KUALA LUMPUR (Oct 24): Prime Minister Datuk Seri Najib Razak is expected to announce a 2018 budget featuring handouts to assist the rakyat in coping with the rising costs of living, said Malaysian Rating Corp Bhd (MARC).

"As Budget 2018 will be the last budget prior to the 14th General Election, some 'rakyat-friendly' measures are to be expected. Measures to tackle the thorny issue of rising costs of living will be further enhanced," the rating agency said in its report Pre-Budget 2018: Negaraku — Shaping the Future, which was prepared by its economic research team led by chief economist Nor Zahidi Alias.

This could include, among others, a one-off personal tax relief for the middle-income group, albeit by a smaller quantum than the reliefs provided in Budget 2014 and the recalibrated Budget 2016, it added.

MARC also sees civil servants receiving special handouts by the government as their contributions bring progress to the nation. In the past, civil servants had benefitted from salary increases by 7% to 13% in 2012 and minimum salary increases in 2016.

It also expects allocations for the needy, that is, the amount of 1Malaysia People's Aid (BR1M) to be raised, albeit by a smaller amount.

"For the middle-income group, the lifestyle tax relief given in Budget 2017 could be reviewed upward as its total amount is currently capped at RM2,500, lower than the combined amount of reliefs given in prior years," it added.

However, the agency does not foresee any outright reduction in the personal income tax for 2018 as the government remains cautious about its revenue growth in 2018 despite a slight recovery in crude oil prices in the past one year.

MARC also anticipates the government to continue being extra cautious in its spending due to uncertainties in the global crude oil market. "While it is true that the proportion of oil-related revenue to total revenue has declined in recent years, in our view, the level of crude oil prices will remain an important consideration in the eyes of policymakers in planning the country's expenditures," it said.

It expects budget deficits to slip marginally to circa 2.8% of gross domestic product (GDP) in 2018 as higher oil-related revenue and the goods and services tax (GST) add to the government's coffers while spending is rationalised.

"With private consumption likely to grow circa 6.7% in 2018, GST revenue will, in our view, be within the range of RM40 billion to RM45 billion, constituting about 20% of total revenue," said MARC, anticipating another year of positive growth in revenue in 2018 after two consecutive years of contraction in 2015 and 2016.

"We foresee development expenditure to be accelerated to support growth, while operating expenditures will be closely monitored to ensure minimal leakages," it said, adding that it does not think further subsidy liberalisation efforts will be introduced during this budget.

On the concerns over home affordability, MARC is of the view that it would be helpful to establish a single entity or agency to coordinate the various housing schemes in order to speed up the progress of all affordable housing projects in a timely manner.

In addition, more incentives can be given to private developers, such as special tax deductions or reliefs for using the industrialised building system technology in developing affordable homes, especially in urban centres, it said.

In Budget 2018, MARC also anticipates the government to highlight the importance of adapting to a digital economy for Malaysia's long-term growth potential.

In addition, possible revenue that can be derived from a digital economy could also be looked into. Such sources of income would supplement the revenue already generated from the GST which helped offset the decline in oil-related revenue since the collapse of oil prices in 2015. Revenue from the GST (amounting to roughly 20% of total revenue) will likely be boosted through better enforcement measures.

Meanwhile, MARC thinks the introduction of a voluntary health insurance scheme is timely as this would lessen the burden of those who incur high medical costs.

"In the past, we have argued for withdrawals from the Employees' Provident Fund (EPF) to be allowed to pay for private medical insurance. If a voluntary national insurance scheme is introduced, MARC feels that EPF withdrawals should be allowed to pay for this health insurance scheme," it said.

MARC said it continues to feel that there is a need to encourage investments in investment-grade bonds that are rated below AA.

"In order to develop a credible benchmark bond index, liquidity conditions in the secondary market must be improved, and the availability of such an index may help attract foreign investors to have greater exposure in the ringgit corporate bond market as an alternative to their existing exposure in the ringgit sovereign bond market.

"At the same time, we feel that there is a need for measures to foster a stronger and more resilient insurance industry in the future. Policyholders should be assured of the financial strength and claims-paying ability of their insurance carrier. As such, MARC thinks that financial strength ratings should be made mandatory," it said.