New incentives for foreign investment will be finalised by January 1, and the government will also prepare steps to encourage special investments of up to 1 billion ringgit ($238.83 million) every year for five years.
Lim Guan Eng told reporters that given the global economic uncertainties, the country needed to "not only convince but reassure investors" that the Southeast Asian nation will be back on track for fiscal consolidation in 2021.
A total of 297.02 billion ringgit (70.96 billion USA dollars) will be allocated for the 2020 budget, down from 314.55 billion ringgit (75.49 billion US dollars) allocation for this year.
Analysts had expected the government to unveil an expanded budget overall, but it is grappling with a RM1 trillion debt pile left behind by its predecessors and declining revenue.
Inflation is expected to remain well anchored at 2.0 percent in 2020 and the government expects to collect 244.5 billion ringgit in revenue next year. Unlike this year, there will be no repeat of a RM30 billion one-off payout to the government by state energy firm Petronas.
Esther Lai, head of sovereign ratings at RAM Ratings, a Malaysian ratings agency said the 3.2% deficit target was within expectations. However, Mr Lim ruled out re-introducing a Goods and Services Tax (GST) that was repealed past year.
But development spending will expand to RM56 billion from RM53.7 billion in 2019 to fund the government's plan to boost economic activity, invest in education and training, and "revitalise public institutions and public finances".
In an accompanying fiscal outlook report, the government said that it would also set aside an additional 3 billion ringgit to speed up on-going major infrastructure projects.
Malaysia's government unveiled on Friday a smaller budget than expected for next year but flagged a wider budget deficit than earlier estimated, and said it would step in with stimulus measures should global demand worsen.
Domestic demand is expected to rise 4 per cent this year and 4.8 per cent next year, supported by a stable labour market and low prices.
Policymakers expect petroleum-related revenue to fall 1.4% to 50.5 billion ringgit in 2020, based on a global crude oil price of $62 per barrel. "It is a pragmatic target as the government is striking a balance between supporting growth and keeping its promise for fiscal consolidation".