Cover Story: Budget 2020: Pump-priming in uncertain times?

This article first appeared in The Edge Malaysia Weekly, on September 30, 2019 - October 06, 2019.

Source: Affin Hwang Research

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THE country is waiting with bated breath for the unveiling of Budget 2020 in two weeks’ time. The second by the Pakatan Harapan government since it came into power, this budget has been deemed very important for the nation for many reasons.

Many expect the upcoming budget to contain a new policy direction, given that 2020 is the last year of the 11th Malaysia Plan. Expectation of a global economic slowdown and the ongoing US-China trade war have also made the 2020 budget one that will be closely watched.

So, how will the government navigate slower economic growth and setting a new policy direction while managing its coffers?

It is common knowledge that the revised fiscal deficit target of 3% for 2020 will not be met. In fact, economists see it coming in at a more realistic 3.2% in 2020, down from 3.4% this year.

Given the prospect of weaker economic growth, economists say the government should not be “obsessed” with the fiscal deficit target at this juncture. What is more pertinent during such a time is prudent spending or spending on things that will generate sustainable economic growth and high multiplier effects, they add.

On that note, many opine that the 2020 budget will be expansionary in nature. Economists believe that the government will still exercise fiscal discipline and estimate a fiscal deficit of 3.2%. They add that the current economic outlook would likely see the government engage in pump-priming to stimulate the economy, which means a higher allocation for development expenditure.

“Development expenditure — construction-related projects like hospitals, schools, railways and others — has high multiplier effects because it benefits more contractors, usually the small to medium companies,” says Affin Hwang Investment Bank economist Alan Tan.

In a recent report, UOB Group senior economist Julia Goh projects the allocation for development expenditure to be raised to RM55 billion for 2020 from a budgeted RM54.7 billion for this year in order to accommodate more growth stimulus-driven projects.

ACCCIM Socio-Economic Research Centre director Lee Heng Guie expects a even higher allocation — RM56 billion — for development expenditure in 2020. “The government should not be fixated on achieving the targeted fiscal deficit while trying to find a balance during turbulent times. The budget must manage trade-offs between supporting domestic demand, protecting social spending and ensuring the optimal mix of spending, depending on sector-specific requirements,” he says.

Goh sees the government loosening its purse strings in targeted areas, such as trade and industry, communications, healthcare, education and training, as well as infrastructure projects, to support the economy. There are also allocations for renovating, rehabilitating and restoring old government buildings.

“Some of the 121 projects outlined for 2019 may be pushed through to next year due to delays caused by adopting a more transparent open tender process,” she observes.

Efforts to boost business confidence represent another important aspect of the 2020 budget, say experts. Lee thinks the upcoming budget should provide a clear direction for the economy, greater policy clarity and investment opportunities for businesses (see accompanying story).

“Private investment vitality is critical to sustain our economic growth, raise future growth potential, create high-income jobs and increase exports. It provides greater economic certainty, enhances business investment and promotes the timely implementation of reforms and catalytic projects. The continued provision and upgrading of infrastructure would boost private investment,” he says.

While private consumption has been a pillar of the country’s GDP growth in recent times, Tan believes private investment functions as the second leg for economic growth and should see some measures to help increase investments.

Tax experts also weighed in on the matter. Deloitte Malaysia tax leader Sim Kwang Gek believes fiscal stimuli in the face of a budget deficit should have a long-term positive impact on the economy. She cites India, which recently announced a number of measures to promote growth and investment.

One of the country’s most surprising measures was the cut in its corporate tax rate from 30% to 22% for domestic companies and 25% to 15% for new investment in manufacturing. The Indian government is projecting a revenue loss of US$20 billion from implementing these measures.

Can local companies expect the Malaysian government to follow in India’s footsteps and slash its corporate tax rate this time around?

Although this is an ideal way to stimulate the economy, it is unlikely to happen in Budget 2020 given the constraints on the country’s finances, says Affin Hwang IB’s Tan. Corporate income tax accounts for 51.1% of direct taxes and 38.2% of total government tax revenue.

