People focus must be in Malaysia's budget: The Star

A general view of Kuala Lumpur's skyline seen from the KL tower.
A general view of Kuala Lumpur's skyline seen from the KL tower. PHOTO: AFP

In its editorial on Oct 17, the paper says Malaysia's lower and middle classes need helping hand in these economically tough times

The signs are on the wall that Budget 2017 will not have many goodies for the people. This should not come as a surprise to those following the economic developments of the country.

The Government is committed to keeping the fiscal deficit down next year from the 3.2 per cent expected this year. This is in line with the expectations of rating agencies who want to see the Government not spend more than what it earns.

On this score, Prime Minister Datuk Seri Najib Tun Razak has a target of delivering a balanced budget in 2020 - something if achieved would see Malaysia's credit rating move up.

Malaysia's budget has consistently been in a fiscal deficit since the 1980s because the Federal Government tends to spend more than it earns on the grounds that it needs to boost the economy. When Najib took over the Finance Ministry in 2009, the fiscal deficit was more than 5 per cent.

Next year, the Government is expected to set a target of achieving a lower fiscal deficit of 3 per cent or less, meaning cuts in spending.

Previously, the Government depended on oil money to spend its way out of economic slowdowns.

However, crude oil prices are hovering above the US$50 (S$69.36) per barrel mark - still a long way from its heyday of US$100 per barrel, which does not bode well for the Government's coffers.

This year, the RM39 billion (S$12.8 billion) that came from the collection of Goods and Services Tax (GST) helped the Government. Going forward, the tax rate cannot be increased as it would cause a serious dent to consumers and businesses.

Nevertheless, it is good that the Government is determined to lower its fiscal deficit.

The immediate impact is that it would give no excuse for rating agencies to downgrade Malaysia. The longer term impact is Malaysia's economic fundamentals would improve and so would the value of the ringgit relative to other currencies.

One needs to only look at the performance of the Australian dollar to see what a good credit rating would do for a currency. The Aussie dollar is relatively strong against other currencies despite the country going through a slowdown due to a slump in the resource sector.

A large part of the strong Aussie dollar is due to the country's triple A rating that has allowed Australia to raise funds at cheap rates.

Going forward, while it is important to remain prudent, the cuts in spending should be laced with mitigating measures to help households cope with the situation.

Towards this end, there is speculation that the Government is looking to cut its spending on education and training. There is also speculation that the subsidy on essentials such as cooking oil would be cut.

In any economy, subsidy is bad because it breeds inefficiency. However, the bottom 40 per cent (B40) of Malaysia's households, who are earning less than RM 3,000 per month, would need some form of assistance to cope with the higher cost of living.

In this respect, the Government's targeted subsidy programmes such as BR1M (Bantuan Rakyat 1Malaysia) should be increased to help the B40 category.

As for the education sector, there should be room for cuts in its budget, considering that there are excesses in the system.

However, as a mitigating measure, the Government should consider cutting down the personal income tax rate. This would ensure that the middle class are less impacted.

A lower personal income tax rate would help the middle class, which constitutes 40 per cent of Malaysia's households with a higher disposable income. It would mitigate their expenses incurred in giving the best education to their loved ones.

Keeping the budget tight is important for the country's economic health as a whole. However, it has to be accompanied by measures to put more money in the hands of the lower and middle income households who make up 80 per cent of the population.

* The Star is a member of The Straits Times media partner Asia News Network, an alliance of 21 newspapers.