Socio-Economic Research Centre executive director Lee Heng Guie.
BUDGET 2025, which will be tabled in Parliament on Oct 18, marks the last budget for the 12th Malaysia Plan (2021 to 2025). What fresh economic impetus to enhance the country’s competitiveness and future viability? What are the thematic priorities? How are citizens going to benefit?
The economy is outperforming expectations. Real gross domestic product (GDP) growth has expanded by an average growth of 5.1% per annum in the first half 2024, driven by resilience private consumption, robust investment and a rebound in exports.
Headline inflation has moderated but high cost-of-living pressures still prevalent. Stable labour market conditions with unemployment rate steadying at 3.3% since the fourth quarter of 2023.
The FBM KLCI has been on a more spirited run, gaining 224.14 points or 15.4% year-to-date (end-August).
The ringgit has made impressive gains against the US dollar since end-June (up 9.3% to RM4.3160) as of Aug 30, reflecting the anticipated narrowing interest rate differentials, improved investors sentiment, positive growth and investment outlook, and also the government and Bank Negara’s coordinated efforts to encourage repatriation and conversion of foreign investment income by government-linked companies and government-linked investment companies. Amid a balance of domestic and external risks to growth outlook, we believe that the economy will stay on track for stable growth, with strong progressive policies and reforms as well as effective execution needed for ensuring a sustainable economic growth.
The International Monetary Fund foresees a third straight year of 3.2% global growth in 2025 though it is below long-term average growth of 3.8% per annum in 2000-2019.
There were concerns about recessionary fears in the US economy amid an imminent pivot to the US Federal Reserve’s interest rate policy in the third quarter of 2024. The US Presidential election in November could have significant economic and market uncertainties. China’s recovery remains a bumpy one due to the depressed property sector while managing ongoing trade tariffs war between China and the United States and Europe, which is likely to deepen post the US Presidential election.
Against the above backdrop, the budget must be a blend of sustaining economic growth with fiscal stability, investment orientation, and supporting sustainable development.
We expect the Finance Ministry to up its 2024 GDP growth estimate to 5.0% to 5.5% from 4.0% to 5.0% currently, and introduce 5.0%to 6.0% for 2025. We are looking at 5.4% in 2024 and 5.0% in 2025.
The budget will lay out measures and initiatives in areas of tackling cost of living and business costs pressures, supporting green economy, wage-enhancement and skills development, fostering investment through reducing bureaucracy and strategic investment funds, and strategic budgetary allocations for key sectors (affordable public housing, public transport and infrastructure, ports, roads, healthcare, education and training and digital infrastructure). Additionally, incentives for Johor-Singapore Special Economic Zone, including for family offices.Gradualism of fiscal and tax reforms
We expect the government to aim for a lower fiscal deficit to GDP ratio of 3.8% for 2025 from the estimated 4.3% in 2024 on better federal revenue outturn and continued restraint in operation expenditure.
A substantial enhancement in revenue is needed to meet higher operating expenditure, including average salary increases between 16.8% and 42.7% for civil servants, to be implemented in two phases, in 2025 and 2026.
We think the government will make its decision on a reintroduction of goods and services tax (GST). If we introduce GST, everything else becomes a no brainer. The revenue generation aspect proved appealing.
As the 16th General Election must be held by Feb 17, 2028, this provides an opportune time to roll out GST so that the government has at least two years to “manage” public angst over it.
It is commendable that sequential fiscal reforms have begun to ease fiscal pressure. Diesel subsidy rationalisation is the third measure.
Re-targeting subsidies rationalisation of RON95 will come next though small price increases are easier to bite and made it possible for the people and businesses to adapt to the new price situation over time.
Tackling cost of living pressures
Rising costs of living, transportation, utilities and other expenses have placed considerable financial burdens on the low and middle-income households.
Further enhancements to Sumbangan Asas Rahmah and Sumbangan Tunai Rahmah estimated at least RM8bil to RM10bi will be announced in the Budget 2025, helping households with cost-of-living concerns.
Targeted tax relief and rebate measures for tax payers and households to cope with immediate financial pressures:
> An increase in personal tax relief to RM12,000 from current RM9,000 (last revision was in 2010);
> Re-introduce the parental care tax relief (last given in 2016-2020);
> Extend the tax rebate of RM400 to individuals with chargeable income not exceeding RM70,000; and
> House rental payment to be given a personal tax relief of up to RM4,000 annually.
