KL50_24022023_PARLIMEN
PRIME Minister-cum-Finance Minister Datuk Seri Anwar Ibrahim delivered a total expenditure of RM386.1bil or 20.4% of gross domestic product (GDP) in 2023, which is even higher than the original budget of RM372.3bil.
That said, the Budget 2023 allocation marked a decline of 2.3% from 2022’s RM395.2bil, due to the expiry of the special trust Covid-19 Fund.
Development expenditure allocation will increase by 35.5% to set a new record high of RM97bil in 2023 (RM71.6bil in 2022), of which US$3bil (RM13.3bil) is for the redemption of 1MDB bonds maturing on March 9, 2023, and hence, does not add value to the economy.
With still strong federal revenue collection, the overall budget deficit is projected to be lower at RM93.9bil or 5% of GDP in 2023 from minus 5.6% of GDP or RM99.5bil in 2022. This new budget deficit marks an improvement of 0.5% pt from the original budget (minus 5.5% of GDP) tabled in October 2022.
Broadly, the new Budget 2023 implements measures and initiatives to strengthen economic resilience to mitigate against the global economic slowdown and slumping exports; coping with the rising cost of living pressures, increasing income and employment opportunities, improving business investment and competitiveness, restoring the tourism industry, and driving digitisation and automation as well as environmental, social and governance or ESG.
Higher allocation for education and training, public healthcare, flood mitigation and climate change-related projects, public urban and rural infrastructure (transport, energy and utilities) and telecommunications.
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.
How realistic is this set of budgetary estimates?
Federal revenue collection calls the shots. Despite a high revenue base in 2022 and weaker economic growth in 2023, the Treasury estimates revenue to decline moderately by 1% to RM291.5bil (2022: plus 25.9% to RM294.4bil), largely due to a strong double-digit growth of 17.4% or RM14.3bil increase in corporate income taxes.
Petroliam Nasional Bhd (PETRONAS) dividend remains substantial at RM40bil (RM50bil in 2022) with a lower Brent crude oil price assumption of US$80 (RM355) per barrel in 2023 versus US$100 (RM443) per barrel in 2022. The tax measures introduced in the budget will result in a net revenue loss of RM753.2mil in 2023.
It was observed that the government has generally missed the revenue target during the period 2014-2021. Hence, there are risks to the budget deficit from a weaker-than-expected economic growth, weaker consumption due to inflation and rising cost of living pressures as well as softer commodity prices, which could affect the tax revenue collection.
Why the still high allocation for both operating and development expenditure? Is this counter-cyclical stance necessary given the government does not forecast a recession?
The Treasury is still projecting a 4.5% economic growth in 2023 as the economy normalises from a robust growth of 8.7% in 2022.
The Socio Economic Research Centre (SERC) has a lower estimate of 4.1% real GDP growth in 2023. Moderating exports, the dampening impact of inflation and higher cost of living, as well as higher interest rate will weigh on domestic demand.
After expanding strongly by 26.1% in 2021 and 25% in 2022, gross exports have slowed markedly to 1.6% year-on-year (y-o-y) in January 2023 (11.8% in the fourth quarter of 2022), and the Treasury expects it to slow sharply to 1.6% in 2023 (SERC’s estimate: 1.8%).
Export contraction risk
We caution the risk of exports contraction ahead, taking the cue from the exports of some countries, which have already contracted.
Can private consumption (61.2% of GDP in 2023) hold the fort in 2023? Private consumption, which has expanded by 11.3% in 2022 and 1.9% in 2021, will normalise to a more sustainable pace of 6.1% in 2023 (SERC’s estimate: 5.9%).
This is attributable to the waning effects of pent-up demand and Employees Provident Fund withdrawals, cost of living pressures as well as the lag impact of higher interest rates.
However, a stable unemployment rate (2023 estimate: 3.5% to 3.7%; 3.6% in 2022) and improved wages, as well as the anticipated boost from a revival of China tourist arrivals will partially underpin retail spending.
The continuation of cash assistance for the targeted households and individuals, special payments and salary increments for civil servants as well as a 2% reduction in the personal income tax rate for chargeable income exceeding RM35,000 and RM100,000 will also help to support consumption.
