PETALING JAYA: The government’s target of a 5% fiscal deficit this year may be challenging amid the anticipation of slower global economic growth.
Although the global economic outlook for 2023 is expected to improve, external headwinds may dampen it and possibly derail the government’s target, according to economists.
The external headwinds include geopolitical tensions between the United States and China as well as the conflict between Russia and Ukraine.
According to the Finance Ministry, the country’s fiscal deficit is expected to consolidate further in 2023 to 5% of gross domestic product (GDP), falling to RM93.94bil from RM99.48bil in 2022.
The government’s GDP growth forecast of 4.5% for this year, is also higher than the World Bank and the International Monetary Fund’s projection of 4% and 4.4% respectively, but ahead of the consensus median estimate of 4.2% growth.
RAM Rating Services Bhd economist Nadia Mazlan told StarBiz that the government’s commitment to fiscal consolidation is commendable with its fiscal deficit target of 5% by year-end, but this is dependent on strong revenue generation and resilient economic growth.
RAM Rating Services Bhd economist Nadia Mazlan
“While fiscal revenue this year is estimated to shrink to RM291.5bil (a reduction of RM2.9bil from last year), corporate and individual taxes are expected to increase by RM14.3bil and RM1.5bil respectively.
“A global downturn from an escalation of current external headwinds would impede domestic growth and this could result in lower corporate taxes as well as petroleum-related revenues if commodity prices were to stay below the government’s estimate of US$80 (RM362) per barrel.
“While new tax measures (on vape products and luxury goods) may support revenue generation, it is unlikely to offset any major shortfall from potentially slower economic growth,” Nadia noted.
Centre for Market Education CEO Carmelo Ferlito said the revised Budget 2023 was lacking in terms of reforms to organically raise revenue and strategies to reduce spending.
“The government is probably relying more on economic growth to boost revenues. But I think it should do more to rationalise spending.
“I think a tax reform should be introduced. For example, reintroduce the goods and services tax to improve tax collection and develope special schemes for microbusiness to exit the shadow economy.
“At the same time, serious plans should be developed to cut spending like targeted subsidies, get rid of some government-linked companies, rationalising hiring in the public sector, etc,” he said.
Centre for Market Education CEO Carmelo FerlitoDevelopment expenditure under the budget saw a new record high RM97bil in 2023 (RM71.6bil in 2022), while operating expenditure allocation is estimated to decrease to RM289.1bil.
Bank Muamalat Malaysia Bhd head of economics, market analysis and social finance Mohd Afzanizam Abdul Rashid said the government’s revenue would normally move in tandem with nominal GDP.
Based on government estimates, he said the nominal GDP is expected to grow by 5.6% in 2023. This is way below the 36-year compound annual growth rate of 9%.
Therefore, if the global GDP is resilient this year along with supportive measures to sustain domestic demand, the government should be able to achieve its budgeted numbers, according to Afzanizam.
While projecting a 4% GDP growth for this year, he said the government should kick start spending as per budgeted numbers.
This would allow the multiplier effects to work through in the economy resulting in higher GDP growth.
By extension, he said the government would be able to collect more revenue via direct and indirect taxes as well as non-tax revenue.
He said another way to boost the government’s coffers and improve the fiscal situation would be in controlling its spending programme.
“Austerity measures are needed as the government must ensure that every ringgit spent would yield the desirable outcome such as higher productivity and avoid wastages.
“Notwithstanding that, austerity will always be associated with unpopular moves.
“Therefore, the message will need to be clearly sent to all the stakeholders.
“Otherwise, it will create anxiety among the businesses and the public as it will affect their livelihood,” said.
Bank Muamalat Malaysia Bhd head of economics, market analysis and social finance Mohd Afzanizam Abdul Rashid
Afzanizam said the government would need to show resolve in fiscal consolidation to bring confidence to the economy.
Foreign ownership in Malaysian government securities has dwindled from as high as 51.6% in October 2016 to 34.5% as of January this year. As such, there is a lot to be done to rejuvenate potential GDP growth, he said.
Economist Shankaran Nambiar said the measures to increase tax revenue are limited.
To handle the narrow fiscal gap, he said the government had chosen to reduce leakages and investment in mega projects.
He did not foresee targeted subsidies in the first half of the year.
“There is not going to be any serious attempt to reduce operating expenditure.
“What is most important is to appease fears of food prices for vegetables, chicken, eggs, etc. It is also important to create and share a common direction for the economy,” added Nambiar, who is the Malaysian Institute of Economic Research head of research.
He forecast the GDP growth to be at around 4% to 4.5% for the year spurred by domestic demand.
Malaysian Institute of Economic Research head of research Shankaran Nambiar.
China’s economic growth of about 5% to 6% this year could help Malaysia hit the upper end of. 4.5% GDP growth this year.
Meanwhile, Nadia of RAM Rating said managing the efficiency of government expenditure and plugging leakages are important to ensure the budgeted fiscal expenditure is not exceeded.
Another key initiative that would have a major impact on the fiscal position is the switch to targeted subsidies from the current blanket subsidies.
Subsidies and social assistance spending is expected to reach RM58.6bil this year, representing 15% of total fiscal expenditure, according to Nadia.
“Given that the bulk of the allocation is for fuels, rolling out targeted subsidies earlier than planned could potentially lead to substantial savings.
“The timing and mechanism of targeted subsidies will determine the extra net savings for this year,” she said.
Economic growth is expected to moderate to 4% to 5% this year from 8.7% in 2022 due to dissipating low base effects as well as a deceleration in global activity, according to Nadia
