Govt to be more conservative in managing public finance — Kenanga Research

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KUALA LUMPUR (Oct 14): The government is expected to be more conservative in managing public finance, more inclined towards promoting fiscal discipline, optimisation and maintaining budget predictability, said Kenanga Research.

In a note today, the research house said amid the expectation of a global growth slowdown and the downside risk from the US-China trade war, the global growth environment may turn for the worse (recession), hence it would be more challenging for the government to sustain its Medium-Term Fiscal Framework (MTFF) target.

“Overall, the forecast under the 2020-2022 MTFF are lower than 2019-2021 MTFF, suggesting that the growth trajectory and the overall macroeconomic outlook has somewhat deteriorated.

“Under the 2020-2022 MTFF, real gross domestic product (GDP) growth is projected within the range of 4.5 per cent-5.0 per cent (2019-21: 4.5 to 5.5 per cent), while crude oil price is forecast at between US$60 and US$65 per barrel (2019-21: US$60-70 per barrel), based on crude oil production of 600,000 barrels per day,” it said.

Consequently, Kenanga Research said the fiscal deficit is targeted to average at 2.8% of GDP for the three-year period, lower than the 3.1% in the 2019-2021 MTFF tabled last year.

In contrast, the research house’s base line fiscal deficit forecast for 2020 is 3.3% of GDP (2019: 3.5%), on the back of slower growth projection next year.

Meanwhile, Kenanga Research complimented the government’s initiative to move away from the dependency on oil revenue and diversifying and broadening its tax base.

“Tax collection remains the most significant contributor to the revenue, estimated at RM189.9 billion in 2020, an increase of 5.5 per cent, driven by higher collection from direct tax (RM142.7 billion; 2019: RM135.6 billion) and indirect tax (RM47.3 billion; 2019: RM44.4 billion).

“The bulk of the increase in direct tax is attributed to higher collection from corporate income tax and individual income tax, mainly due to better corporate earnings prospect and efforts in enhancing auditing and tax compliance," it said. 

Subsequently, the government will introduce a new tax band for those earning over RM2.0 million a year at 30% tax rate (currently 28% tax rate applied to those earning over RM1 million), affecting approximately 2,000 top income earners in the country.

The increase in indirect tax is attributed to higher collection from Sales and Services Tax on the expectation of higher consumption, Visit Malaysia 2020 programme and various international events.

Going forward, government initiatives to improve revenue collection and broaden tax base are expected to uplift total revenue and improve the efficiency of income redistribution for the nation.

“Nevertheless, in terms of effectiveness, the better option would be to reintroduce the Goods and Services Tax (GST),” it added.

Finance Minister Lim Guan Eng had however said that the Pakatan Harapan government would not be bringing back the GST.

Tabled last Friday, the 2020 Budget has four thrusts including boosting economic growth in the new economy and digital era, strengthening economic diversity and strengthening access to financing for businesses. — Bernama