Resetting Malaysia in biggest spending bill?

Reset. Rebuild. Targeted subsidy. Malaysia's budget for next year, which will be tabled today, will likely feature "feel-good" measures to reset the path for a stronger Malaysia against the backdrop of a lacklustre global economic recovery.

This is by rebuilding the government's fiscal space, transforming the economy and businesses, and raising the rakyat's standard of living.

Observers said the 2024 Budget, which is expected to be the biggest spending bill in the country's history, could also focus on ensuring a more equitable distribution of resources to Malaysians.

This means the government may announce subsidy cuts for the well-off by implementing targeted fuel subsidy.

It will likely start with a targeted subsidy for diesel, albeit gradually, as the government looks to ease its subsidies burden which may hit RM81 billion in 2023, up from slightly over RM55 billion last year.

"The government may affirm the realisation of targeted fuel subsidy mechanisms, incorporating both a clear timeline and strategic framework," an analyst said.

"Concurrently, the inauguration of the Central Database Hub or PADU housing Malaysians' socio-economic data, is poised to serve as a potent tool for fine-tuned subsidy targeting, elevating the effectiveness of existing cash assistance, welfare provisions, and safety net programmes," the analyst added.

HIGHER REVENUE, BIGGER SPENDING?

This will be Prime Minister Datuk Seri Anwar Ibrahim's second budget since the formation of his unity government in November 2022.

Eight months ago, Anwar unveiled the revised 2023 Budget with a combined operating expenditure (OE) and development expenditure (DE) of RM386.3 billion.

Of this, RM289.3 billion was for OE and RM97 billion for DE. This was against a projected RM294.4 billion revenue for 2023.

The government could revise its revenue and spending projections for 2023 and 2024.

Observers believe the government could afford a bigger budget this time, with some of it being used to continue providing cash aid for the needy.

"The government could generate more revenue and spend more this year than what was originally projected in the revised 2023 Budget tabled in late February.

"For 2024, the revenue and spending may be projected to be higher," one of them said.

A larger spending could be used to lay the foundation for more economic expansion in 2024 as well as to protect the people's livelihood, raise disposable income and improve food security.

Malaysia's economy is expected to grow at about four per cent this year from the blistering pace of 8.7 per cent in 2022, which was the best in Southeast Asia.

The government could be projecting the 2024 growth at around four to five per cent.

SPRINGBOARD

Those familiar with the matter said Anwar could use the 2024 Budget as a springboard to achieve the government's key targets over the medium term. This includes reducing its fiscal deficit to a maximum three per cent of gross domestic product (GDP) and debt-to-GDP ratio of about 60 per cent.

In the re-tabled budget for 2023, the government recalibrated its fiscal deficit target, reducing it from 5.5 per cent to 5.0 per cent.

The official budget deficit in the first half of 2023 (1H23) amounted to RM39.4 billion, representing 42 per cent of the full-year deficit projection of RM93.9 billion.

The 1H23 budget deficit, as a percentage of GDP, stood at 4.5 per cent.

INFLATION TO CREEP UP?

The government, observers said, may be wary that by implementing the targeted subsidy for diesel, inflation can creep up to 3.6 per cent next year.

Inflation, which is measured through Consumer Price Index (CPI), grew at 2.8 per cent from January to August 2023.

This was attributed to moderating trend in global commodity prices, easing supply-related disruptions, existing price controls and provision of subsidies for selected items as well as the lagging impact from the normalisation of interest rate by Bank Negara Malaysia. 

For this year, inflation is estimated to range between 2.5 per cent and 3.0 per cent.

The inflation rate is expected to range between 2.1 per cent and 3.6 per cent in 2024 partly attributed to a possible gradual shift towards targeted subsidy mechanism, observers said.

They said additionally, potential risks to the inflation outlook remain subject to the fluctuations in exchange rates and supply related factors such as global commodity prices, geopolitical uncertainties and climatic conditions.

NEW TAXES

The 2024 Budget may also see the introduction of some new taxes, including the capital gains and luxury taxes first mooted in the 2023 Budget. 

The reintroduction of the Goods & Services Tax and tax cuts for individuals and companies may not be on the agenda, though.

"From a tax standpoint, the 2024 Budget announcement may provide further updates on the implementation of the global minimum tax in Malaysia," said Farah Rosley, Malaysia tax leader at Ernst & Young Tax Consultants Sdn Bhd.

It may also offer more information on the previously-announced capital gains tax on the sale of unlisted shares by companies, she added.

"It is quite unlikely that there would be tax cuts for individuals and companies in 2024 Budget with the tax rate for individuals maintained as it had already been amended in 2023 Budget," Harvey & Associates managing partner Harvindar Singh said.

"Personal income tax collection in Malaysia is quite small, less than 10 per cent of the government budget," he added.