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

THE federal government’s larger expenditure for 2019 proves its point that Malaysia is not in austerity mode but is willing to spend smartly to grow the economy and the people’s well-being. Due to the need for several one-off items, including returning RM37 billion owed to the people by the previous administration, the RM314.55 billion 2019 budget allocation is 8.3% or RM24.2 billion larger than the revised estimate of RM290.35 billion for 2018 (previously RM280.3 billion).

The return of RM37 billion in outstanding tax refunds to the people and businesses potentially puts money that represents 2.4% of GDP at play to boost private consumption and the economy next year. Malaysia expects its economy to expand 4.9% next year, up from 4.8% this year, helped mainly by domestic consumption.

The RM37 billion boost — RM18 billion for income taxes and RM19 billion for Goods and Services Tax  (GST) refunds — was made possible with a RM30 billion special dividend from national oil company Petroliam Nasional Bhd (Petronas), which is benefiting from higher global oil prices.

The special dividend lifted the federal government’s investment income to RM59.52 billion from RM36.94 billion in 2018 and RM21.64 billion in 2017. A RM7 billion additional dividend from Petronas also helped the federal government cushion the RM21 billion shortfall in its 2018 revenue from stopping GST from June 1 and replacing it with an enhanced Sales and Services Tax (SST) from Sept 1 this year. The rest was buffered by RM14.5 billion of additional revenue from SST, higher oil-related revenue and RM6.3 billion in savings from cutting wastage and smarter spending.

The oil price assumption for Budget 2019 was raised to US$60 to US$70 a barrel from US$52 a barrel assumed in Budget 2018 under the previous administration, which had guided a RM300 million boost to government revenue for every US$1 increase in global oil prices.

What about the deficit?

The RM30 billion special dividend from Petronas helped increase government revenue to RM261.81 billion for 2019, up 10.7% from the RM236.46 billion revised estimate for 2018. It also helped make Malaysia’s closely watched budget deficit or fiscal deficit figure a lot smaller than feared.

For 2019, the budget deficit is 3.4% of GDP or RM52.04 billion — the highest since 2014 (RM37.4 billion) but lower than the revised 2018 budget deficit of 3.7% of GDP or RM53.33 billion.

Instead of standing at 2.8% of GDP (RM39.79 billion) as announced previously, the 2018 budget deficit — basically the excess the government is spending on top of its revenue that year — was revised upwards to 3.7% of GDP to take into account RM16 billion in additional expenses, namely a RM9.5 billion allocation for sewerage infrastructure, repairs and maintenance; RM4 billion for GST refunds; RM2.7 billion cash assistance for civil servants; RM2.4 billion for LRT3 and the electrified double-tracking project; and RM1.3 billion for the acquisition of the Eastern Dispersal Link in Johor, according to details in the 2019 Fiscal Outlook and Federal Government Revenue Estimates report.

Economists had said that sovereign rating agencies would not downgrade Malaysia’s credit rating if they deemed any increase in its budget deficit or fiscal slippage as temporary. Some economists had already, in recent weeks, revised upwards their expectation of the 2018 deficit figure to 3.5% from 3% previously.

Like the revised 11th Malaysia Plan released last month, the report made no specific mention of attaining a balanced budget but promised greater transparency and accountability in spending taxpayers’ money and managing the country’s resources.

“In the adjustment period, the fiscal position in 2019 will be set at a new base, which will reset the new fiscal consolidation trajectory going forward,” the report says.

It would seem that Malaysia remains committed to fiscal consolidation but would need until 2021 to see its fiscal deficit reach the “old” 2.8% figure provided for 2018 based on a chart appended to the 2019 fiscal outlook report.

“The government’s fiscal stance will continue to be expansionary, where the amount spent on the economy is higher than the revenue collected. The stance is appropriate, considering the nation’s high level of domestic savings. Due to high liquidity in the domestic financial market, there is ample room for the private sector to increase its investment without the government’s borrowings crowding out the market. Furthermore, domestic investors will benefit from the government’s debt issuance by earning a stable return,” the report says.

It is understood that the near-term approach is to invest in building the nation’s competitive advantage and raising the general well-being of the people. A larger economy would also go towards reducing the federal government’s total debt ratio, as projected in the 2019 fiscal outlook report.

Debt-to-GDP ratio now at 74.5%

The RM1.087 billion total federal government debt, guarantees and other liabilities, which represented 80.3% of GDP as at end-2017, were stated as 74.5% of GDP as at end-June this year despite there being only a RM21.4 billion reduction in the absolute tally to RM1.066 billion.

