Lee Heng Guie - SHAARI CHEMAT /The Star
WITH the global economy subjected to downside risks and slowing domestic economic conditions, Budget 2024 is framed as fiscally sustainable and responsible for sustaining economic growth, addressing cost of living pressures and future-proofing Malaysia to strategically move forward.
Budget 2024 comes at a pivotal time in anchoring our medium-and long-term growth trajectory as laid out in the Madani Economy framework and the Mid-Term Review of the 12th Malaysia Plan (MTR of 12MP) in aligning with the New Industrial Master Plan (NIMP) 2030 and National Energy Transition Roadmap (NETR).
The Finance Minister focused on providing a platform for continued fiscal consolidation to strengthen fiscal health whilst at the same time continuing to support economic growth, build capabilities, drive technology and new investments in emerging sectors as well as continued assistance for lower income households to cope with rising cost of living.
The budget also focuses on education and healthcare services, food security, clean energy transition, environmental, social and governance (ESG) initiatives, human capital formation and the provision of services for aged communities.
Domestic demand remains the growth driver amid still moderate exports recovery. Real gross domestic product (GDP) growth is expected to expand by 4% to 5% in 2024 (estimated 3.9% in 2023), which is in line with the Socio Economic Research Centre’s (SERC) estimates of 4.5% for 2024 and 3.8% in 2023.
There remain downside risks to the domestic economic outlook. Downside risks to the global economy could come from the persistent high level of interest rates, inflation risk, global trade tension and geopolitical conflict.
Domestic risks include the inflationary and cost pressures on consumers and businesses, as well as ineffective implementation of the budget’s projects and measures.
The Finance Ministry (MoF) expects private consumption growth to be sustained at 5.7% in 2024 (5.6% in 2023) versus SECR’s 4.6%, which we caution that the subsidy rationalisation and ensuing inflation could bite into consumer spending.
While the budget’s measures and catalysts from the NIMP and NETR are expected to drive private investment growth (estimated 5.4% in 2024 versus 4.3% in 2023) versus SERC’s 5.5%, we are concerned that cost pressures from subsidy rationalisation and the impact of weakening ringgit will dampen business spending.
The budget deficit repair remains a necessary part of the fiscal stability framework. The overall budget deficit is targeted to reduce further to RM85.4bil or 4.3% of GDP in 2024 from minus 5% of GDP (minus RM93.2bil) in 2023, which is a shade lower than our projection of 4.5% of GDP.
With a target fiscal deficit to GDP ratio of 4.3% in 2024, this implies a further reduction of between 0.8 percentage and 1.3 percentage points in order to achieve the MTR of 12MP’s fiscal deficit target of 3% to 3.5% by 2025.
This may prove challenging given that a balance allocation of RM92.2bil for development expenditure (DE) in 2025, which is the last year of the 12MP.
We view positively the passing of the Public Finance and Fiscal Responsibility Act (FRA) in making the government accountable for ensuring sound fiscal rules to fortify fiscal discipline and contain fiscal risks. The FRA has set four targets for the government to achieve annually: firstly, an annual DE of at least 3% of GDP; secondly, fiscal balance of 3% of GDP or less in the next three to five years; thirdly, debt level to GDP ratio of 60% or less in the next three to five years; and lastly, government guarantees or contingent liabilities must be 25% of GDP or less.
The tabling of the Government Procurement Act in 2024 would make every minister accountable for the failure to comply with finance regulations, management and high-priced procurement.
The budget proposed an appropriation of RM90bil DE for 2024, a decline of 7.2% from RM97bil in 2023, partly due to non-recurrence of the US$3bil allocation for the redemption of 1MDB bonds in 2023.
Of the total DE allocation, there are about 2,000 new projects with an estimated initial cash flow of RM8bil in 2024.
We have always questioned the effectiveness of public spending and the ministries and agencies’ implementation capacity.
The government must institutionalise the results-oriented approaches to budgeting and management of the budget allocation for ministries, moving the focus of decision making in budgeting away “How much allocation can the ministry get?” towards “What can the ministry achieve with this allocation?”.
