KUALA LUMPUR: The tabling of Budget 2024 will likely unveil a number of restrictive measures underpinned by a fiscal consolidation roadmap grounded on responsible spending, says Socio-Economic Research Centre (SERC) executive director and economist Lee Heng Guie.
With Putrajaya having reaffirmed its commitment towards a sustained deficit reduction of between 4.5% and 5% of gross domestic product (GDP) in 2024 from an estimated 5% this year, some painful measures are necessary to broaden government revenue base and control expenditure, according to Lee.
He also called on the government to expedite the enactment of the Fiscal Responsibility Act and Government Procurement Act, while emphasising that a long-term as well as sustainable revenue and tax system has to be put in place.
“The government has limited fiscal space and as of 2022, our tax revenue base is only 11.7% to GDP which is lower compared with several other countries.
“This is because Malaysia depends heavily on direct taxes and not on indirect ones like consumption taxes,” he said.
For comparison, according to CEIC Data, Singapore’s tax revenue as of June was 16.7%, while the United States reported 18.7% as of December last year. In the meantime, the Organisation for Economic Cooperation and Development revealed that the tax income of the Chinese government was 21% as of 2021.
He said ad hoc revenue enhancement measures such as the implementation of windfall or prosperity taxes would not be as effective a solution to assist the government in garnering sustainable revenue compared with consumption taxes such as the goods and services tax (GST).
However, there is a possibility that Putrajaya is concerned that the GST may have a regressive impact on the economy, according to Lee.
“There are many ways to go around bringing back a sustainable revenue generator like a consumption tax.
“If the government is worried about a regressive effect, perhaps it can provide an exemption for most of the important consumption items.
“The principle behind the GST re-implementation is the more one spends or consumes, the more he or she will have to pay in terms of taxes,” he said.
He is also expecting more clarity on the targeted subsidies rationalisation at the upcoming Budget 2024, while anticipating that the initiative would be carried out on a measured and sequenced pace.
Owing to the similarities between price ceiling controls on consumption items and the targeted subsidy mechanism, Lee said the government has a tough balancing act and would likely be assisted by the central database hub initiative.
“There are many controlled items on the plate, such as sugar, rice, eggs, chicken, but the most important is fuel.
“The targeted subsidy mechanism has to be based on the principle of needs and income to meet the goals of efficiency and equity,” he said.
He said the implementation should be simple, easy and carry low administration costs, with a pre-announcement of the mechanism – such as between three to six months before implementation – on transparent and extensive communication.
On the targeted implementation of fuel subsidies, one procedure that he suggested was a staggered approach that could begin with diesel, before moving gradually to petrol.
On a separate note, Lee said Prime Minister Datuk Seri Anwar Ibrahim would likely introduce easing business application processes in the national budget, especially with a view of improving foreign direct investments.
“It is important that the federal and state governments, together with the local authorities, synchronise and collaborate better on this matter so that approvals and implementation can be sped up. On the other hand, we acknowledge the progressive role that Pasukan Petugas Khas Pemudahcara Perniagaan or Pemudah had played,” he added.
Lee pointed out that the Malaysian Investment Development Authority could provide regular updates on the implementation of approved investments in the country both domestic and foreign as progress updates are important to investors who are in their early stages of setting up shops in Malaysia.
The SERC is estimating the GDP growth to be at 3.8% this year, and hit 4.5% by the end of next year, driven by improved exports.
It is also expects Bank Negara to maintain its overnight policy rate at 3% for the rest of this year and throughout 2024.
Global macroeconomic risks such as the lag effects of higher interest rates and geo-economic tensions would likely persist, with core inflation remaining above historical averages, according to the SERC.“We see a soft landing in the United States amid lingering risks on restrictive monetary policy stance and tighter credit conditions. On the flipside, retail sales and industrial production have exceeded market expectations,” said Lee.
Disappointments in Chinese economic data since April had attributed to cautious consumer spending, contractions in fixed asset investment, declining exports and increasing stress in the real estate sector, he added.
