This article first appeared in The Edge Malaysia Weekly on October 30, 2017 - November 5, 2017

MALAYSIA has tabled its biggest budget in five years for the 2018 general election year while sticking to its deficit reduction commitment. The Budget 2018 allocation of RM280.25 billion is 7.5% more than the RM260.8 billion budgeted for 2017 (and 5.4% above the 2017 revised estimate of RM265.9 billion).

Not only is the fiscal deficit targeted to fall to 2.8% of gross domestic product (GDP) in 2018 from a likely 3% this year and 3.1% in 2016, the actual shortfall in ringgit terms is also projected to be smaller at RM39.79 billion in 2018 compared with the RM39.89 billion revised estimate for 2017.

The 2.8% budget deficit projection for next year comes on the back of expectations of higher revenue collection and modest expenditure growth. That said, fiscal consolidation needs to pick up speed if Malaysia is to attain its “balanced budget” or 0.6% fiscal deficit target in 2020.

For 2018, the economy is forecast to grow between 5% and 5.5% — slightly less bullish than the new GDP growth estimate of 5.2% to 5.7% for this year. The original forecast was 4% to 5% for 2017.

The Malaysian economy will remain resilient in 2018, says the Economic Report 2017/18, with the GDP expansion led by domestic demand.

Private sector expenditure will continue to be the primary driver of growth with private investment and consumption growing 8.9% and 6.8% respectively. However, public sector expenditure is expected to decline as public corporations lower capital outlays.

“Malaysia’s external position is forecast to remain favourable, supported by global growth and trade. The economy will continue to operate under conditions of full employment with the unemployment rate at below 4% while inflation remains benign,” says the Economic Report.

For Budget 2018, a total of RM234.25 billion is allocated to operating expenditure and RM46 billion for development expenditure. The operating expenditure is 6.5% higher year on year while the development expenditure is up 0.1%.

Emoluments remain the highest expenditure for the government next year. The RM79.15 billion allocation is 0.4% higher than the revised estimate of RM78.8 billion for 2017. Nevertheless, the government intends to keep its civil service size at 1.6 million to contain the growth in emoluments.

Other large expenditure, including retirement charges, has been allocated with RM24.55 billion — up 3.8% from the previous year — and debt service charges with RM30.88 billion, up 7% from RM28.87 billion for 2017.

It is worth noting that subsidies and social assistance will be seeing the largest increase in allocation in 2018, up 15% to RM26.54 billion from RM23.09 billion in 2017. This comes after a contraction of 6.5% y-o-y in 2017 as the government cut subsidies for the 1kg to 5kg bottle cooking oil and implemented the weekly managed float system for fuel prices.

Supplies and services are expected to amount to RM33.62 billion in 2018, representing a 3% increase from the previous year while refunds and write-offs will increase 10.7% to RM888 million in 2018. Grants and transfers to state governments and grants to statutory bodies will be trimmed by 0.8% to RM8.02 billion and 2.6% to RM13.1 billion respectively.

Of the amount allocated for development expenditure, RM26.34 billion will go to the economic sector, RM11.72 billion to the social sector,

RM5.21 billion to security and RM2.72 billion to general administration. The social sector will see a cut of 3.3% in 2018 to RM11.72 billion. The biggest cut is from education and training, which will be 11% lower at RM5.26 billion compared with 2017’s RM5.9 billion. Housing will see a 34.1% boost to RM1.17 billion and health, 24.7% to RM1.91 billion.

As for the economic sector, only the energy and public utilities, and agriculture and rural development will get a larger piece of the pie with a 9.2% increase to RM2.75 billion and 4.4% expansion to RM2.52 billion respectively.

Trade and industry sees the biggest reduction of 14.1% to RM4.15 billion. This is followed by environment (-8.4% to RM2.01 billion) and transport (-2.5% to RM10.48 billion).

Government revenue for 2018 is expected to grow 6.4% to RM239.86 billion from RM225.34 billion in 2017. The bulk of it will be direct taxes, which will see an increase of 6.7% to RM127.71 billion. Indirect taxes is expected to rise 5.5% to RM63.86 billion in 2018. These come on the back of better economic activity and supportive business environment, says the Economic Report.

But the biggest increase in percentage terms will come from the non-tax revenue portion, consisting of licences, permits and investment income, which is expected to increase 7% to RM48.29 billion in 2018.

The report also says federal government debt “remains sustainable within the prudential limit of 55% of GDP”.

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