Malaysia budget looks to soften fiscal tightening blow

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KUALA LUMPUR (Oct 10): Malaysia's government looked to shore up its support base on Friday by announcing a budget that took the sting out of cuts to fuel subsidies and a new consumer tax by announcing lower income taxes and more money for assistance programmes.

Prime Minister Najib Razak, in his annual speech to parliament, said he would cut individual income taxes by between 1 and 3 percentage points, while the net revenues from the new goods and services tax that comes into effect in April, though announced last year, will be considerably diluted.

Earlier this month, the government had announced a round of fuel subsidy cuts as it tries to move closer to its target of achieving a balanced budget by 2020.

However Najib used his speech to assure the rakyat - Malay for people - that they would not be faced with a sharp rise in living costs.

"The government gives top priority to the rakyat particularly in terms of their daily cost of living," Najib said.

While Malaysia's economy is on a strong growth trajectory - GDP is forecast to grow 5.0 to 6.0 percent in 2015 following expected growth of 5.5 to 6.0 percent this year - investors have been worried by the country's high debt levels.

In the economic report released just ahead of Najib's speech, the Prime Minister said the government was committed to its plan to lower the deficit to 3.0 percent of gross domestic product in 2015 from 3.5 percent this year, with the aim of balancing the budget by 2020.

Overall, Najib said total expenditure in the 2015 budget would be 273.9 billion ringgit, up 3.7 percent from 2014, although tax revenues are forecast to be up 4.5 percent to 235.2 billion.

However he is faced with the challenge of achieving the fiscal deficit goals without losing more support ahead of elections in 2018.

The ruling National Front, led by Najib's United Malay National Organisation (UMNO), is worried that support has ebbed from the ethnic Malay majority. The coalition is dependent on Malays and ethnic groups in Sabah and Sarawak for votes, and has shored up support through subsidies and cash handouts.

Najib said that while the new sales tax set at 6 percent would raise a total revenue of 23.2 billion ringgit, once exemptions and the abolition of the previous sales and services tax are accounted for, it would bring in a net revenue of 5.6 billion ringgit. Of that total, 4.9 billion ringgit will be channelled back to people through assistance programmes, such as increases in cash handouts.

Having raised administered prices for diesel and a cheaper grade of gasoline earlier this month to reduce the subsidy bill earlier this month, Najib promised in the budget speech that he would soon announce a new mechanism to "rationalise" the fuel subsidies that would benefit the less well off.

"The rationalisation aims to ensure a more targeted subsidy, reduce leakages and smuggling," he said.

An extension of the stamp duty exemption for first time home buyers was also announced, increasing the purchase limit from 400,000 ringgit to 500,000 ringgit.