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This article first appeared in The Edge Malaysia Weekly on October 2, 2017 - October 8, 2017

COME Oct 27, Prime Minister Datuk Seri Najib Razak will table his last budget before the 14th general election, which must be held by August next year. With the theme of “Shaping the Future”, it is highly expected to be a people-friendly election budget. Economists believe it will be an expansionary budget that focuses on the rakyat’s wellbeing.

“The budget will be a capstone ‘feel-good’ factor rolled out by the government before the country goes to the polls,” says Yeah Kim Leng, Professor of Economics at Sunway University Business School.

In a report, RHB Research Institute expects the government to emphasise the country’s aspirations for the next 30 years under Transformasi Nasional 2050 (TN50). “We believe the government may likely place a lot more emphasis on economic development, using technology to make advancements. In this regard, we believe that the government’s measures and incentives would likely focus on setting the foundation for TN50, high-technology industries in areas of automation, robotic development, big data, cloud computing, tackling the rising cost of living, further development of SMEs (small and medium enterprises) and affordable housing,” it explains.

United Overseas Bank (M) Bhd economist Julia Goh has similar views, adding that the focus in the upcoming budget will likely be on the lower to middle-income segments, addressing common issues such as cost of living and affordable housing.

But with the government committing to lowering the fiscal deficit, how many goodies can the government dole out?

Fortunately, the price of oil has been stabilising and economic growth looks better this year. Many opine that these factors will give the government more room to provide a “feel-good” budget this year.

Nevertheless, increasing tax revenue is still a challenge faced by the government, says Dr Veerinderjeet Singh, vice-president of the Malaysian Institute of Certified Public Accountants and executive chairman of Axcelasia Inc.

One segment that the government is looking to collect tax revenue from is the digital economy. Customs director-general Datuk Seri Subromaniam Tholasy was recently quoted as saying that his department is looking into amending the Goods and Services Tax Act 2014 to facilitate collection of tax from foreign companies offering digital services in Malaysia.

Other than that, the government will not introduce new taxes this year, say tax consultants and economists The Edge spoke to. Instead, they believe the government will enhance its tax revenue by broadening the tax base, increasing tax compliance and stepping up enforcement.

Recent media reports say this year’s GST collection is likely to surpass the RM42 billion target by RM1 billion while income tax collection is poised to hit the targeted RM127.7 billion.

“Revenue is expected to improve by 4.5% to RM226.9 billion in 2018 from the RM217.2 billion estimated for this year. This would be underpinned by an increase in income taxes in line with stronger economic growth next year, as corporate earnings and wages rise,” says RHB Research in its report.

The research house also points out that revenue could be supported by higher oil prices next year, which could result in more petroleum revenue tax. “The oil price assumption for 2018 is expected to be higher at around US$52/bbl, compared to the US$45/bbl budgeted for this year,” it says.

This year, Petronas raised its dividend payment to the federal government by RM3 billion to RM16 billion. And if oil prices trend higher as expected, RHB Research says Petronas may opt to maintain its dividend payment at the RM15 billion to RM17 billion range for 2018.

When crude oil prices were at their peak, Petronas paid out handsome dividends amounting to RM30 billion to the government.

 

Goodies galore?

Experts are divided on whether the government will lower the income tax rates to appeal to the rakyat. Yeah thinks it could as that would reduce the high cost of living.

UOB’s Goh agrees, saying that with higher oil prices and increased GST revenue, there could be room to lower the income tax rates of those in the lower-income bracket.

However, Veerinderjeet disagrees. “I don’t think it will be lowered this time around. After all, the tax rates for those in the higher brackets were just raised last year.”

He believes the government may give out special one-off reliefs for the middle-income earners or maybe look at lowering the Employees Provident Fund rate they are paying to give them more disposable income.

RHB Research thinks the government may increase tax relief for medical expenses, disability and early children’s education. Meanwhile, the lifestyle tax relief could also be increased to help the people keep pace with technological advancement, it adds.

Veerinderjeet also believes the government is unlikely to cut the GST. “The GST rate can be lowered if only the essential items are exempt from GST. Right now, we have one of the longest lists of exempted items in the world. It reduces the potential revenue to be collected but it was perhaps done to help the lower-income group.

“With the elections on the horizon, the government might want to steer clear of cutting the exemption list, lest it becomes an issue,” explains Veerinderjeet.

Some believe that the Bantuan Rakyat 1Malaysia (BR1M) cash handouts could be increased but UOB’s Goh does not think so, given that the target for BR1M under Barisan Nasional’s 2013 election manifesto has already been achieved.

The BR1M cash handout, which started in 2012 as an initiative to ease the financial burden of the lower-income group, was increased from RM500 per household to RM1,200 in the last budget.

RHB Research opines that the government is expected to increase the special assistance payouts announced in Budget 2017, which saw public servants receiving RM500 and pensioners, RM250.

Meanwhile, Yeah believes the budget could also see re-prioritisation in areas such as healthcare and education, which saw cuts in the last budget. Goh says that the budget will sustain the momentum of core infrastructure spending as project announcements and awards are reaffirmed.

With the higher revenue expected this year, experts believe the government will be able to cut back on spending and lower the fiscal deficit at a faster rate. At present, the country is on track to achieve the 3% fiscal deficit target for 2017. That said, some economists think this is unlikely as elections are close.

 

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