KUALA LUMPUR - Malaysia is set to trim spending in 2023 despite a crucial general election due by September, after deeply increasing its debt burden to rescue the economy hit by Covid-19 shutdowns.
According to its budget tabled on Friday, the deficit in 2023 will ease to 5.5 per cent of gross domestic product (GDP), largely due to cuts in a subsidy bill that ballooned this year to an expected record of RM77.7 billion (S$23.9 billion).
The shortfall in 2022 is expected to come in at 5.8 per cent of GDP instead of the budgeted 6 per cent.
Blanket subsidies for consumption of items such as vehicle fuel, electricity, cooking oil and chicken benefit richer consumers more than poorer Malaysians.
The Ministry of Finance (MOF) is ready to roll out subsidies - especially for electricity and pump fuel - targeted at poorer Malaysians from Jan 1, but such a switch will require Cabinet approval.
Based on projections by the ministry, the change will save the Treasury at least RM22 billion to fund other populist measures that include RM10 billion in cash handouts to millions of Malaysians, income tax cuts for the middle class, student loan discounts and new highways in East Malaysia.
"To be very honest, it is not sustainable to continue to have this kind of subsidy in our budget. It's not necessarily an election budget. If the expectation is a windfall for the public, then no," said Finance Minister Tengku Zafrul Aziz on Thursday in a media briefing.
"It's a responsible budget. It is still expansionary but just the subsidy (is less). There's RM20 billion more on development expenditure."
Although Budget 2023, at RM371.6 billion, is the largest ever and surpasses the RM332.1 billion allocated for 2022, it is in fact lower than the revised estimate of RM384.7 billion expected to be spent in 2022.
Nonetheless, 2023 will see a whopping RM95 billion channelled to development expenditure, made possible in part by trimming operating costs to RM272.3 billion from the RM284.7 billion in 2022.
This year's lower deficit is largely due to higher fossil fuel-related revenue - state oil giant Petronas doubled its dividend to a whopping RM50 billion - and a better than expected economic growth.
A range of 6.5 per cent to 7 per cent has been set for GDP growth - taking into account uncertainty from a sooner than expected deceleration of the global economy in the final quarter of this year - surpassing the 5.5 per cent to 6.5 per cent target set during Budget 2022.
According to Budget 2023, growth will moderate to 4 per cent to 5 per cent next year as global headwinds continue to strengthen. With the economy now back above 2019 levels following the pandemic contraction, there is no longer a low-base effect.
Malaysia's deficit surged beyond 6 per cent in 2020 and 2021, as the government spent to soften the blow from Covid-19. Borrowings - over RM100 billion in 2021 - pushed the country's debt to more than RM1 trillion in 2022 from less than RM800 billion before the pandemic.
Debt service charges - which exclude payment of principal - has correspondingly surged to RM43.1 billion in 2022 from RM32.9 billion in 2019, with next year's RM46.1 billion bill expected to swallow nearly 17 per cent of revenue.
Despite this, the government will neither extend the prosperity tax on windfall profits that it introduced for 2022, nor revive the broader goods and service tax which was replaced in 2018 with the current sales and services tax.
“With an intention to protect the economy from an imminent global economic slowdown, it proposes a modestly expansionary budget laden with cash handouts, tax cuts and numerous targeted social spending signalling an incoming election,” Kenanga Investment Bank’s head of economic research Wan Suhaimie Wan Saidie told The Straits Times.
“This is at a time when it needs to uphold fiscal discipline and debt management to ensure sustainable long-term economic growth.”
The budget was tabled amid swirling speculation that Parliament would be dissolved by Thursday when Prime Minister Ismail Sabri Yaakob met the King for a pre-Cabinet audience.
The Umno vice-president has been under increasing pressure from party chief Zahid Hamidi’s faction to hold elections as soon as possible.