Centre for Market Education CEO Carmelo Ferlito.
PETALING JAYA: The possibility of the government missing its 2025 fiscal deficit target cannot be ruled out.
CGS International (CGSI) Research projects the overall 2025 fiscal deficit to be at RM77.5bil or 3.8% of gross domestic product (GDP), an improvement from the estimated RM84bil or 4.3% of GDP this year, although potentially missing the initial target of 3% to 3.5% in 2025.
The research house added it expects deficit improvement to come from a slightly higher revenue growth of 1.1% year-on-year (y-o-y) to RM314bil (2024: RM310bil).
“We assume the increase in direct tax will contribute somewhat, although collection is likely to be minimal. We believe revenue growth will come mainly from the expansion of economic activities.
“We also price in an increase in operating expenditure of 2.9% y-o-y to RM314bil (2024: RM305bil) and major spending reduction coming from lower subsidy spending. However, part of the savings will likely be offset by higher spending on emoluments following the revision in public servant wages,” CGSI Research said in a report yesterday.
Additionally, a potential decrease in development expenditure to RM78bil (2024: RM90bil) is also expected by the research firm, following the need to maintain the deficit target as well as limited revenue sources.
Centre for Market Education (CME) chief executive officer Carmelo Ferlito said the possibility of the country overshooting the year’s fiscal deficit target is a valid one, looking at the growing budget size in previous years.
“Achieving a balanced budget should be Putrajaya’s target for Budget 2025. The consolidation of several years of deficit into debt is the shift of a burden on future generations, in terms of a slower economy with fewer opportunities. In the immediate term, overspending means inflation.
“Hence, the need for constitutional reforms which introduce compulsory balanced budgets is needed,” he told StarBiz.
A systematic and holistic tax reform should also be prioritised in the upcoming budget, Ferlito added.
He noted there had mostly been the adding up of small and fragmented new taxes in the past and a consolidation which shows the direction that the government has on fiscal matters is needed.
“I would also like to see more emphasis on fiscal responsibility. While the government has added measures to increase revenues, substantial reforms to cut spending have yet to be seen,” he said.
Meanwhile, economist Geoffrey Williams said it is likely that Budget 2025 will be larger because of commitments already announced including higher civil service salaries and pensions and allocations to Sabah and Sarawak.
“At the same time, there should be savings from cutting wastage, leakages and corruption and extra revenue from economic growth. Hence, we will expect slightly higher spending in line with inflation and higher revenues to pay for it on the operating expenditures side,” he said.
Williams added that there may be lower development expenditures and also some projects financed by public-private partnerships.
“This will reduce the deficit and the percentage of deficit to GDP will also be lower because GDP growth is higher. All of this is in line with a responsible fiscal policy under the Fiscal Responsibility Act. We will also be interested to see if there are announcements on the Government Procurement Act.
“Additionally, we will also look out for commitments related to subsidy rationalisation and the savings from that measure. The new minimum wage and the scope of the progressive wage policy to raise incomes and address the cost of living are also points of interest,” he said.
Geopolitical tensions that stemmed from the various ongoing war conflicts and the US-China trade war are still running high.
Recently, the United States announced substantial new tariffs on China. This raises concerns whether Washington’s measures on China would hurt the Malaysian economy, given the country’s trade relation with the latter.
On top of this, oil prices have been climbing higher on fears of major supply disruption, as the conflict in the Middle East escalates. Ferlito said these new tariffs could affect Malaysia in indirect ways.
“Firstly, China may look at different export markets. To note, Malaysia is already importing from China more than what it exports to the Chinese economy.
“Secondly, Malaysia could become a place where transformation processes happen so that Chinese products may reach the United States indirectly. Thirdly, Malaysia could try to replace China as a manufacturer and exporter,” he said.
Williams, however, dismissed the notion that oil prices would lead to inflation or stagflation. “Strong oil prices will help Petroliam Nasional Bhd and support oil royalties.”
