Increase of Capitation Grant Rate Will Boost Economy Growth
The rate of capitation grant that will be distributed to state governments is set to be increased by 25% (RM109 million) to RM548 million starting 2026, which is scheduled for approval during the 2025 National Finance Council meeting.
“This marks the first time the capitation grant rate has been reviewed since 2002, reflecting the MADANI government’s commitment to assisting state governments in delivering services to the people,” said Prime Minister Datuk Seri Anwar Ibrahim.
The National Finance Council also approved improvements to the Ecological Fiscal Transfer for Biodiversity Conservation’s (EFT) implementation guidelines.
According to Anwar, the MADANI government’s focus on preserving and conserving the environment is demonstrated by the rise in the EFT allocation from RM150 million in 2023 to RM200 million in 2024 and up to RM250 million for this year.
“Through the National Finance Council, the MADANI government demonstrates its commitment to cooperate with and provide continuous support to all state governments towards the development of Malaysia MADANI,” the prime minister said.
Anwar also stated that the federal government grants to state governments amounted to RM9.3 billion in 2024 and the figure will be increased further this year with an allocation of RM9.8 billion for the benefit of all Malaysians.
The federal government also plans to implement inclusive development, where newly approved development projects approved in Budget 2025 will be aligned with the priorities of each state government.
In addition, he noted that the allocation for agricultural programmes in cooperation with the state governments has been raised to RM300 million for this year from RM150 million in 2024.
On this, Malaysian Economic Association president Dr Yeah Kim Leng believes that the indirect multiplier effects would further enhance its contribution to the national gross domestic product (GDP) and cause increased spending to 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 said.
Yeah also noted that while the increase is insufficient to fully cover the rising inflation and governance costs since 2002, it is still 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 continued.
He 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 explained.
Meanwhile, Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashim said the higher allocation indicates that the federal governmentis 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,” Yeah commented.
Ultimately, he said this move 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.
This, he said, would result in a more vibrant economy, leading to quality employment creation and business opportunities.