 

SST scope broadened?

Over the past year, the general focus has been more on expenditure than revenue. But with revenue limitations and assurance from Finance Minister Lim Guan Eng that no new tax will be introduced, it is widely speculated that the scope of the Sales and Services Tax (SST) will be widened.

Malaysian Institute of Certified Public Accountants president Dr Veerinderjeet Singh believes any widening of the SST base should be done gradually over the next three years or depending on the economic situation.

“The Customs Department would need to determine the type of goods and services that can be included in the tax base, bearing in mind the present economic circumstances. In addition, the Customs Department must ensure there will not be a cascading of the tax as goods or services flow through the distribution system, from manufacturers to wholesalers and retailers,” he says.

Deloitte’s Sim does not think SST’s scope will be widened this time around, given that the 2019 budget had included imported taxable services and the expansion of the service tax to foreign operators who provide digital services in Malaysia with effect from Jan 1, 2020.

Nevertheless, Sim believes a more holistic review of the SST regime and effective enforcement are necessary to prevent abuse and to eliminate the issue of double taxation faced by some businesses.

“For example, only certain services are exempt from service tax currently and it is hoped that the exemption can be broadened to include more services so that the tax-cascading effect can be minimised and the prices of goods and services kept competitive.

“Alternatively, an input tax credit mechanism can be considered for certain businesses to prevent multiple layers of taxation at each supply point,” she explains.

If the scope of SST is broadened to capture more services in the net, Sim believes more concessions should be given to businesses to address the double-taxation effect under the SST regime.

 

Tax reform

Last year, there was much talk about the need for tax reform in the country. A Tax Review Committee was established to look into the matter and many are looking forward to see the proposals and reformations pushed through in the Malaysian tax system.

Will more tax reform be introduced this year?

Veerinderjeet believes this is not the right time to introduce tax reforms in “a big way”, on account of the economy facing headwinds due to slowing global growth.

“The government did start off with some specific measures in the 2019 budget, which signalled the start of some form of tax reform in terms of trying to shore up tax revenue and reduce leakages. And, of course, there is nothing to stop the government from continuing to enhance tax administration and trying to make it easier for people to comply with tax laws and submit tax returns as well as settle their tax obligations.

“Notwithstanding that, given the various requests and representations from the trade bodies and organisations, we may well see some extension of the existing tax incentives (like the reinvestment allowance) for those sectors for which the maximum period has come to an end, and some special tax deductions to stimulate business activities,” he explains.

EY Malaysia tax leader Amarjeet Singh, who also serves as the Asean tax managing partner, comments that while he expects some tax changes to be announced in the budget, similar to every past one, he does not see any significant change being introduced.

“Malaysia already has a robust tax framework and I dare say our tax system is as advanced as that of many other countries. Therefore, I do not expect a major overhaul of the tax framework to be announced in the budget.

“What is required, I believe, is to address the increased competition within the region and how we, as a nation, can be tax competitive and yet achieve fiscal balance, especially since we don’t have a broad indirect tax system like the Goods and Services Tax in place,” he adds.

Prime Minister Tun Dr Mahathir Mohamad had said earlier this year that the Tax Review Committee would draw up a proposal to enhance tax revenue that would entail holistic and simplified tax investment incentives.

This is definitely good news for the business community and the general public, Amarjeet says, adding that he is looking forward to a well-formulated and sustainable pro-growth tax reform.

“Beyond the budget, we expect to see changes introduced to the tax system in the near future based on the work that the Tax Review Committee has done,” he says.

Veerinderjeet, meanwhile, remains hopeful that the government will continue with its initiative to enhance compliance. He hopes to see the tax authorities carry out their role in a professional manner and provide effective services to continue to build trust and confidence among the rakyat with regard to the tax agency.

“Trust is driven by the degree to which the tax system [including the approach to facilitation and enforcement] is characterised as being fair, equitable, reciprocal and accountable. Therefore, a more service-oriented approach, rather than using the strong arm of the law, can help increase citizens’ trust in government, tax morale and, thus, tax compliance,” he says.

 

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