Anwar has sounded a note of caution on the federal government’s debt and off-budget liabilities, which has now reached RM1.5 trillion or more than 80% of GDP. — Reuters
ON Feb 24, Prime Minister cum Finance Minister Datuk Seri Anwar Ibrahim will present the new Budget 2023 of the unity government. It is also the first national budget for Anwar after a lapse of 25 years when he last assumed the post of Finance Minister from 1991 to 1998 – a spectacular period in which the Malaysian economy has registered impressive performance.
The Malaysian economy faces mounting headwinds in 2023. Global growth is projected to decelerate sharply to its weakest pace in nearly three decades.
China’s reopening eases fears of a global recession at a time when advanced economies are slowing as a result of rising interest rates aimed at containing inflation, worsening financial conditions, and continued disruptions from the military conflict in Ukraine.
Malaysia’s exports growth has moderated fast since last September from 30.1% year-on-year to 6% in December.
On the domestic front, inflation issue and cost of living pressures, increased business costs, the persistent shortage of manpower, higher interest rate environment will temper domestic demand and business activities.
The man on the street is worried about financial stress and shrinking purchasing power due to inflation and rising cost of living. Businesses are keeping the cautiously optimistic mood while coping with increased operating costs.
The positive factors that help to support discretionary consumer spending growth, albeit normalising from the strong pent-up demand are the continued improvement in employment and income conditions.
Larger improvement in the tourism sector is expected, thanks to China’s reopening which will witness a revival of Chinese tourists.
New Budget 2023 – How many changes?
Will the finance minister maintain the same level of total expenditure as presented at the original budget on Oct 7, 2022 (of the total expenditure budgeted of RM372.3bil, development expenditure is budgeted at a record high of RM95bil) against projected total revenue of RM272.6bil, resulting in a budget deficit of 5.5% of gross domestic product (GDP) in 2023, a slight reduction from estimated minus 5.8% of GDP in 2022?
Anwar has sounded a note of caution on the federal government’s debt and off-budget liabilities, which has now reached RM1.5 trillion or more than 80% of GDP.
What the underlying assumptions and parameters have changed from the original Budget 2023? While the International Monetary Fund’s latest assessment indicates that it is not a rosy picture for the global economy, it is not as bad as feared a couple of months ago.
Positive surprises, including China’s reopening and growth in Europe have eased concerns about an impending global recession. However, inflation remains elevated and higher interest rates to fight inflation will weigh down both output and demand.
Brent crude oil price averaged US$83.09 (RM358) per barrel as of January (US$100 or RM430 per barrel in 2022), moderately lower compared to the original budget’s assumption of US$90 (RM387) per barrel.
We expect Petroliam Nasional Bhd’s (PETRONAS) dividend to likely be maintained at RM35bil as budgeted – lower than the RM50bil in 2022. We do not discount the possibility of PETRONAS raising its dividend contribution if oil prices go higher.
Subsidies and social assistance are expected to remain substantial at RM42bil or more as the government confronts difficult trade-offs amid rising cost of living pressures as well as increases in food and services prices.
Currently, the bulk of the government’s subsidies goes to essential items such as egg, chicken, cooking oil and fuel, as well as utilities (electricity).
Starting January, the implementation of targeted electricity subsidies has incurred RM10.76bil.
Will the government move to implement targeted fuel subsidy for optimising limited financial resources and ensuring fiscal sustainability?
Latest fuel subsidy for RON95 is estimated at around 90 sen per litre. With global crude oil prices softening, it provides a window of opportunity to pursue reforms of subsidy programmes.
Rationalisation of expenditure
We believe that Budget 2023 will take a balanced approach towards fiscal and debt consolidation. Overall fiscal deficit is projected to be lower at between 4.5% and 5% of GDP in 2023 compared with the original budget of minus 5.5% of GDP. The interim mini-budget of RM163.7bil tabled on Dec 19, 2022 has made up 44% of total original budget (RM372.3bil).
While we expect development expenditure allocation to increase from 2022 to 2023, it will be reduced from the original budget of RM95bil as the government is expected to rationalise spending programmes and projects based on priority and the agencies’ implementation capacity.
By economic sector, the budget will continue to allocate most of development expenditure on education and training, public healthcare, flood mitigation and climate change related projects, public urban and rural infrastructure (transport, energy and utilities) and communications.
Targeted measures and initiatives to promote home ownership such as stamp duty exemption for the property priced below RM1mil and the construction of more affordable rural houses under public housing programmes.
Agriculture and food security will be given continued emphasis and facilitation support through financing facilities, tax incentives as well as various subsidies and incentives for farmers and fishermen.
Broadly, we expect the Budget 2023 to implement measures and initiatives to strengthen economic resilience to mitigate against the impact of global economic slowdown and slowing exports while implementing reforms to retool Malaysian businesses.
Resilience
The initiatives that have already been implemented in the mini-interim budget and likely to be implemented are aimed at coping with rising cost of living pressures, increasing income and employment opportunities, improving business facilities and the competitiveness of small and medium enterprises (SMEs), restoring the tourism industry, and driving digitisation and automation.
