Preliminary views on budget 2019
Highlights
This year’s budget was themed as “a resurgent Malaysia, a dynamic economy, a prosperous society” with three focus areas 1) to implement institutional reforms, 2) to ensure the socio-economic well-being of Malaysians and 3) to foster an entrepreneurial economy. The focus areas clearly show an attempt by the government to strike a balance among reducing the burden of the people, inducing growth and setting the budget on the right trajectory.
The government sees that the fiscal deficit will be at 3.7% of GDP in 2018, 3.4% of GDP in 2019, 3.0% of GDP in 2020 and 2.8% of GDP in 2021 whilst in the medium term, it will be at around 2.0% of GDP. This is a rather rapid decline but the government claims that the elevated level in 2018 is due to the need to pay back 1MDB debt at RM1bn, the reclassification of RM3.7bn of off balance sheet liabilities back into the budget and the need to pay back GST refunds amounting to RM3.9bn.
Expenses
On the cost side, overall expenditure is expected to increase from 20.2% of GDP in 2018 to 20.6% of GDP in 2019. Operating expenditure is expected to increase from 16.4% of GDP in 2018 to 17.0% of GDP in 2019 whilst net development expenditure is expected to reduce from 3.8% of GDP in 2018 to 3.6% of GDP in 2019.
Among the measures the government has unveiled to reduce cost includes the following:
It should be noted that implementing these measures successfully to prevent leakages will take time as it may require designing the system itself, training staff and enforcing the new rules.
Interestingly, the government is expecting emoluments and retirement charges as a share of operating expenditure to fall between 2017 – 2019. They see it making up 45.9% of operating expenditure in 2017 before falling to 45.4% in 2018 and 41.8% in 2019. This comes despite Lim Guan Eng’s previous commitment that they would not be actively rationalizing civil servants.
The government will be allocating RM37bn to pay back the tax refunds in 2019. This comprises of RM19bn for GST and RM18bn for other taxes. This would exceed actually the amount the government claimed is owed in refunds of RM35.4bn and also hinting that it is expecting to pay it off in a year only. This is also possibly the main contributor to the increase in operating expenditure between 2018 and 2019.
Meanwhile, some interesting expenses that the government will be incurring include:
Revenue
On the revenue side, revenue is expected to increase from 16.5% of GDP in 2018 to 17.1% of GDP in 2019.
The government though has announced a number of changes to the tax system as follows. The key measures are as follows:
Some of these measures look like they can take time to implement and therefore, it shouldn’t be just immediately expected to just come rolling out in 2019. As expected, a limited form of digital tax looks like it would only be introduced in 2019.
Other new revenue raising measures they have talked about include:
Again, these measure may take time to implement especially if the government wishes to maximize revenue raised from them.
Petronas is also expected to raise its dividend contribution to RM30bn for 2019. This is not exactly unrealistic given that ICE Brent prices may edge up above US$70 per barrel next year.
In an attempt to manage the debt levels, some of the key measures the government has announced include:
Overall, fiscal slippage was expected in the short term given that the government’s situation was weighed down by the tax refund. Also, as mentioned, many of the measures need time to implement so therefore, in the longer term, the situation should improve if they are implemented successfully. Despite running a deficit, many of the factors driving it cannot necessarily be said to be simulative to the economy. The GST refunds after all go to firms rather than consumers. Going forward, the government has a big task at hand but they do appear determined to implement many of these measures.
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