The MoF can use performance results to hold ministries and agencies accountable for their performance.
It is reassuring that targeted subsidy rationalisation will likely roll out in the first and second quarters of 2024, to help reduce the fiscal burden. Subsidies and social assistance are expected to decline by RM11.6bil or 17.9% to RM52.8bil in 2024 (estimated RM64.2bil in 2023).
Subsidy rationalisation is estimated to save at least between US$1bil (RM4.73bil) and US$2bil (RM9.47bil) a year.
The targeted subsidies mechanism will be based on Padu (a centralised database) to identify eligible recipients.
As better targeting subsidies is a complex process, both technically and politically, buy-in’s from the public is crucial to ensure success.
The 3Cs to implement price subsidy reforms are credible, comprehensive and communication. Effective communication is needed to explain the reasons for shifting to targeted mechanisms and its benefits for the economy.
Net savings from subsidy reforms should be transparently allocated to high priority projects.
Emoluments, the largest component of operating expenditure (OE) (31.5% of total), is budgeted to increase further by 4.8% to a new high of RM95.6bil in 2024 due to annual salary increments for 1.7 million civil servants and 971,000 pensioners as well as new hires in the education and healthcare sectors.
Since a comprehensive study of the salary and retirement scheme for civil servants will be completed in 2014, credible civil service reforms are needed to improve the quality and value of public services-based performance and productivity-linked salary systems. These include rightsizing civil servants and accelerating digital government.We are disappointed that the budget did not touch on reforming public pension payments, which was raised in the MoF Economic Report 2022-2023.
Retirement charges averaged RM29.2bil in 2019-2023, and will increase further by 1.1% to RM32.4bil or 10.7% of total OE in Budget 2024.
It was estimated that pension payments could reach about RM46bil by 2030.
A path to public pension reform entails the transition to a defined contribution plan for new hires; and also applied to existing public sector employees according to the number of years for which they had already contributed to the system.
A key advantage of defined contribution plans is that it eliminates the potential risk to underfund long-term pension liabilities.
What is evident is that the creation of a sustainable revenue system is still not part of the fiscal consolidation plan.
How can Malaysia ensure the long-term viability of its tax system without a proactive effort from now on? We have to build a sustainable revenue system and there is much room for improvement. We cannot have a tax system if a small group of people at the top end pay more taxes all the time while the rest get to piggyback on their contributions to enjoy more benefits.
The MoF is not ready to implement the Goods and Services Tax, an efficient and transparent consumption tax. Instead, the budget proposes to increase the services tax rate to 8% from 6% as well as to widen the scope of services tax to include logistics, brokerage, underwriting and karaoke services. Food and drink as well as telecommunication services will be exempted; implementing the High Value Goods Tax (5%-10%) and Capital Gains Tax (CGT) on non-listed corporates (10% on the net gain of share disposal or 2% on the gross sales value), effective from 1 March 2024.
We are concerned that these taxes could have adverse effects on the domestic luxury goods market, entrepreneurial and startups development. There are lingering investors’ concerns that the CGT will cover other asset classes down the road.
The introduction of e-invoicing in stages, though not directly a tax measure, supports the increase in tax revenue by potentially reducing the tax leakages from the shadow economy.
Subsidies rationalisation, followed by an upward adjustment of ceiling prices must be introduced gradually to cause less disruption in the economy. It allows households and businesses to adjust their consumption and cost structure in response to price changes and market conditions in an orderly manner.
The lifting of price controls for chicken and eggs could exert higher prices of eggs due to a shortage of supply. The increase in service tax rate would mean higher living expenses for paying electricity bills, motor vehicles repairs and insurance coverage.Consumers will bear higher prices though additional cash handouts for the targeted group will ease the price impact. Businesses will bear higher cost pressures, and there could be some cost pass-through to consumers.
Lee Heng Guie is Socio-Economic Research Centre executive director. The views expressed here are the writer’s own.
