25 PCT INCREASE IN CAPITATION GRANT TO STRENGTHEN STATE BUDGETS, BOOST ECONOMIC GROWTH

By Abdul Hamid A Rahman

KUALA LUMPUR, March 11 (Bernama) -- 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 said the indirect multiplier effects would further enhance its contribution to the national gross domestic product (GDP), but more importantly, the increased spending would benefit the state economies. 

“This will contribute to job creation, infrastructure development, and other improvements that raise the living standard and quality of life of the citizens,” he told Bernama. 

He was commenting on Prime Minister Datuk Seri Anwar Ibrahim, who is also the finance minister, announcing that the capitation grant rate distributed to state governments will be increased by 25 per cent, or RM109 million, to RM548 million effective 2026.

The 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.

“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 said.

He also opined that fiscal decentralisation, which enables state governments to mobilise revenue and spend on state-specific development priorities, is a desirable long-term goal.

“This 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,” he said.

Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the higher allocation indicates that the federal government is empowering state governments to manage their financial affairs. 

“Generally speaking, state governments have a better understanding of local needs concerning infrastructure and relevant assistance required by their citizens. 

“This could also foster better coordination and collaboration between the federal and state governments, especially in implementing the national agenda,” he said. 

Ultimately, he said 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, which leads to quality employment creation and business opportunities,” he added.

-- BERNAMA