For the targeted financial distress households (B40) and also M40, the yearly cash assistance (rebranded as Sumbangan Tunai Rahmah) benefiting 8.7 million recipients with a total allocation of RM1.67bil has started the first batch of payment in January.
We expect the budget to provide a clear policy commitment towards the rollout of targeted subsidies rationalisation on food and fuel aimed at scrapping subsidies gradually and replacing them with targeted subsidies through cash assistance for the B40 community.
For the M40 and below tax payers, the proposed cut in personal income tax rate in the original budget will likely be maintained.
The tax cut will result in income tax savings between RM250 and RM1,000, releasing about RM800mil disposable income.
Employers and employees will be encouraged to retrain, reskill and upskill for strengthening competency, improving labour productivity and also employees’ employment prospects to make them ready for future jobs.
These include Apprentice@Work for the youth’s participation in technical and vocational education and training courses and a matching fund or tax rebate/allowance scheme for SMEs’ manpower development such as digital literacy and data solution services as well as technology-enabled solutions.
For the industry and SMEs, the budget will unveil development programmes, initiatives, tax and non-tax incentives to encourage them to enhance their competitive edge and venture into new growth areas to build resilience and withstand future adverse shocks.
These include lowering the preferential tax rate for SMEs on the first RM500,000 chargeable income, one-off grant, direct loans and financial guarantees as well as 100% stamp duty exemption on restructuring or rescheduling of loans or financing agreements.
A facilitation fund, including soft loans, reinvestment allowance and accelerated capital allowance will be provided to encourage large businesses and SMEs in all sectors to adopt digitalisation and automation as well as environmental, social and governance.
The tourism and leisure industry, including tour operators and related ancillary services will be given fiscal support (discounts, vouchers and rebates as well as tax exemption for the purchase of the purchase of locally assembled completely knocked-down tourism vehicles for the use of rental and drive and tour buses) to boost domestic tourism, especially to welcome the return of Chinese tourists.
Inclusivity
No one is left behind will be the guiding principle in ensuring that the budget takes an interest in one another’s well-being – a fairer and more inclusive Malaysia.
For ensuring a balanced regional development, the poorer states should be given a fairer share of total allocation of development expenditure.
Better targeted social safety nets for the vulnerable households and disadvantaged groups will be enhanced via direct cash transfer, retraining, skilling and employability scheme, public work programmes as well as welfare assistance for senior citizens.
The workers most affected by lack of social protection are those in the informal sector, micro businesses such as hawkers, and small businesses as well as workers in the gig economy.
The budgetary cost of the social safety net programme should not be so high that it fuels inflation or crowds out spending that is crucial for securing high-quality economic growth, such as expenditure on infrastructure in rural areas, water and sewage, and basic education and primary health care.
Sustainability
Malaysia’s promise to achieve net-zero carbon emissions by 2050 has committed the government to a sustainability and green strategy. The proposed funding programmes and tax incentives to encourage the adoption of green technology in the original budget will likely be maintained.
They include:
> Extending the period to apply for the Green Investment Tax Allowance and Green Income Tax Exemption to Dec 31, 2025; to extend the tax allowance and exemptions from three years to five years;
> The Green Technology Financing Scheme will be enhanced by increasing the guaranteed value to RM3bil up to 2025, and
> Soft loans under the High Technology and Green Facility to support innovative startups, as well as the Low Carbon Transition Facility for SMEs.
The government-linked companies and government-linked investment companies will take the lead in driving the sustainability agenda in fully compliant with environmental, social and governance standards as well as carbon-neutral operations, including undertaking green procurements as well as providing electric vehicle (EV) infrastructure such as EV charging facilities.
To encourage the take-up of EVs, EV incentives will be extended as well as expanded as proposed in the original budget. These include:
> Extending exemptions on import and excise duties on completely built-up EVs until Dec 31, 2024;
> Exemptions on approved permit fees for the import of EVs until Dec 31, 2023;
> A 100% tax exemption on the statutory incomes of manufacturers of EV chargers, as well as 100% Investment Tax Allowance, from year of assessment 2023 until year of assessment 2032.
It is hoped that a longer time frame for the exemption of import and excise duties as well as the exemption of road tax (till 2025 currently) as the volume of EVs is still very small at just 2% of the total automotive industry’s volume.
The government must fast track its target of installing up to 10,000 public charging stations for EVs in Malaysia by 2025. In addition, the government can consider reviewing the road tax calculation guideline for EVs to make it fairer and affordable to own an EV for the masses, not just for the consideration of purchase price.
For EV owners, the higher the power output of an EV, the more road tax you’ll be paying when compared with owners of internal combustion engine vehicle owners. This is not in sync with driving more efficient and less polluting vehicles and greening the environment.
Lee Heng Guie is Socio-Economic Research Centre executive director. The views expressed here are the writer’s own.
