This article first appeared in The Edge Malaysia Weekly on November 5, 2018 - November 11, 2018

FINANCE Minister Lim Guan Eng probably had businesses and investors in mind when he said “sustainable economic growth must be maintained to improve economic well-being”.

At the same time, the well-being of ordinary Malaysians was not forgotten. “The historic moment on May 9, 2018, will only matter if the government’s fiscal health can be restored and the people are better off economically in the form of higher wages, better jobs and more money to spend,” he said when tabling Budget 2019 last Friday.

It was clear that the six-month-old Pakatan Harapan government knew that Budget 2019 was its first real test to demonstrate to the world that it can strike the right balance between being a socialist government for the people’s well-being and being pro-business to promote investments and spur economic growth.

The latter is important as without private investments, jobs that would help lift more Malaysians up the income ladder are less likely to materialise. The return of RM37 billion in excess taxes owed to businesses and individuals at one go, without borrowing that much more money, also kills two birds with one stone.

Budget 2019’s three focus areas — implementing institutional reforms, ensuring socioeconomic well-being and fostering an entrepreneurial economy — are essential for sustainable inclusive growth.

Here, the message was directed at sovereign rating agencies, whose vote could determine just how expensive debt to fund growth would be. “The Harapan administration is committed to maintain a path of fiscal consolidation to achieve a deficit of 3.4% in 2019, 3% in 2020 and 2.8% in 2021. Over the medium term, we expect the deficit to be reduced further to the region of 2%,” Lim said. According to him, the fiscal deficit for 2018 was actually 3.7% and not 2.8%.

“As long as we are clean, people-centric and focused on carrying out institutional reforms, we can restore Malaysia back to fiscal health in three years,” he added.

For now, it would seem that rating agencies remain concerned with the new debt and government revenue numbers but are willing to give New Malaysia a bit more time.

“In our view, risks to Malaysia’s fiscal and debt profiles remain elevated as it works to manage a number of legacy issues and fund key priorities of the Pakatan Harapan government. A heavier reliance on commodity-based revenue presents an additional risk to Malaysia’s fiscal accounts in the absence of more structural revenue-raising measures. Higher-than-expected fiscal deficits for this year and next reflect current challenges … However, we believe that the government’s commitment to gradual fiscal consolidation is credible, and that one-off pressures, such as the funding of GST rebates, should abate after 2019,” S&P Global Ratings analyst Andrew Wood says in a statement.

While agreeing that new tax revenues and spending cuts may place Malaysia back on the path of fiscal consolidation over the medium term, Moody’s senior analyst Anushka Shah reckons that “wider deficits and a heightened reliance on volatile oil-related revenues, including Petronas dividends, will weaken the fiscal profile” in the near term. “Improved transparency and a focus on inclusive growth will be credit positive if sustained over time,” she says in a separate statement.

Fitch Ratings’ associate director Sagarika Chandra notes that Malaysia’s higher 2018 deficit figures “could be a step towards greater transparency” if indeed the change merely reflects how off-budget spending are not brought on-budget previously. “Nevertheless, failure to stick to a more conservative fiscal consolidation path raises some concerns about policy credibility. Malaysia’s public debt is high relative to rating peers and a further increase in debt over the medium term could have a rating impact,” Sagarika says.

Local experts are more forgiving. RAM Ratings views Budget 2019 as “a targeted approach to supporting growth while ensuring that its fiscal position remains manageable”.

UOB Malaysia senior economist Julia Goh describes the higher fiscal targets as “a temporary diversion” and not one that steers away from the path of fiscal consolidation.

“As for Malaysia’s sovereign rating risks, we view the risks to be quite balanced. Positive rating factors include efforts to restore public finances and improve transparency and governance standards. However, negative factors are the higher headline fiscal trajectory, execution risks and revenue uncertainties,” she says in a note, describing Budget 2019 as one that “remains expansionary despite fiscal constraints and did not sacrifice too much on growth”.

Malaysia’s economy is projected to grow 4.9% next year, up from 4.8% this year, in line with moderating global growth outlook.

