<p>Malaysia used to be categorized as one of the “High Performing Asian Economies” for its track record of high economic growth and macro-economic stability, among others. However, recent debates on the Malaysian economy point to slowing growth, being caught in a middle-income trap, persisting income inequality, budget deficit, and increasing government debt after the Asian Financial Crisis. To overcome these problems, the Malaysian government launched an economic-fiscal-distributive reform package called the New Economic Model (NEM) in 2010. However, the implementation of the NEM has been faced with a series of compromises and deadlocks. This is surprising given the prior characterization of Malaysia as a “strong state.”</p><p>This paper aims to reveal the weakness of the state of Malaysia by shedding light on the persisting budget deficit. Based on federal budget documents, the paper argues that the expanding public expenditure is attributed to the increase in the following: (i) redistributive programs, such as subsidy for gas and oil and cash transfers to the lower-income group as a means to earn electoral support; and (ii) particularistic distributive programs that are often allocated by the Prime Minister, benefit Bumiputera businesses and cronies of the dominant governing party, the United Malays National Organization (UMNO), and consolidate the intra-party power basis. In addition, the Government’s failure to strengthen the revenue base given the fear of losing votes can be regarded as another driver of the persisting fiscal deficit.</p><p>In spite of the NEM’s target of a balanced budget by 2020, the Malaysian government has been failing to implement fiscal reforms. The paper argues that this is a result of the lack of autonomy of the Prime Minister vis-a-vis the voters and the intra-party constituency. Malaysia’s leadership has been increasingly sensitive to the demands of its broad and internal constituents owing to increasing electoral competition since the Asian Financial Crisis, glaringly manifested in the 1999, 2008 and the 2013 General Elections. Such a weak state is a historical by-product of a strong state in the 1990s that marginalized intra-UMNO opposition and laborers in order to implement development policies, and eventually brought about a face-off between the governing party that keeps cohesion through distribution of rents, on one hand, and opposition that expanded its support by exploiting the issues of lack of transparency, freedom and equality, on the other.</p><p>To regain fiscal balance, the Malaysian government is faced with a dilemma. Decreasing budgetary allocation for the lower income group or the intra-UMNO interests will further weaken the government. Likewise, tax raise will turn away voters who are skeptical about the way their money is used. While the promise of fiscal accountability may persuade some of the skeptical taxpayers, vested interest groups would continue to resist such moves.</p>