Published by TheStar and MySinchew, image by AstroAwani.
In our earlier commentary, “Budget 2026: From B40 to B70, Redefining Malaysia’s Middle Class,” EMIR Research argued that Malaysia’s deepest fiscal challenge lies not merely in managing debt but in recognising the erosion of its true middle class. The so-called “M40” is no longer the secure, upwardly mobile core of society that official classifications suggest. Instead, it is a squeezed, stretched, and anxious middle, caught between rising living costs, stagnant wages, and thinning buffers of savings.
That piece proposed a recalibration of Malaysia’s household classification from B40–M40–T20 to B70–M20–T10, reflecting post-Covid realities and the hollowing out of middle-class security. This follow-up extends that discussion, moving from diagnosis to design. The question now is: how can Budget 2026 protect and rebuild the middle class while preserving fiscal discipline and reform credibility?
The middle-income squeeze is not simply the by-product of subsidy rationalisation or global inflation. It stems from structural weaknesses that predate both: stagnant wage growth, industrial inefficiency, and the fiscal drag of leakages and corruption. The disease is structural. Corruption and inefficiencies siphon resources away from productive investment — billions that could raise wages, expand social protection, or improve infrastructure. At the end of the day, the funds lost to leakages are precisely what Malaysia needs to invest in R&D, education, and connectivity to climb the value chain and escape the middle-income trap. Household-level data only make the symptoms visible, with household debt now standing at 84.3% of GDP as of August 2025 (Bank Negara Malaysia), savings rates plunging, and median wages barely outpacing inflation. But the underlying problem is the slow climb of Malaysia’s productivity curve relative to its peers.
If productivity and wages had moved in tandem since the early 2000s, a single median household income today would plausibly stand at around RM9,100–RM9,500, compared with RM6,900–RM7,200 on current trajectories, a shortfall of more than RM2,000 per month. That missing income now compels a second earner to fill the gap. Overwork has become the default survival strategy, not the route to prosperity.
The challenge, then, is to ensure that fiscal policy reinforces productivity and complexity, not consumption alone. Malaysia’s industrial base must shift decisively from low-value services and assembly operations toward sectors that create enduring surpluses: advanced E&E, AI-enabled services, green manufacturing, creative industries, and biotechnology. Without this pivot, real wages will remain trapped and every budget cycle will be forced to patch symptoms instead of curing causes.
Early signals for Budget 2026 point to no new broad-based taxes but continued revenue gains from the expanded Sales and Service Tax (SST), the global minimum tax, and digitalisation of compliance through nationwide e-invoicing. Tax collections rose 12 % year-on-year in 1H 2025 to RM147.6 billion, with SST revenue alone up from RM19.7 billion to RM25.6 billion. Analysts estimate that these measures will contribute an additional RM10 billion in 2026, giving Malaysia tangible fiscal headroom even without new levies.
However, that space should be used not for populist giveaways but for strategic relief targeted at the vulnerable middle.
The government could fine-tune the RM35,000–RM100,000 income-tax band by introducing marginal rate trims or higher thresholds to raise disposable income where the marginal propensity to consume is highest.
Parallel to this, expanding B2B SST exemptions can prevent cascading costs that firms otherwise pass on to consumers, ensuring that compliance and rationalisation do not translate into household inflation.
Carbon pricing, scheduled to begin on 1 January 2026, offers another fiscal innovation that can serve both discipline and equity. Properly designed, it protects exporters facing the EU’s Carbon Border Adjustment Mechanism (CBAM) while advancing Malaysia’s net-zero commitments. The crucial step is in its design: part of the carbon revenue should be recycled into household energy-efficiency rebates (insulation, solar panels, and efficient appliances) so that the “stick” of higher tariffs arrives with a “carrot” that lowers monthly bills. Earmarking a slice of future carbon receipts for home efficiency retrofits and targeted M40 electricity-bill rebates would make the system both fairer and more visible to households — proof that climate policy can double as household relief.
Protecting the middle without derailing consolidation
Fiscal credibility and social protection need not be opposites. Three levers can protect the middle class without expanding the deficit. First, calibrate personal income tax where pressure is greatest; even modest trims can boost consumption and morale. Second, prevent tax-on-tax accumulation by widening B2B SST exemptions, which helps reduce hidden inflation. Third, ring-fence subsidy savings from diesel and RON95 reforms into tangible household assets such as affordable healthcare, childcare, and reliable public transport. These visible returns make reform politically sustainable.
The government’s fiscal restraint is already anchored in a credible trajectory: the deficit is expected to narrow to 3.4–3.6 % of GDP in 2026, with debt easing to around 63 % of GDP, consistent with the Fiscal Responsibility Act’s long-term target of staying below 60%. However, civil-service emoluments and pensions, which account for about 44 % of operating expenditure, limit room for broad transfers, making precise targeting all the more essential.
The cost of overwork
Dual-income and multiple-job households have become the rule, not the exception. A 2022 Remote Work Report found that 66 % of Malaysians now have a second income source, reflecting the ubiquity of economic pressure. Yet because formal part-time employment remains minimal, much of this effort occurs in the informal economy, through gig work, freelancing, and micro-enterprises, often without protection or stability.
Qualitative studies show that dual-income households face chronic role stress, work–family conflict, and emotional strain (Khor & Mohamad, 2020). What appears as resilience in statistics often conceals exhaustion. Overwork props up consumption in the short term but erodes long-term productivity and family well-being. The remedy is not to normalise two jobs, but to raise real wages and productivity so one job can sustain a decent life.
In this regard, wage-linked incentives for firms that adopt digitalisation or automation could ensure that workers share in productivity gains, countering the stagnation of real wages while supporting industrial upgrading.
Development expenditure, projected at RM86–87 billion, provides ample space for targeted, productivity-enhancing investment within a consolidating budget. When tied to high-value sectors and human-capital development such as STEM, TVET, and lifelong learning, these outlays can turn fiscal discipline into growth rather than restraint. The IOOI (Input–Output–Outcome–Impact) logic of public spending must become visible: inputs like compliance-led revenue and subsidy savings must be clearly mapped to outputs such as higher employability, and outcomes such as wage increases and productivity growth.
Malaysia’s fiscal reform journey has matured. With the subsidy and tax reforms of the past two years beginning to bite, the credibility of Budget 2026 will hinge not on new measures but on how well existing reforms deliver tangible results, whether households feel the relief, and whether firms feel the incentive to invest in higher-value activities.
The first step in addressing Malaysia’s middle-income squeeze should be to recognise it, and to redefine its contours through the B70–M20–T10 lens. The next step is to act decisively within Budget 2026 to rebuild confidence: easing short-term burdens through calibrated relief while planting the seeds of long-term wage and productivity growth.
Fiscal consolidation and social protection need not compete for moral priority. When well-sequenced, they strengthen each other. A budget that narrows deficits but also narrows anxiety, reassuring the majority that reform is not abandonment, is not just good economics; it is good governance.
The true test of Budget 2026 will be whether Malaysia can deliver that balance: a credible fiscal path that restores faith among those who work hardest to hold the country together — its middle class.
Dr Rais Hussin is the Founder of EMIR Research, a think tank focused on strategic policy recommendations based on rigorous research.
