MALAYSIA’s resolve to adopt a prudent fiscal stance by going ahead with the implementation of the Goods and Services Tax (GST) and cutting subsidies and debts while promoting economic growth will see it achieve its targeted lower fiscal deficits, say economists.

When tabling Budget 2015 in the Dewan Rakyat last Friday, Prime Minister Datuk Seri Najib Razak said, “The government is steadfast in strengthening fiscal governance. Consolidating the fiscal deficit is a moral responsibility of our generation towards the future generation … we do not want Malaysia to inherit federal government finances burdened with debts.”

The budget deficit next year is targeted to be 3% of gross domestic product, down from 3.5% this year and 3.9% last year.

The Economic Report 2014/2015 released by the Ministry of Finance has a similar stance. “The government remains committed to achieving a balanced budget by 2020. The measures include the implementation of GST, accrual accounting and outcome-based budgeting as well as the adoption of a more targeted fuel subsidy mechanism,” it says.

For 2015, economic growth is expected to remain strong — between 5% and 6%, compared with this year’s 5.5% to 6%.

According to Najib, who is also the finance minister, the federal government’s revenue in 2015 is projected at RM235 billion, a RM10 billion increase from 2014 due partly to the implementation of the GST in April 2015. 

Tax revenue for 2015 is expected to increase 6.8% to RM183.37 billion on higher collection of corporate tax and the GST, according to the budget proposals.

And, the overall bill for subsidies and cash assistance will fall by over 7% next year.

On debts, the government expects to lower them to 52.8% of GDP this year, down from 54.7% in 2013.

Dr Yeah Kim Leng, the Dean of School of Business at the Malaysia University of Science and Technology, tells The Edge, “Given the current improving external environment, the government should be able to achieve its fiscal target next year with increase in revenue and the steady GDP growth of 5% to 6%.

“As long as Malaysia can maintain high GDP growth, reduce spending and subsidies gradually, maintain investor confidence … it should be able to attain a balanced budget by 2020.”

Patricia Oh Swee Ling, senior economist at AmInvestment Bank Group, says, “We believe that the official deficit target is not overly optimistic, considering the revenue and expenditure allocation for the forthcoming fiscal year.”

Oh’s GDP growth projections are 5.7% and 5.5% for 2014 and 2015 respectively. “With the rise in tax and non-tax revenue, the deficit is expected to gradually decline, and then, achieve a balanced budget by 2020,” she says.

But Oh says the risks ahead for the local economy include fiscal consolidation efforts, slowdown in loans growth and escalation in domestic prices.

Jeff Ng, Standard Chartered Bank’s economist in Singapore, says, “It’s a positive budget. The government will introduce the GST, lower corporate tax, maintain fiscal prudence and maintain steady growth. This is in line with our expectations.”

On fiscal prudence, he says over the phone, “We continue to see progress in the last few years. There is limited risk that Malaysia will not achieve the 3% fiscal deficit and our projected 5.5% GDP growth next year, with the implementation of the GST amid improving growth in the US and China in the fourth quarter of this year.”

Describing the budget as “market friendly”, Ng notes that it contains a lot of initiatives for infrastructural development which could promote growth and pave the way for the economy to expand, an element important to achieving a balanced budget by 2020.

Malaysia will start work on infrastructure projects including roads and railways worth RM75 billion to sustain economic growth, according to the budget proposals.

These projects are the 1,663km Pan Borneo Highway linking Sabah to Sarawak at a cost of RM27 billion, the construction of a RM23 billion second mass-rail system, a RM9 billion light-rail line and four highways with a combined cost of RM16 billion.

This article first appeared in The Edge Malaysia Weekly, on October 13 - 19, 2014.