The Treasury has revised its inflation estimate higher to between 2.8% and 3.8% in 2023 (2022: 3.3%) from 2.8% to 3.3% previously (SERC’s estimate: 2.5% to 3.3%).
We see risks to inflation are skewed to the upside due to the underlying price pressures from cost and demand; the gradual implementation of targeted subsidy mechanism and the likely floating of eggs’ and chickens’ prices in June 2023.
The consumer price index or CPI increased 3.7% y-o-y while core inflation was up 3.9% in January 2023.
Subsidies and social assistance are budgeted to remain substantial at RM58.6bil in 2023 despite a decline of 12.9% from RM67.4bil in 2022 due to a gradual implementation of the targeted subsidy mechanism and softer commodity prices.
However, it is RM16.6bil higher than RM42bil in the original budget.
The government confronts difficult trade-offs in subsidies rationalisation amid rising cost of living pressures as well as increases in food and services prices.
Currently, the bulk of the government’s subsidies go to essential items such as eggs, chicken, cooking oil and fuel, as well as utilities (water, electricity and gas).
We have been raising our reservations about the budgeting of high development allocation, given the implementation capacity constraints of the ministries and agencies, and the effectiveness of projects/project implementation as well as the leakages and misappropriation of public funds.
The Auditor-General’s (AG) Report has been flagging poor oversight, inconsistent disbursement of grants, and irregularities among the litany of issues in the yearly audit reports. The government must give serious attention to the irregularities and the ministers be made accountable to the AG audit.
The real multiplier impact of the projects would depend on how fast the allocation is disbursed and spent wisely, as well as effectively carry out the planned projects and programmes.
Malaysia needs fiscal discipline and reforms to rebuild fiscal space. Fiscal reforms initiatives such as the Fiscal Responsibility Act or FRA is scheduled to be tabled in 2023; explore options such as defined contribution to efficiently manage future pension contributions and reviewing public expenditure will be implemented to deliver better fiscal outcomes, enhance governance, accountability and transparency in financial management as well as ensuring debt sustainability.
Reducing persistently high levels of government debt and liabilities (RM1.45 trillion or 80.9% at end-2022) remains a key policy priority. Policy convergence towards sound fiscal balance sheet and sustainable debt levels are paramount to regain fiscal buffers and increase economic resilience.
The government must not succumb to fiscal fatigue, which is more likely to set in at a very high debt ratio.
In the absence of credible fiscal action, the fiscal space and downward debt adjustment would be much more constrained not only by higher committed expenditure, but also to meet mounting ageing-related spending pressures, environmental change and higher future costs of public debt.
Tax revenue reforms
On the tax revenue reforms, the budget did not commit a wholesale tax reform to broaden the tax base as the current narrow tax base is unsustainable. Malaysia’s tax revenue to GDP ratio of 11.6% in 2023 is low compared to the Asia-Pacific region (19.1%).
In times of meeting revenue shortfall, the government has implemented a piecemeal revenue enhancement approach or turned to PETRONAS as its last resort of banker, thanks to soaring crude oil prices.
But once the high crude oil prices fizzle out, the challenges for having a sustainable revenue stream to meet high committed obligations and expenditure remain.
The budget has increased the marginal tax rate of higher income bracket and also study the implementation of the Capital Gains Tax (CGT) starting at a low rate on the disposal of non-listed corporate shares in 2024.
We are concerned that higher marginal tax rate can dampen work efforts, affect productivity and hinder talent retention.
Malaysians may seek career opportunities elsewhere that offer more attractive remuneration packages and a competitive income tax rate coupled with a conducive working environment as well as strong purchasing power.
The proposed implementation of the CGT should be studied comprehensively in terms of cost-benefit analysis impact to the economy, including capital flight as well as the impact on domestic capital market.
There are concerns the CGT would eventually cover other asset classes such as real estate; shares of listed companies and other suitable assets.
The government has not decided to implement the goods and services tax.
While the current weakening economic conditions, inflationary pressures and rising cost of living do not warrant a re-introduction of a broad-based consumption tax, a gradual implementation of subsidy rationalisation and consumption tax (starting with a lower rate of 4%) can be partially mitigated by higher cash assistance for the targeted groups as well as the exemption of necessities from the consumption tax.
Lee Heng Guie is Socio-Economic Research Centre executive director. The views expressed here are the writer’s own.