Income support scheme for old age and retirees via
> Higher income relief up to RM8,000 for an increase in the Employees Provident Fund voluntary contribution rates for those aged 55 to 60; and
> Tax incentives for employers to offset employees’ monthly wages to employers who voluntarily re-employ workers after the retirement age 60.
Managing business costs
While consumer inflation has lessened, but businesses are still swamped by price increases in materials and services. Measures to help small and medium enterprises (SMEs) manage rising costs:
> Raise the first chargeable income that enjoys preferential tax rate of 15% to RM600,000 from RM150,000 currently
> Qualifying SMEs and mid-tier companies should be given a corporate income tax rebate of 25%, capped at RM20,000; and > For the qualified SMEs that are not making a profit at a certain threshold, a cash payout of RM5,000 should be disbursed to support these businesses.
The budget is expected to announce new minimum wage (currently at RM1,500 per month) and also a multi-tiered foreign levy. Micro SMEs hope that the quantum of increases must not be too steep so as not to overburden them. The levy can be applied to SMEs only two years after its initial implementation for large companies.
On the e-invoicing implementation for all taxpayers in Malaysia, regardless of their annual turnover or revenue starting July 1, 2025, the Budget can consider making participation voluntary for micro-businesses with an annual turnover or revenue of RM300,000 and below.
Tax reforms
The budget will formalise the implementation of a global minimum tax rate of 15% based on the Global Anti-Base Erosion Rules Rules under Pillar Two in 2025. This is to align with international taxation standards, especially in curbing tax base erosion activities and transferring profits to countries with low tax rates.
The Qualified Domestic Minimum Top-up Tax (QDMTT), a top-up mechanism to ensure that multi-national enterprises pay a minimum effective tax rate of 15% in each jurisdiction in which they operate. The QDMTT allows Malaysia the first right to charge top-up taxes on revenue from entities located in Malaysia that are paying low taxes.
Managing healthcare costs and medical insurance
Rising healthcare costs and medical insurance premiums are hitting the low-and middle-income households. Hence, the budget can consider the following policies to rein in escalating healthcare costs:
> The establishment of Universal Healthcare Insurance Fund;
> Introduce hospital fee benchmarks for 21 common surgical procedures and 8 common medical conditions, making transparent about components of the chargeable bills;
> Capping the level of prices by setting maximum amounts that hospitals and physicians could receive from commercial insurers;
> Capping the annual growth rate of those prices; and (e) Medical insurance subsidies.
Wage-growth support scheme and skill set development
The pilot run of the Progressive Wage Model (PMW) is below expectations. As of Aug 5, only 144 companies covering 1,038 employees out of 1.094 companies’ voluntary participation in the scheme have met the eligibility to get the co-sharing wage incentive. The budget is expected to enhance the PWM scheme to encourage a sustainable wage enhancement and skills improvement.
The budget can consider to provide tax relief to individuals and parents of children that enroll in STEM courses as these courses incurred high fees as well as TVET courses. Additionally, provide matching allowances covering tuition fees and living expenses for companies sponsoring TVET students and offer them full-time jobs upon graduation.
Green investment and green technologies
We expect the budget to incentivise sustainability by offering tax benefits like deductions or accelerated depreciation for companies investing in renewable energy, electric vehicles, and other green technologies. Additionally, a carbon tax framework, including emissions trading scheme may be announced.
Amongst the measures for consideration:
> Introduce a special tax incentive or allowance equivalent to 100% of capital expenditure for companies undertaking projects that achieve a specified threshold of carbon emission reduction;
> Income exemptions for the sale of specific products with lower carbon intensity;
> Eliminate restrictions that limit companies to claiming only one qualifying project for 100% of qualified capital expenditure under Green Investment Tax Allowance
> Implement an automatic top-up mechanism to replenish quotes for Net Energy Metering Rakyat Programme and Net Offset Virtual Aggregation Programme when they are nearing full utilisation, says 80%;
> Allow the household to install additional capacity within specific limits without restriction;
> Extend Solar for Rakyat Incentive Scheme to at least 2026 with additional rebate quota. For the remaining installation cost (after rebate, if any), provide personal tax relief of up to RM10,000 for the year assessment 2025-2026, to encourage installation of clean energy sources.
Lee Heng Guie is Socio-Economic Research Centre executive director. The views expressed here are the writer’s own.
