This article first appeared in The Edge Malaysia Weekly on December 12, 2022 - December 18, 2022

THE clock is ticking for the new unity government led by Prime Minister Datuk Seri Anwar Ibrahim to revise and pass Budget 2023.

At one of his press conferences, Anwar said the primary focus of the government was to ensure the sustainability of the economy and to address the rising cost of living. He also hinted at a review of the budget for 2023 that was presented by the previous government, but indicated that most of the proposals were likely to remain intact.

“I think a large part of it is acceptable,” said Anwar, who has appointed himself the minister of finance.

The new government plans to table a revised budget as early as next month. While infrastructure expenditure is seen as a quick fix to boost the economy, several economists and analysts expect the size of the new budget to be smaller than that proposed previously on Oct 7, when former finance minister Datuk Seri Tengku Zafrul Abdul Aziz tabled a budget of RM372.3 billion — the largest ever. In Budget 2022, RM332.1 billion was allocated.

Budget 2023 could see some infrastructure projects being revised, especially after Anwar ordered the halt of RM7 billion in flood mitigation initiatives approved by the previous government because some projects were directly awarded without tender. This has led to the possibility of more mega-infrastructure projects coming under review, including the Mass Rapid Transit 3 (MRT3).

Anwar is expected to instil greater fiscal discipline and better governance to ensure a sustainable economic recovery and prioritise measures to address the rising cost of living while accelerating income and job growth.

The reintroduction of the Goods and Services Tax (GST) is seen as unlikely, although tax reform will be essential to address the shortfall in government revenue.

Sunway University Business School professor of economics Dr Yeah Kim Leng estimates that the revised budget will be smaller by 5% to 10% through the elimination of unnecessary spending and a lower cost structure due to improved financial governance and oversight.

“With greater spending efficiency and effectiveness, the overall economic impact could be maintained with a smaller budget, especially if the fiscal incentives, funds, projects and other government assistance are spread across a wider spectrum of households and micro, small and medium enterprises (MSMEs),” he tells The Edge.

Lee Heng Guie, executive director of the Associated Chinese Chambers of Commerce and Industry of Malaysia’s Socio-Economic Research Centre (SERC), estimates that lower expenditure for development and operation by the federal government in 2023 could result in a significant reduction in the country’s budget deficit to 4.5% to 5% of gross domestic product (GDP) compared with 5.5%, or RM99.1 billion, in the budget that was announced in October.

He adds that the high growth policies funded with debts taken on by the previous government will need a readjustment, or it could impact investor sentiment in the long run.

“Persistent high deficits and growing debt can trigger investors’ concerns about fiscal solvency. Hence, a credible fiscal reduction plan to gradually transit from fiscal imbalances to more sustainable levels is clearly needed.”

He observes that the adoption of fiscal countercyclical measures via government borrowing may be acceptable, but too high a debt burden can impede sustainable growth and crowd out the private sector. “Public debt has to be well managed to avoid debt risks,” he stresses, adding that a credible deficit reduction plan needs to be put in place to create a fiscal space to deal with future economic and financial shocks and to fund new priorities.

“By putting its finances in order, the government can reassure creditors and investors that it can sustain its fiscal policies down the road,” Lee points out.

Malaysia has run a budget deficit for 2½ decades since 1998, spending more than it earns even in the years of the mega oil boom. Consequently, federal government debt escalated sharply, from RM242 billion in 2006 to RM502 billion in 2012 and RM741 billion in 2018. By end-June 2022, it had shot up to RM1.045 trillion, or 63.8% of GDP.

At the same time, debt service charges have exceeded 10% of federal government revenue since 2014. By 2023, it is estimated that about 17 sen of every ringgit earned by the government will be spent on debt repayment, according to a report by the Ministry of Finance on its fiscal outlook and federal government revenue estimates for 2023.

Lee points to the government’s distinct lack of fiscal discipline, which was evident in its adoption of counter-cyclical fiscal policy during good economic times. “This means when the economy was growing and not slowing, it continued to increase government spending or cut taxes.

“A derailed fiscal consolidation, except for the unanticipated shocks, will be chastised by financial markets. If we do not have credibility in fixing our fiscal house, creditors could be reluctant to lend us money or they will demand a higher risk premium.

“The government must not try to assuage markets with assertions that we can count on growing the economy to ‘grow out of’ the fiscal deficit,” he cautions.

It is worth noting that the Dewan Rakyat is expected to meet on Dec 19 to approve a mini-budget to ensure that civil servants are paid their salaries in January, as the budget tabled on Oct 7 was not passed owing to the dissolution of parliament three days later.

Apart from lowering the operation and development expenditure, what other measures can be adopted to narrow the revenue shortfall?

CGS-CIMB Research says the Pakatan Harapan-led government is opposed to the reintroduction of GST, but a weak fiscal situation may necessitate the formulation of alternative sources of revenue.

“In the near term, this may include the revival of the prosperity tax, which could provide a boost to government income. In the long run, a more sustainable tax may be introduced, such as by expanding the scope of the Sales & Service Tax (SST), improving the current system, or an outright renaming of the GST,” it said in a report.

