RM204 Billion in Tax Collected. The Money Is Already Spoken For.

On 24 April 2026, at the Inland Revenue Board’s 30th anniversary in Cyberjaya, Prime Minister Anwar Ibrahim announced that LHDN had collected RM203.99 billion in direct taxes for 2025. The first time in three decades the agency had crossed the RM200 billion mark. An increase of RM19.186 billion, or 10.38 per cent, over 2024. The speech was actually read out by Deputy Prime Minister Fadillah Yusof, since Anwar was in Johor that day, but the announcement made every front page. The Star and Free Malaysia Today both carried it on 24 and 25 April.

That number deserves a fair hearing. It reflects sharper enforcement, the partial rollout of e-invoicing, and improved compliance. It also gave the government room to settle RM11.4 billion in corporate tax refund arrears that had been hanging over Malaysian companies for years. Businesses that had effectively been lending the government their own money got it back. That matters, and the government deserves the credit for finally doing it.

The trouble is that the celebration is louder than the substance, and the substance is what I want to talk about.

Four days after the announcement, on 28 April 2026, former finance minister Lim Guan Eng asked the question someone had to ask. If LHDN’s collection grew by 10.4 per cent, but Malaysia’s economy only grew by 5.2 per cent in the same year, where did the extra revenue actually come from? In a Facebook post that Malay Mail reported the same day, Lim warned the government against “killing the golden goose”. He pointed out that micro, small and medium enterprises were facing falling revenues and shrinking profits while only a handful of sectors, mainly banking, were doing well.

Lim has a point worth sitting with. Malaysia’s tax-to-GDP ratio sat at 12.5 per cent in 2024 according to AMRO’s analysis, published in The Edge Malaysia on 20 May 2025. The OECD’s 2025 Revenue Statistics in Asia and the Pacific report put Malaysia at 13.1 per cent in 2023, against an Asia-Pacific average of 19.5 per cent. The 15 per cent threshold widely treated by development economists as the floor for sustainable financing? We have been below it for years.

What does this mean in practice? It means the RM204 billion record is being squeezed out of a relatively narrow pool. Most registered companies in Malaysia do not pay corporate tax. Only a fraction of working Malaysians fall within the income tax net. So when collection grows ten per cent in a year where GDP grew half that, what is most likely happening is not broader prosperity but tighter pressure on the same group that was already paying.

Now, where does this money go? This is the part most Malaysians never see clearly, and once you do see it, the rest of the conversation changes.

Budget 2026, tabled on 10 October 2025, sets total federal expenditure at RM419.2 billion. Of that, RM338.2 billion, or 80.7 per cent of the entire budget, is operating expenditure. RM81 billion goes to development. Before a single school is rebuilt, before a single hospital ward is upgraded, more than four out of every five ringgit collected has already been committed elsewhere. These figures come from the Ministry of Finance’s own Budget 2026 documents and the FMT and Asia News Hub reports of 10 October 2025.

The three biggest items inside that operating budget are striking when you put them next to the tax haul. Civil service emoluments, RM109.4 billion. Pensions, gratuities and leave awards, RM42.8 billion. Debt service charges, RM58.3 billion. Add those three alone and you are at RM210.5 billion, already above the entire RM204 billion that LHDN collected. That is before any subsidies, supplies, services, or grants to states.

That last figure should be keeping policymakers awake. RSIS analysis published on 4 November 2025 noted that debt service payments will consume close to 17 per cent of federal government revenue this year, up from just 9 per cent in 2009. The Ministry of Finance’s own self-imposed ceiling is 15 per cent. We have already breached it. RSIS put it more starkly: we are now spending the equivalent of 72 per cent of the entire development budget just on interest. Every ringgit of that is a ringgit that does not build a school or train a doctor.

Then came the war.

Budget 2026 was tabled on the assumption that Brent crude would trade between USD 60 and 65 per barrel. On 28 February 2026, the Iran-US-Israel war broke out and the Strait of Hormuz tightened. Brent crossed USD 100. By April, according to The Edge Malaysia’s 21 April reporting and a follow-up State of the Nation piece a few days later, Malaysia’s monthly fuel subsidy bill had grown from around RM700 million before the war to roughly RM7 billion. Tenfold in two months.

To put that in proportion, Budget 2026 had earmarked RM49 billion for subsidies and social assistance combined. Of that, only RM15 billion was specifically allocated for fuel subsidies, with the rest going to STR, SARA and other targeted aid. At the new run rate of RM7 billion a month for fuel subsidies alone, the original fuel allocation would last barely two months. Treasury Secretary-General Johan Mahmood Merican confirmed in a directive issued on 29 April 2026, reported the same day by FMT, The Star and Reuters, that the total subsidy bill for 2026 is now expected to balloon to RM58.4 billion. Almost four times the original fuel subsidy allocation.

The government’s response was a Treasury directive ordering all ministries, departments and agencies to submit proposed spending cuts by 15 May. The proposed cuts: salaries for unfilled vacancies, a 10 per cent reduction on services, supplies and assets, and a 20 per cent cut to the budgets of federal statutory bodies and government-linked companies limited by guarantees. CodeBlue reported the same day, 29 April, that the Health Ministry alone is facing a proposed RM3.06 billion cut from its RM46.5 billion budget. The Higher Education Ministry is facing a RM2.39 billion cut. Numbers that size mean equipment that does not arrive, posts that do not get filled, and programmes that quietly stall halfway through the year.

The crisis is real. Some of it is genuinely external. Malaysia did not start the war in West Asia. Brent did not cross USD 100 because of anything Putrajaya did. But the structural fragility now being exposed is entirely domestic, entirely chronic, and entirely the consequence of choices made over decades. That is the part nobody wants to own.

