Kuala Lumpur: The 25 per cent increase in the capitation grant to state governments, amounting to RM548 million effective 2026, is a significant step towards supporting state budgets. Malaysian Economic Association president Dr Yeah Kim Leng noted that the indirect multiplier effects would further enhance its contribution to the national gross domestic product (GDP), and the increased spending would benefit the state economies.
According to BERNAMA News Agency, Dr Yeah Kim Leng highlighted that the grant will contribute to job creation, infrastructure development, and other improvements that raise the living standard and quality of life of citizens. He was commenting on Prime Minister Datuk Seri Anwar Ibrahim’s announcement that the capitation grant rate distributed to state governments will be increased by 25 per cent, or RM109 million, to RM548 million effective 2026. This new rate was approved during the 2025 National Finance Council meeting.
Yeah noted that while the increase is insufficient to fully cover the rising inflation and governance costs since 2002, it remains a sizeable adjustment that will help state governments balance their budgets and increase spending to improve the welfare and livelihood of state citizens. He emphasized that due to limited revenue sources and the inability to borrow without federal government approval, state governments will continue to rely on federal allocations, especially for large-scale state development and investment funding.
He also opined that fiscal decentralisation, enabling state governments to mobilise revenue and spend on state-specific development priorities, is a desirable long-term goal. This approach could fully unlock each state’s development potential through a bottom-up approach rather than the current centralised system. Nevertheless, in the short to medium term, states will continue to depend on federal allocations for large infrastructural and development funding.
Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid stated that the higher allocation indicates that the federal government is empowering state governments to manage their financial affairs. He pointed out that state governments generally have a better understanding of local needs concerning infrastructure and relevant assistance required by their citizens. This could foster better coordination and collaboration between the federal and state governments, especially in implementing the national agenda.
Ultimately, Dr Mohd Afzanizam Abdul Rashid mentioned that this would improve investors’ and businesses’ experience when dealing with government officials, which can be achieved through a strong relationship between the federal and state governments. The resultant effect would be a more vibrant economy, leading to quality employment creation and business opportunities.