Alternative approach to raise discretionary income

To be sure, Budget 2019 did provide specific examples of how the government plans to raise revenue to make up for the income lost from delivering its election promise of swapping the Goods and Services Tax (GST) with the Sales and Services Tax (SST). The RM4 billion from the setting up of an airport REIT is one example. The soda tax, higher casino duties, taxes on selected imported services, levy on air travellers and time-limited amnesty to encourage the reporting of unreported income would all potentially bring in more revenue for the government.

Sending efficient Inland Revenue Board (IRB) officers after tax evaders who display extraordinary wealth while providing tax benefits for corporations that hire people over the age of 60 as well as ex-convicts are other deft moves that underline its emphasis on inclusive growth.

Budget 2019 also spelt out how plans are underway to prevent its RM1 trillion debt from ballooning out of control and promised that measures would be implemented to ensure borrowings were only made where necessary and that the monetisation of non-core government assets would be done smartly to maximise value for the country. The government also introduced measures to get more taxes and already has people reviewing the country’s tax structure and incentives for relevance to cut leakages.

The need to spend smartly to maximise the impact on each ringgit spent is perhaps what is forcing the government to think out of the box when delivering value to the people, especially those who do not feel they are better off despite the strong GDP growth numbers in recent years.

As Prime Minister Tun Dr Mahathir Mohamad put it, there is no use in having high income if the money does not buy more things. While raising the minimum wage to RM1,100 from January next year will benefit the lower-income group, Budget 2019 measures, such as targeted cash transfers, petrol subsidy for those driving cars below 1,500cc as well as the freezing of toll rates, will also put more money in the pockets of the people who need it most.

Meanwhile, the proposed national B40 Health Protection Fund, which provides up to RM8,000 coverage for four critical illnesses, widens the social safety net  for the lower income group.

What is perhaps more important is the different approach the government is taking to increase the people’s discretionary income.

Budget 2019 also introduces measures targeted at the fact that housing, transport and food are the three biggest expenses for the lower to middle-income group.

The Price Catcher mobile application, which harnesses the power of the crowd in sourcing information on the prices of goods and services, may help in lowering the cost of living.

The government also demonstrated its willingness to explore new, technology-enabled and innovative mechanisms to solve the people’s housing problems.

“We will be approving private sector-driven property crowdfunding platforms, which will serve as an alternative source of financing for first-time homebuyers. These exchange platforms will be regulated by the Securities Commission Malaysia under the peer-to-peer financing framework. For example, the buyer will be able to acquire a selected property for 20% of its price while the remaining 80% will be fulfilled via potential investors who are interested to fund the acquisition in exchange for the potential appreciation in the value of the property over a particular period of time.

“In simple terms, Ah Chong will be able to own and stay in a RM250,000 property by paying up RM50,000 without having to procure a mortgage. Ali, who might only be interested in investing in a new property for capital appreciation, will fund the balance of the RM200,000 via the peer-to-peer property crowdfunding exchange. This financial innovation will be the first in the world, and if successful, will transform the affordability of homes for first-time homebuyers in the country. The first exchange is expected to go live in the first quarter of 2019, after all the necessary approvals are obtained from the SC,” Lim said.

He also rightly pointed out that migrating Malaysian households from private car ownership to the adoption of public transport is a key solution to increasing the people’s real disposable income. “The typical monthly expenses for just a Perodua Myvi would be about RM900 after taking into consideration the loan instalment, petrol, parking and maintenance.”

Budget 2019 allocates RM240 million to introduce a RM100 unlimited public transport pass to kick off initially on the RapidKL rail and bus network from January 2019. There will also be a RM50 monthly pass available just for RapidKL bus services only.

Its out-of-the-box approach may just be what is necessary to deal with longstanding issues of the rising cost of living and prices of homes. Measures to encourage businesses to invest in people’s education, the digital economy as well as social enterprise are also expected to aid long-term growth. The latter will build confidence that Malaysia can overcome its economic challenges and take on a new trajectory of growth and “awaken Malaysia as an Asian Tiger all over again”.

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