MIDF Research economist Abdul Mui’zz Morhalim is looking at the possibility of an increase in the tax rate for high-income earners, the introduction of the inheritance tax, especially on large estates, or an extension of the windfall tax (such as cukai makmur).

He adds that the reintroduction of the GST (or Value Added Tax) is another possible option. “Earlier experience shows that GST was effective and more comprehensive to boost fiscal income. We reckon the government will keep its focus on improving the fiscal position, adhering to the longer-term fiscal consolidation agenda.

“As part of measures to ensure growth sustainability, stronger fiscal space (with reduced size of fiscal deficits to GDP) is crucial to enhance the government’s capability to provide counter-cyclical policy measures to support the economy during any economic downturns. Consequently, smaller deficits will also translate to reduced reliance on additional government debt to finance fiscal spending.”

Federal government revenue collection in 2023 is projected to be lower at RM272.6 billion, or 15% of GDP, due to anticipated lower non-tax revenue collection. RM285.2 billion was collected in 2022 and RM233.8 billion in 2021.

Last week, Economy Minister Rafizi Ramli said the government was looking into ways to ensure Malaysia’s revenue would be more robust, noting that it would be unsustainable for the country to depend “too much” on natural resources- or commodity-related revenue.

He indicated that taxation was not the only option. “We want to vary our taxation streams so that it will become more robust and less dependent on certain industries.

“However, the process cannot be decided or done abruptly within a few months. It does take some time, but our [the ministry’s] job is to make sure we provide enough planning for the cabinet to consider,” he said.

This year, Petroliam Nasional Bhd (Petronas) is dishing out a total dividend of RM50 billion to the government, double the RM25 billion for last year. This payout is its highest since 2019, when the group declared a total dividend of RM54 billion.

Petronas group CEO Datuk Tengku Muhammad Taufik said in August that the additional RM25 billion in dividend payout for this year “came after having considered a request from the government”.

Strong crude oil prices and a weakening ringgit boosted Petronas’ profit to a record high of RM30.8 billion in 3Q2022, up 88% year on year. For the first nine months of 2022, the national oil company’s cumulative net profit doubled to RM77.2 billion from RM35.1 billion. It remains to be seen if Petronas will dish out more dividends in the light of its latest performance.

However, Sunway University’s Yeah reckons it would be premature for Anwar’s unity government to reintroduce GST or impose new taxes until it is on a stronger footing, as it would need to address cost of living issues and persistent inflationary pressures.

“Rising global uncertainties and a softening domestic economy also make it less conducive to raise taxes and add to the contractionary forces. The focus on enhancing the efficiency of tax administration, including the implementation of a digital tax, and reducing tax evasion will likely continue to be primary thrusts to shore up revenue amid intensified efforts to raise spending and allocative efficiencies,” he says.

UOB Global Economics & Markets Research senior economist Julia Goh says while the allocation of funds will depend on the new government’s priorities, it could retable the same budget.

She points out that the initial budget included cash aid of RM10 billion, tax cuts for the middle-income group and SMEs (RM1 billion), electricity subsidies of RM2.5 billion and a record development expenditure of RM95 billion. The budget did not pencil in new taxes.

“We think the new unity government will remain pro-growth though populist, particularly given the challenging global outlook in 2023. It remains to be seen if key fiscal measures such as reintroducing a consumption-based tax such as GST, carbon tax and targeted subsidies will be implemented amid mounting macro headwinds,” she says.

“If targeted subsidies are introduced, we think it will be done gradually to ensure it does not worsen inflationary pressures and the effects could be offset with targeted cash transfers.”

Economists expect Malaysia’s economic performance to be softer next year, primarily because of the “high-base” effect in 2022.

SERC’s Lee projects a GDP growth of 8.5% in 2022, slowing to 4.1% next year due to moderating exports, normalisation of domestic demand, continued dampening impact of inflation and higher cost of living, and the lag effects of higher interest rates that will weigh on domestic economic growth. “The key driver of growth will be domestic demand, albeit slower, while exports are expected to moderate in tandem with a slowing global economy,” he says.

MIDF’s Mu’izz pegs 2023 growth at 4.2%, driven mainly by sustained growth in domestic demand, which will help offset the expected drag from weaker external demand. “We foresee continued growth in employment and income, as well as assistance from the government such as income transfers and subsidies, which will support consumer spending next year,” he says, adding that inflationary pressures will ease next year on the back of improved supply conditions.

Bank Negara Malaysia expects 2022 GDP expansion to surpass its earlier estimate of 7%, boosted by the first nine months of robust growth.

For the third quarter ended Sept 30, Malaysia’s GDP growth surged to 14.2%, up from 8.9% in the previous quarter, outperforming its regional peers. Growth was led by a continued expansion in domestic demand, firm recovery in the labour market, robust electrical and electronics (E&E) and non-E&E exports, as well as ongoing policy support.

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