Thursday 28 Mar 2024
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KUALA LUMPUR (Oct 23): OCBC Bank's economist Wellian Wiranto said Malaysia's Budget 2016 was designed as if an election is coming soon.

“From the higher civil service pays and an uptick in minimum wages, to infrastructure spending in rural and Eastern Malaysia, and fatter handouts to the poor, the budget’s designed as if an election is coming soon,” he said in a note this evening.

Titled 'Popularity Bid: Malaysia's 2016 Budget Highlights', his statement came after Prime Minister Datuk Seri Najib Razak unveiled the new budget at Parliament, earlier today.

To pay for all the largesse, Wiranto said the government is banking on the still-sizable contribution from oil-related revenue streams, a pick-up in goods and services tax (GST) receipts, and — last but not least — a sizable uptick in income tax proceeds from the high earners.

Under the new budget, it is proposed that the taxable income band for the highest tax rate be increased from 25% to 26%, for those with an income between RM600,000 and RM1 million. For those earning above RM1 million, the tax rate will be increased from 25% to 28%.

The federal government is targeting a 3.1% deficit target for next year, compared to this year’s 3.2%, a difference which Wiranto described as just "a hair's breath away".

"This leaves any sense of continuous fiscal conslidation at the risk of getting thrown out of the window, with even slight changes in the parameters," he added.

He pointed out that if either real growth rate or inflation rate — which determine the nominal gross domestic product (GDP) denominator — turns out to be lower than expected, the actual deficit will head up and go above the target.

"Perhaps in realisation of such sensitivity, the government has pencilled in a relatively low-ball GDP expectation of 4%-5% for next year, although its inflation forecast of 2%-3% appears slightly on the high side.

"That aside, the actual amount of deficit, obviously matters too. Within that, any significant shortfall in revenue or sizeable uptick in expenditure would again be risk points to look out for," it said.

Of note, is the government’s assumption that oil price will be at US$50 per barrel (compared to US$55 in the revised 2015 budget and US$100 in the original version), which Wiranto said is "largely reasonable", though he noted overall government revenue would remain very much dependent on whether oil price stays put.

"In short, if oil price somehow does a dance downward again next year, fiscal alarm bells would still be ringing for Malaysia," he said, adding this is true, even with the lower expected oil revenue contribution of RM31.7 billion or 14% of total revenue, compared to almost 20% previously.

Overall, Wiranto said the new budget is designed to show that the government is keen to be seen as helping the poor and the neglected, perhaps driven at least in part by political considerations.
 
“To help pay for all that, it has banked on the idea that those who are better off, would not mind paying higher income taxes and that oil price would stay friendly enough for dividends and royalties to stream in, at an acceptable rate,” he added.
 
There also seemed to be the underlying thinking that as long as the government continues to project cutbacks in fiscal deficit — no matter how slight — the market and rating agencies would be placated and not question its commitment to balance the budget by 2020, he added.
 
"Given the risks attached to its assumptions, he said Budget 2016 is probably a budget that one can be comfortable with, though only with caveats."

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