PUTRAJAYA: The Organisation for Economic Cooperation and Development (OECD) has called on Malaysia to strengthen its fiscal position by reintroducing the Goods and Services Tax (GST), broadening the personal income tax base and gradually phasing out fossil fuel subsidies.
The OECD said stronger government revenue will be needed to support rising spending on education, social protection and an ageing population.
In its OECD Economic Surveys: Malaysia 2026 released today, the organisation said fiscal consolidation should be accelerated to reduce the country’s vulnerability to external shocks while preparing for mounting long-term spending pressures.
“Fiscal consolidation should be stepped up to reduce Malaysia’s vulnerability to economic shocks, including soaring energy prices due to the conflict in the Middle East, and anticipate rising spending pressures. This will require reducing fossil fuel subsidies and reintroducing a broad value-added tax while protecting low-income households with targeted transfers,” the report said.
The OECD said although Malaysia had made progress in fiscal consolidation, the pace remained gradual despite relatively high public debt and growing fiscal demands.
“Fiscal consolidation has been and is planned to remain very gradual, despite a high public debt ratio. It is now at risk amidst soaring global energy and commodity prices.”
It recommended that Putrajaya implement spending and tax measures to ensure that the 3% of gross domestic product (GDP) deficit target in 2028 is met, prioritising subsidy containment.
The report noted that Malaysia has expanded the scope of the Sales and Service Tax, but argued that the current system is less efficient than a broad-based consumption tax.
“The scope of the sales tax and the services tax has been expanded but it is not the most efficient way to collect taxes on goods and services.”
It added that tax revenues below 13% of GDP make increasing government revenue a priority.
To strengthen the country’s fiscal position, the OECD recommended that Malaysia reintroduce GST while protecting low-income households through targeted transfers.
It also called for a broader personal income tax base by streamlining deductions, limiting exemptions and taxing a wider range of capital income, as well as further enhancing tax administration.
The OECD said a broad-based consumption tax would align Malaysia’s tax policies with international best practice and provide a stable revenue base, while targeted transfers could help protect vulnerable households from higher living costs.
The report also renewed its call for further fuel subsidy reforms, saying blanket energy subsidies continue to weigh on public finances while weakening incentives to reduce carbon emissions.
“Fossil fuel subsidies weigh on public finances and reduce incentives for emission reductions. Despite some progress in subsidy rationalisation, the RON95 petrol subsidy was raised in September 2025.”
The OECD recommended that the government limit and gradually phase out energy subsidies and use part of the savings for targeted cash transfers to low-income households.
It also urged Malaysia to move from subsidising fossil fuels towards a carbon pricing strategy, while protecting vulnerable households through targeted transfers.
Malaysia’s ageing population will place increasing pressure on public finances, the OECD said, as it called for a stronger fiscal revenue base to meet rising spending needs. “Mounting spending needs in social protection and education call for strengthening the fiscal revenue base.”
The OECD noted that non-contributory pension coverage remains limited and recommended expanding means-tested pensions to older Malaysians without other retirement income, while taking fiscal sustainability into account.
It said Malaysia’s long-term growth prospects would depend not only on stronger public finances but also on structural reforms to improve productivity.
“Policies that have served Malaysia well in the past may not be the ones that the country needs going forward.”
A combination of more efficient spending and higher revenues will allow the public sector to provide better social safety nets and public services, supporting the country’s transition towards high-income status, the report said.
