KUALA LUMPUR - Prime Minister Anwar Ibrahim is set to unveil a larger national budget on Friday, surpassing the RM372.3 billion (S$112 billion) plan proposed by the previous government last October, in a bid to address Malaysia’s slowing growth and higher cost of living.

The key bread-and-butter issues need to be tackled ahead of elections expected to be held in July in six states, where about half of the country’s electorate will vote and signal their level of satisfaction with Datuk Seri Anwar’s so-called unity government.

According to an official source, Mr Anwar, who is also Finance Minister, will be able to spend more on the back of higher revenue from an economy that recovered better than expected in the past year.

The Treasury’s coffers drew more than the projected RM285.2 billion in 2022, thanks to the gross domestic product (GDP) jumping by 8.7 per cent against the expected 6.5 per cent to 7 per cent.

“We can expect a larger 2023 budget,” said the source, as revenue this year will remain elevated despite growth expected to slow to between 4 per cent and 5 per cent.

Domestic demand will remain the key driver of economic growth in 2023, bolstered by higher tourism, continued recovery in the labour market, and implementation of new and existing investment projects, Malaysia’s central bank governor Nor Shamsiah Mohd Yunus said in a media briefing in February.

With the projected larger budget, the government will likely spend on cash aid to vulnerable groups, upskilling and reskilling programmes, digitalisation of the economy and investment allowances for businesses, especially small and medium-sized enterprises, said Socio-Economic Research Centre executive director Lee Heng Guie.

“I do expect some policy commitment for the government to roll out targeted subsidies for the bottom-40 group of people, though it would be gradual. The government is also likely to provide employment opportunities despite a recovering labour market,” he said.

The national unemployment rate for 2022 was 3.6 per cent, still above the 2019 pre-pandemic level of 3.3 per cent.

People-friendly measures, such as cutting personal income tax by 2 percentage points for those earning between RM50,000 and RM100,000 a year in the initial budget presented by the previous government, are likely to be maintained to ensure sustainable domestic demand, said economists.

Currently, those earning between RM50,000 and RM70,000 a year are taxed at a rate of 13 per cent. Individuals in the next tier up to annual incomes of RM100,000 face a rate of 21 per cent.

The upcoming budget would likely allocate more funds to the private sector and voluntary organisations for Malaysians to create and develop local solutions rather than importing them from abroad, said Mr Patrick Tay, PwC Malaysia’s deals partner of economics and policy.

“Beyond enhancing personal tax incentives for knowledge workers and R&D (research and development) grants, it will be crucial to develop an incentive framework that promotes the high-quality investments involved in electrical vehicle battery manufacturing, aerospace composite, medical components, biomaterials, among other things, in view of global developments,” he said.

In the Finance Ministry’s monthly gathering in February, Mr Anwar disclosed that the budget will likely address the “speed of business approvals, digitalisation, sustainable consumption and production of natural resources in downstream activities” for Malaysia to remain competitive against its South-east Asian peers.

Analysts also anticipate that Mr Anwar will aim to cut the country’s budget deficit as the national debt has reached RM1.5 trillion as at January.

According to a Bloomberg survey of 11 economists, Mr Anwar’s administration could likely target a lower deficit of 5 per cent of GDP from the 5.5 per cent set by his predecessor in October.

Malaysia’s sovereign rating outlook is currently stable, with a credit rating of BBB+, according to Fitch on Feb 15.

However, Bank Islam chief economist Firdaos Rosli said Mr Anwar will have to address rating agencies’ concerns that the country is overly dependent on oil revenue to manage the government’s fiscal position.

If the budget is judged to be inadequate in tackling bread-and-butter issues and the high national debt, it could be seized upon by the opposition in political debates ahead of state polls and dilute the credibility of the Anwar administration, said BowerGroupAsia senior analyst Arinah Najwa.

“This could pose a risk to Mr Anwar’s unity government’s chances of winning the state elections.”