KUALA LUMPUR: Malaysia's tax revenue collections will likely expand by 6.0 to 6.5 per cent in 2025, driven by changes in nominal gross domestic product (GDP) growth, Brent oil prices, and non-revenue tax collections.
OCBC Senior Asean economist Lavanya Venkateswaran said the factors remain stable to modestly lower in 2025.
"Specifically, our house view is for Brent prices to average US$79 per barrel in 2025 versus US$82 per barrel in 2024, while we expect nominal GDP growth to be stable at 6.5 per cent," she said in a research note on the 2025 Budget preview.
In terms of non-tax revenues, Lavanya noted that Petronas dividends, which are usually quite significant, have come down since 2022.
While higher dividend payments in 2024 cannot be ruled out, she said the budgeted dividend payments are expected to be reduced over the medium-term.
However, she stated that the tax revenue growth may not be adequate to ensure that fiscal consolidation is achieved in line with the Medium-Term Fiscal Framework at an average of 3.5 per cent of GDP for 2024-2026.
She noted that the tax revenue growth of 8.0 to 9.0 per cent would make for a more comfortable consolidation path.
"Past budgets have already paved the way for some crucial tax changes in 2025, including widening e-invoicing to a broader tax base and introducing a minimum global tax rate of 15 per cent.
"There are also some potential new tax measures that could be considered in Budget 2025, including the high-value goods tax and a carbon tax to prepare for the implementation of the EU Deforestation Regulation.
"Recent statements from the Finance Ministry, however, suggest that a carbon tax may not be on the cards for Budget 2025," Lavanya added.
While there are some ways for the government to achieve this fiscal consolidation, she said the question remains whether it will reintroduce the goods and services tax (GST) and rationalise retail fuel prices.
"The share of revenues from GST rose to about 20 per cent of the total revenues in 2016-2017, accounting for 3.3 per cent of GDP. This was higher than SST, which accounted for a 9.0 per cent share of total revenues and 1.8 per cent of GDP from 2000-2014," she added.
However, Lavanya said if the 2025 Budget includes GST reintroduction and RON95 prices are rationalised, it will have monetary policy implications.
She noted that either measure will likely lead to higher inflationary compared to the benign inflation backdrop, where the headline and core inflation to-date have averaged 1.8 per cent and 1.9 per cent, respectively.
"Our base case is for Bank Negara Malaysia (BNM) to keep its policy rate on hold at its November 6 meeting and in 2025. We will, however, closely monitor the inflation outcomes from fiscal changes.
"We cannot rule out the possibility of BNM raising its policy rate in 2025, particularly if demand-side inflationary pressures become more persistent," she said.