Here is what I keep coming back to. Professor Yeah Kim Leng of Sunway University, who is also President of the Malaysian Economic Association and sits on the Prime Minister’s Policy Advisory Committee, has been one of the more sober voices in this debate. In an interview with The Star on 25 March 2026, he proposed what he called a “tripartite sharing of the subsidy burden between the government, consumers and businesses” as a more equitable and sustainable response to the energy shock. He has argued for years, including in a Bernama interview in November 2024, that the shift from blanket to targeted subsidies should be extended to RON95, not just diesel. He is not a populist saying ordinary Malaysians should bear the full price of war. He is a careful economist saying the current architecture cannot survive another shock without breaking, and that pretending otherwise is a form of denial.

The numbers on subsidy distribution should embarrass anyone who claims the current system protects the poor. Research from the University of Sussex’s SUS-POL project, corroborated by Malaysian Ministry of Finance disclosures, shows that the richest 20 per cent of Malaysians receive 42 per cent of fossil fuel subsidies, while the poorest 20 per cent get just 4 per cent. Earlier MOF data, cited in a 2023 study published in F1000Research, put it more bluntly. For every ringgit of blanket fuel subsidy, 53 sen flowed to the T20 and only 15 sen to the B40. We have been transferring tens of billions of ringgit a year, from a narrow tax base, to households that by any honest measure do not need the help. And then we have been borrowing to do it.

So what should actually be done? Let me try to be specific.

The tax base needs to widen, and it cannot widen indefinitely by squeezing the same group that already pays. AMRO estimates that a well-designed Goods and Services Tax could generate around 1.3 per cent of GDP in additional revenue annually, significantly more than the 0.4 per cent of GDP expected from the recent SST expansion. The political backlash from GST’s previous incarnation is real and remembered. But the case for a broad-based consumption tax with proper exemptions for essentials, paired with direct cash transfers to lower-income households, is now closer to fiscal necessity than political preference. The Prime Minister himself has acknowledged GST’s transparency and efficiency. The honest conversation is about timing and design, not about whether.

Fuel subsidy reform cannot keep being deferred either. The Iran war has done the politically inconvenient work of exposing the absurdity of the status quo. RON95 at RM1.99 a litre, paid for in part by foreign workers who do not declare income tax in Malaysia and by Malaysians wealthy enough to drive multiple cars, is not a defensible social policy. Economist Geoffrey Williams, quoted in the same 25 March 2026 Star piece as Yeah Kim Leng, suggested two practical options: reducing the petrol quota, which he said would produce substantial savings without affecting most of the population, or alternatively a tiered price mechanism where the subsidy is tied to the volume of petrol purchased rather than to the identity of the buyer. Either approach is incremental and low-friction. Either should have happened years ago.

On operating expenditure, the picture is harder. Civil service emoluments at RM109.4 billion grew partly because of the second phase of the public service remuneration system rolling out in January 2026, which gives a 7 per cent basic salary hike to staff in Grade 15 and below, itself following a 13 per cent increase in December 2024. Civil servants are not the enemy. Nobody serious is suggesting pay cuts. But the trajectory cannot keep accelerating while pension liabilities grow alongside it. The proposed defined-contribution pension scheme administered through the Employees Provident Fund, mentioned in the Budget 2026 documents and analysed by Tricia Yeoh in her November 2025 commentary, is a genuinely sensible reform. The question is whether it gets implemented seriously or watered down to nothing in the next political cycle.

There is also the question of who actually creates the tax base in the first place. Lim Guan Eng has flagged this repeatedly, in statements from March and April 2026, and the data backs him. The MSME sector contributes nearly 40 per cent of GDP and employs roughly half of the labour force. Squeezing it harder for compliance revenue while doing little to ease its cost base is short-sighted in the way Lim described. A moratorium on cumulative compliance burdens, not a permanent removal but a pause to let MSMEs catch their breath, would be a defensible counterweight to aggressive enforcement. Bank Muamalat’s chief economist Mohd Afzanizam Abdul Rashid, in his 19 February 2026 Bernama commentary, was careful to note that high prices “can have a disproportionate impact on Malaysians across income levels” and that middle and low-income groups are the ones who feel it. The same logic applies to MSMEs. The policy mix has to recognise who is actually bearing the cost.

And then there is the part that nobody wants to say out loud. The Prime Minister himself, in his 24 April speech, urged that “every ringgit be spent prudently” and called on the government machinery to “plug leakages”. That is the right diagnosis. The question is whether the people benefiting from those leakages are inside or outside the tent, and whether the political will exists to act on the answer. The civil service, the GLCs and the politically connected contracting class are not separate from the fiscal problem. They are central to it. A Treasury directive that hits hospital budgets and university hiring while leaving the politically protected layers untouched is not fiscal consolidation. It is fiscal triage at the wrong end of the patient.

None of this is comfortable. None of it is electorally easy. But the alternative is what we are watching now: a country forced into mid-year budget cuts because a war thousands of kilometres away exposed structural weaknesses we have known about for two decades.

I want to end on a point that often gets lost. This is not a Madani problem, or a Pakatan Harapan problem, or a Barisan Nasional problem, or a Perikatan Nasional problem. The trajectory described here stretches across every coalition that has held power since the Asian Financial Crisis. The ratio of operating to development expenditure has been crowding out the future since the early 2000s. The tax base has been narrowing while social spending demands have been widening. The fuel subsidy has been protected by every government because no government wanted to be the one that touched it.

We are now in a position where external events are forcing the conversation that domestic politics refused to have for twenty years. The RM204 billion record is real. The relief on cleared corporate tax refunds is real. The fiscal danger is also real. Citizens who understand the numbers are harder to placate with slogans, and that is enough reason to keep writing about them.