Spending cuts and new taxes expected in Malaysia's budget

Finance Minister Lim Guan Eng.
Finance Minister Lim Guan Eng.

Analysts predict deficit will surge; govt faces having to pay back billions in tax refunds

Prime Minister Mahathir Mohamad has billed it as a budget of sacrifice. But the Finance Ministry has been coy about today's historic Budget 2019, the first to be unveiled by Malaysia's new administration.

This is what is known so far: The six-month-old government is not prepared to tax the life out of the economy to solve RM1.1 trillion (S$363 billion) in debt it claims was left behind by the previous regime. Nor does it have the room to spend its way out of a downturn that is expected to make landfall next month and continue into next year.

Finance Minister Lim Guan Eng has indicated that Malaysia's deficit will increase from the 2.8 per cent of gross domestic product forecast for this year, saying that it would be "foolish" to follow the "unrealistic" target set by his predecessor.

He has repeatedly accused former prime minister Najib Razak, who was also finance minister, of withholding RM35 billion in income and consumption tax refunds, thus skewing the government's balance sheet favourably by artificially boosting revenue.

Najib, whose government claims to have reduced the budget deficit from 6.7 per cent when he took over in 2009 to 3 per cent last year, has denied these allegations.

Analysts are widely expecting the deficit to surge up to between 3.3 per cent and 4.6 per cent next year, while the government has forecast a deficit of 3 per cent for 2020.

Mr Lim's political secretary Tony Pua told The Straits Times that next year, the Treasury faces the extra burden of paying back the income and consumption tax refunds, which are nearly equal to the entire 2017 deficit of RM40 billion.

Finance Minister Lim Guan Eng has indicated that Malaysia's deficit will increase from the 2.8 per cent of gross domestic product forecast for this year, saying that it would be "foolish" to follow the "unrealistic" target set by his predecessor.

In its budget preview, AmBank said it views the payment as a "one-off" as such backdated refunds will not be required moving forward.

However, The Straits Times understands that officials are now suggesting the refunds could be split up - a few billion ringgit to be paid by the end of this year, and the rest carried over to 2020.

Speculation is also swirling that the government will recognise "off-budget" spending in its books for this year. These are projects that were previously funded via special purpose vehicles so that financing could be accounted for as "contingent liabilities" rather than public debt.

These moves will push this year's deficit from 2.8 per cent to up to 3.6 per cent, according to Citi Research.

Coffers will be boosted by higher oil prices, as Malaysia is a net petroleum exporter, but they are also set to take a RM20 billion hit after the goods and services tax was replaced with a narrower sales and services tax.

Official sources told The Straits Times that proposed new taxes on carbon and wealth are not ready to be rolled out, although they could be previewed in the budget speech.

"Softer" levies such as a digital tax are more likely, according to analysts. While some see this as an equalising tax to level the playing field with bricks-and-mortar businesses, fintech players such as iPay88 have argued that some sectors of e-commerce have yet to reach break-even point.

A soda tax on sugary drinks is also in the offing.

There is a possibility that while Mr Lim has promised not to increase income tax, tax brackets could be restructured to increase the effective tax applied to higher-income earners while optimising tax reliefs to better target low-income workers.

 

Spending cuts will still be the main source of pain. Tun Dr Mahathir has spoken repeatedly of weaning Malaysians off "free money" handed out by the Najib administration.

Annual cash handouts of up to RM1,200 for each individual from low-income groups look set to be gradually eased. The RM7 billion BR1M programme, rebranded by Pakatan Harapan as Cost of Living Aid (BSH), benefited about half the population of 32 million people this year.

Dr Mahathir has also singled out monthly government allowances paid to fishermen, criticising the fact that they "were practically paid a salary" whether or not they went out to sea.

In Budget 2018, Najib had announced RM2.3 billion in assistance and incentives to paddy farmers, rubber smallholders and fishermen. There was another RM150 million for paddy farmers - each getting RM200 monthly for three months - to tide them over while awaiting the harvest.

Fuel subsidies could also be targeted at lower-income owners or smaller vehicles, in place of blanket subsidies at the pump.

Such cuts are making investors nervous over economic growth, which analysts expect to come in under 5 per cent for this year.

Economists and government statisticians looking at indicators expect a further slowdown for next year, although PH leaders still believe they can turn things around.

The Finance Ministry has said the RM35 billion in tax refunds it is injecting back into the market will be a form of stimulus.

The good news for those looking at the long term is that after the refunds are paid, the government can loosen its belt for 2020, while still being able to cut the deficit.

A version of this article appeared in the print edition of The Straits Times on November 02, 2018, with the headline 'Spending cuts and new taxes expected in Malaysia's budget'. Print Edition | Subscribe