The Malaysian government has tabled its Budget 2023 today. In line with market and OCBC’s expectation, Budget 2023 represents a balancing act between the need to support the Malaysian economy and the determination to continue with fiscal consolidation. 2023 Budget deficit has been planned at 5.0% of GDP, which is an improvement from the 5.6% of GDP for 2022. The improvement is to be achieved via a higher nominal GDP (a bigger-sized economy) while the fiscal deficit amount is planned to be a tad smaller than the 2022 outcome.

The spending package for 2023 is mildly smaller than the outcome for 2022 but remains generous. The decrease in expected fiscal spending is primarily due to the expiry of the COVID-19 Fund and spending optimization measures such as reducing spending wastages and shifting to a more targeted subsidy framework. The Budget remains supportive of economic growth both on a short-term and long-term horizon. Allocation on development expenditure is planned at MYR97bn, a significant increase from the previous year. This is expected to enhance Malaysia’ long-term growth potential via investments in infrastructure, health care facilities and educational institutions under 12MP. For instance, Malaysia will expand the capacity of Penang and Subang airports, which is timely given the increasing international visitor arrivals, especially with China’s reopening. 

Fiscal revenue is expected to fall slightly alongside slower economic growth and expected moderation of commodity prices. The government forecast 2023 GDP growth at 4.5%, a slowdown from the impressive 8.7% in 2022. OCBC’s 2023 GDP growth forecast for the Malaysian economy is 4.4%, partly due to the high base last year as well as the global growth slowdown, especially in key markets. There are policies to broaden the tax base and streamline tax reliefs to mitigate the impact on fiscal revenue. We believe these policies will be carried out in a calibrated manner, as the government recognises the challenge of rising cost of living particularly for vulnerable groups.

Notable budget announcements included the shift to a more progressive tax system with the personal income tax cut by 2% for those earning a taxable income of MYR35,000-100,000 to benefit 2.4 million taxpayers, whereas those earning MYR100,000-1million will see higher tax rate of 0.5-2% affecting less than 150,000 taxpayers. In addition, Malaysia will introduce taxes for luxury goods this year, plan for excise duty on liquids and gels containing nicotine, as well as study imposing a capital gains tax. Malaysia will also cut the corporate income tax rate for smaller firms from 17% to 15%.

Budget 2023 strikes a balance between the need to support the economy and the commitment on fiscal consolidation. The Budget can be expected to be welcomed by the market.