan, Budget 2025, on Oct 18, he will do so from a position of strength. 

Defying critics and sceptics, Mr Anwar seems to have fulfilled his basic promises of political stability, economic recovery, and renewed investor confidence. 

By budget day, Mr Anwar would have been governing for 23 months as prime minister, longer than his immediate predecessors – Ismail Sabri (15 months), Muhyiddin Yassin (17 months), and his long-time rival Mahathir Mohamad (22 months in his second stint) – with an unchallenged two-thirds majority. 

The budget session in the Malaysian parliament acts as a de facto economic state of the union address, and on this front, the economic indicators serve as the government’s tailwind. 

Malaysia’s gross domestic product growth, stock market and currency performances have been at either historic highs or the best performing in Asean or Asia. A foreign direct investment boom, from global tech giants such as Oracle, Nvidia, Intel, and the hyperscalers, primarily in semiconductor and data centres, has attracted global attention. 

Top analysts have backed Malaysia’s rising momentum, with some reports likening Malaysia as the next global chip giant entering its golden age. 

A FAVOURABLE TIME FOR ANWAR

Mr Anwar’s political hand is also more favourable than before. His government’s bloc was able to retain all its incumbency in the year’s by-elections, which serve as an indirect referendum of the government’s performance. 

The two by-elections in the past two months have been particularly significant, as the government was able to flip a state seat of Nenggiri in the opposition’s stronghold state of Kelantan, and expand its majority by four times in Mahkota, both expanding its vote share among the Malay community, its most critical ethnic constituency. 

The opposition faces fractures both within and between the parties in the coalition. Claims of non-cooperation between Bersatu and Parti Islam Se-Malaysia (PAS) have surfaced, with declining morale from defections and a by-election losing streak.

Both parties are also encountering a leadership catch-22, with senior leaders mired with health problems preventing effective stewardship, but stepping down would risk deeper party divisions. 

This backdrop is important to understand the politics that will likely surface during the budget debate. 

STICKY ISSUES

For this mid-term budget, Mr Anwar has hinted that he would double down by focusing on the twin objectives of raising the living standard and advancing the country’s development. 

The opposition will likely embark on attacks focused on social issues, like the halal certification issue where a clear policy stance is still unavailable. With the privilege of being in the opposition, the Perikatan Nasional (PN) coalition could criticise the government for not doing enough to protect Muslims’ interests, while not taking a position that is both socially fair and commercially viable.

However, the problem with this approach is that social issues do not usually feature prominently in budget debates as it is seen as a forum for finance and economics. 

The item that the opposition has largely still relied on, though with waning effectiveness as seen in the recent by-election, is cost of living. Although the inflation numbers – between 1.5 per cent to 2 per cent in 2024 – are at its most stable in five years, and significantly lower than the PN era under Mr Muhyiddin, the opposition will likely pounce on it because cost of living is a sticky issue. 

This is similar to the “Wall Street versus Main Street” phenomenon in the United States, and the stickiness of cost of living is due to both sentiment and delay. Building on Robert J Shiller’s seminal work entitled Why Do People Dislike Inflation?, Harvard economist Stefanie Stantcheva wrote in a study that that people are averse to inflation because of the “widespread belief that it diminishes their buying power”, giving rise to stress, emotional responses, and a sense of inequity. 

It didn’t matter if this wasn’t true, as people typically ignore the potential positive associations with inflation, such as rising incomes, reduced unemployment or enhanced economic activity, said Ms Stantcheva. This would lead them to blame the government, businesses, and the “system” in general for their conditions. 

Another explanation for the disconnect between robust economic data and poor sentiment is the “referred pain” hypothesis, where the gloomy mood from non-economic reasons such as distrust in the system, rising ethno-religious polarisation, and general uncertainty takes prominence. The life-altering Covid-19 pandemic that saw people live through economically precarious times has a long-tail effect that cannot be ignored, as economic pessimism becomes a more persuasive feature in the minds of ordinary Malaysians. 

Other than sentiment, there is also a natural lag in economic realisation on the ground. Foreign direct investments take time to be approved and realised, and factories need to be built before high-value jobs can be offered. 

Similarly, stock market profit-taking will benefit those who invest directly, before increased profits translate to higher economic activity and salary. A strong currency makes imported goods cheaper over time, but it takes a while before consumer spending and business revenue to go up.

The changes to Malaysia’s economic structure will take time to yield its full effects, and it is expected that ordinary Malaysians still feel their lives remain largely unchanged. 

SHOWING AWARENESS

If the economic momentum is a validation of the government’s restructuring efforts, then the period between now and when the effects are felt ought to be seen as transitional. 

That means the upcoming budget could be used to address the concerns of ordinary Malaysians, chiefly relating to cost of living and poverty, so that it shows an awareness of the inevitable gap between data and sentiment. 

While such sensitivity to the ground is unlikely to assuage all opposition criticisms, it will help communicate with the audience. 

Other than corruption, Mr Anwar has treated poverty and, by extension, cost of living as his pet subjects since the start of the Reformasi movement a quarter of a century ago. 

It is unlikely that he will depart from this theme in Budget 2025; instead, we can expect him to double down. The only question is whether this is enough to close all the space possible for a meaningful opposition reply. 

James Chai is a political analyst, columnist and the author of Sang Kancil (Penguin Random House).