Friday 29 Mar 2024
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KUALA LUMPUR: The government will likely raise cash handouts to alleviate the hardship of lower income earners and announce measures to soften the impact of higher costs of living as well as support economic growth. But subsidy rationalisation and the need for continued fiscal prudence will be a key message in the tabling of Budget 2015 this evening, government sources said.

Themed “Accelerating growth, ensuring fiscal sustainability and prospering the rakyat”, the sources said Budget 2015 would seek to “be as inclusive as possible” but blanket subsidies will be replaced with more targeted safety nets for people who need them most.

“Studies show the top 20% income earners benefit six times more than the bottom 20%,” one source said, calling broad subsidies “regressive”.
Other than fuel subsidies, which are expected to cost more than RM21 billion despite the recent 20 sen reduction from Oct 2, it is learnt that the government is looking at removing blanket subsidies for everyday items such as cooking oil and liquefied natural gas in favour of more targeted aid.

Economists are largely in favour of targeted subsidies but some reckon that 1Malaysia People’s Aid (BR1M) handouts are unlikely to fully absorb the expected increase in costs — a factor expected to dampen consumer spending next year when inflation is expected to spike from subsidy removal and the implementation of the goods and services tax (GST) from April 1, 2015.

The good news is that Budget 2015 would likely detail plans to provide more affordable housing and “some reduction in personal income taxes”, the sources added.

It is not immediately known whether the reduction is on top of the 1% to 3% cut in individual income tax rates announced last year in Budget 2014, but tax experts reckon Malaysia can afford to raise personal income tax relief to reduce taxable income.

The source said Malaysia would like to have further personal income and corporate tax cuts but reckons that the government would likely choose to first observe the impact of GST on its revenue base before deciding on further reductions. As it is, Malaysia will cut corporate tax to 24% in 2016 from 25% now.

In any case, Budget 2015 is also widely expected to give more details on the implementation of the GST such as whether medicine, petrol and books will be exempted from the consumption tax.

It is understood that the government expects to see between RM5 billion and RM6 billion net higher income in 2015 from nine months of implementing a 6% GST, which will replace the current sales and services tax regime.

Given that most of the GST net income is likely to be channelled to the lower income group in the form of the BR1M and other social safety nets, economists are looking out for more details on how the government will seek to reduce its operating expenditure and raise development spending.

Among other things, market watchers are looking out for signs on more prudent spending practices by the government and proof that Malaysia can successfully broaden its revenue base and maintain the improvement seen in its fiscal positions. Market watchers expect Malaysia to raise cash from asset sales and reduce subsidies in public healthcare by increasing the token sum public hospital charges.

“University fees may also be raised,” an observer said, noting that the UK and India have hiked fees. Any fee hike will need to be coupled with a better collection of PTPTN, which is said to be only seeing a 45% payment by debtors.

Apart from a lower budget deficit, Malaysia needs to ensure its current account balance remains in a surplus position to stay out of the so-called “twin deficit” position that is likely to spark a sovereign rating downgrade and push costs of debt higher. Malaysia’s current account surplus fell to RM16 billion in the second quarter of financial year 2014 (2QFY14) from RM19.84 billion in 1QFY14 but is still above the recent low of RM2.55 billion in 2QFY13.

In a statement yesterday, Prime Minister Datuk Seri Najib Razak said Malaysia is on track to cut its fiscal deficit to 3.5% by year-end and to 3% by end-2015 and stressed the importance of ensuring Malaysia achieves a balanced budget by 2020.

“It is wrong to pass the burden of debt to the next generation. We must pass on a stronger economy with less debt. We must do what is right for Malaysia’s economy, not what is popular. By doing so, we will ensure long-term prosperity of the people,” Najib said, stressing that the current levels of subsidies are “unsustainable”.

The fuel subsidy which only cost RM1.6 billion in 2002 and had escalated to RM2 billion a month in 2014, is widely expected to be among the first of the blanket subsidies that will make way for more targeted aid to the needy groups.

Still, Budget 2015 will be “pro-rakyat” and include measures to ease concerns over the cost of living, enhance job opportunities, improve education and create more affordable housing, Najib added in the statement, flagging the importance of the BR1M programme.

“BR1M will continue as it is part of our manifesto. It is part of our subsidy rationalisation. By switching from blanket subsidies to more targeted support, we are getting better value for money.”


This article first appeared in The Edge Financial Daily, on Oct 10, 2014.

 

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