KUALA LUMPUR - Malaysia will widen the scope of its sales and services tax (SST) and reform the subsidy of a widely used fuel next year, Prime Minister Anwar Ibrahim said on Friday as he announced record budget spending of 421 billion ringgit ($98 billion).

The government said it was on track to narrow its fiscal deficit to 3.8% of gross domestic product (GDP) next year, from an estimated 4.3% in 2024.

"Next year, the fiscal reforms will be more aggressive and inclusive, with the progressive expansion of tax revenue and the targeting of subsidies for those most in need," Anwar told parliament.

Since taking office in 2022, Anwar has sought to trim a hefty subsidy bill and improve tax collections to reduce the deficit, with a medium-term goal of getting it to 3% of GDP.

This year the government cut blanket subsidies for diesel, electricity, and chicken, among others. Anwar said on Friday that policy would be extended to the RON95 transport fuel in the middle of 2025.

Budget papers released before Anwar spoke showed 52.6 billion ringgit was allocated for subsidies and social assistance in 2025, down from 14.4% from this year.

On the revenue side, the government will progressively expand the SST from next May, widening it to include commercial services, non-essential goods and premium imports such as salmon and avocados, Anwar said.

The budget reports also showed plans to enforce a global minimum tax from 2025.

Revenue is seen rising by 5.5% to 339.7 billion ringgit in 2025 from 322.1 billion ringgit this year, according to the fiscal and economic outlook reports released with the budget.

The 2025 spending, up 3.3% on this year's 407.5 billion ringgit spending, includes development expenditure of 86 billion ringgit and operating expenditure of 335 billion ringgit.

Operating expenditure, which makes up nearly 80% of the budget, will rise 4.2% from 2024, primarily driven by a public service restructuring that will see pay hikes and salary adjustments for 1.6 million government employees, the reports said.

STEADY PETRONAS DIVIDEND

State energy firm Petronas IPO-PETO.KL will pay the government a dividend of 32 billion ringgit in 2025, unchanged from this year, in anticipation of declining petroleum-related output and revenue.

Economic growth was forecast at 4.5% to 5.5% in 2025. This year's growth forecast was raised to 4.8% to 5.3%, from 4% to 5% previously, the reports showed.

The government said headline inflation was projected to remain manageable next year at between 2% to 3.5%, up from this year's revised estimate of 1.5% to 2.5%.

The federal government debt-to-GDP ratio was seen steady around 64% in 2025.

Despite a global easing cycle, the government said Malaysia's monetary policy was unaffected by the timing and policy path of other central banks and would continue to be guided by domestic considerations.

Bank Negara Malaysia has kept its benchmark interest rate at 3.00% since May 2023, with analysts expecting no changes until at least 2026.

($1 = 4.3070 ringgit)

(Reporting by Rozanna Latiff, Danial Azhar and Ashley Tang; Editing by John Mair)