The decline was largely helped by a RM75.2 billion decrease in commitments under public-private partnerships and project payments that the current government deems as “other liabilities”.

The direct federal government debt (the item that is supposed to be below 55% of GDP) remained at 50.7% as at end-June this year, although the absolute figure was RM38.4 billion higher than at end-2017. Committed government guarantees as well as the net debt of 1Malaysia Development Bhd also increased in absolute terms in the first half of this year.

Given that the new administration is only seven months old, it is not surprising that operating expenditure remains high.

Debt service charges are projected to rise to RM33 billion or 12.6% of government revenue in 2019 from RM30.88 billion in 2018. Without Petronas’ RM30 billion special dividend, debt financing charges would have been 14.2% of government revenue. There is a 15% cap on this based on its administrative fiscal rules.

With a move towards more targeted subsidies and social assistance, allocation for 2019 is reduced to RM22.27 billion from RM28.13 billion in 2018. Among other things, the Bantuan Sara Hidup or Living Aid Assistance (BSH) cash transfer (which replaced BR1M or 1Malaysia People’s Aid) has been revised to RM5 billion and is targeted at 4.1 million recipients for 2019 compared with the reported RM6.8 billion for more than 7.2 million recipients under the previous administration for 2018.

The cost of civil service emoluments is projected to rise to RM82.05 billion (31.3% of government revenue) in 2019 from RM81.3 billion in 2018. Some 67% of emoluments are allocated to the Ministry of Education and Ministry of Health to remunerate some 834,000 civil servants in both ministries comprising mainly teachers, doctors and nurses.

Another 10% of government revenue next year goes to retirement charges, benefiting 836,000 civil service pensioners and their eligible next of kin. The allocation rose to RM26.56 billion for 2019 from RM25.76 billion in 2018.

Without the one-off tax refund and Petronas special dividend

Collectively, operating expenditure is projected to rise to RM259.85 billion in 2019 from RM235.45 billion. Without the RM37 billion tax refund, operating expenditure would have decreased by RM12.6 billion to RM222.9 billion next year in line with the new zero-based budgeting approach. The core lower expenses were helped by savings from non-essential expenditure, the postponing of programmes and projects with less priority and urgency, improved cost efficiency of existing programmes and subsidy rationalisation through a more targeted mechanism.

Development expenditure, which was revised upwards from RM46 billion under the previous administration to RM54.9 billion for 2018, is projected to shrink 0.4% to RM54.7 billion in 2019.

The main reason for the close to RM10 billion increase in development expenditure from 2017 was the reclassification of some items — RM6.9 billion in 2018 and RM9.7 billion in 2019 — from operating expenditure to development expenditure, according to Finance Minister Lim Guan Eng. These include payments to Prasarana for LRT construction and to Suria Strategic Energy Resources for the gas pipeline projects, which were treated as transfers under operating expenditure when they were actually development expenditure.

Other similar expenditure comprised lease or maintenance payments for the construction of PDRM buildings and capital refurbishment of schools, Lim said when tabling Budget 2019.

Under development expenditure, infrastructure projects with a high multiplier effect are prioritised. The economic sector remains the largest recipient with a 53.4% share, although its allocation has been reduced to RM29.2 billion in 2019 (RM33.03 billion in 2018). The sector will focus on the transport system, trade and industry, energy and public utilities as well as agriculture and rural development, in tandem with initiatives to enhance the competitiveness of the economy and raise its value chain, the fiscal outlook report says.

To bridge the urban-rural gap, the allocation for the social sector has been increased to RM15.18 billion (RM14.5 billion in 2018) to expand access to basic services, including education and healthcare. In particular, RM2.3 billion has been given to the health subsector and RM1.7 billion for housing. Meanwhile, the allocation for the security sector has been raised to RM7.08 billion (RM5.34 billion in 2018), primarily to improve surveillance and procure equipment to enhance public safety and national security.

Without the RM30 billion Petronas special dividend (to help with the RM37 billion tax refund), the federal government’s total revenue would have declined by RM4.6 billion to RM231.8 billion in 2019, mainly due to lower interest and investment income despite a higher tax collection.

With a narrower revenue base, the government admits that there is a need for a more thorough expenditure review. It adopted zero-based budgeting in formulating the 2019 budget to improve its spending efficiency. To help broaden its tax base and shrink the tax gap, the government has also set up a tax reform committee to undertake a comprehensive review of the tax system. This is a step in the right direction as every extra ringgit will help Malaysia towards becoming a developed and inclusive nation.

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