Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on July 18, 2022 - July 24, 2022

THAT 60% of Malaysia’s outsized RM77.7 billion subsidies bill for 2022 had not been budgeted for when Budget 2022 was tabled last October meant that there were bound to be spending cuts elsewhere to pay for the RM46.7 billion gap, which works out to be close to 3% of GDP.

The entire RM77.7 billion is close to 5% of GDP, which means that the RM31 billion originally budgeted for subsidies was already about 2% of GDP.

That gap is significant, given that Malaysia’s fiscal deficit was pencilled in at 6% of GDP, or RM97.49 billion, when Budget 2022 was tabled. The actual fiscal deficit amount — debt-funded spending in excess of revenue — could well be higher.

The Edge had previously estimated that, to keep the budget deficit at 6% of GDP for 2022 — which the government has said it intends to do despite the outsized subsidies bill — the government may need to obtain at least RM15 billion in additional dividends from government-linked institutions, including national oil company Petroliam Nasional Bhd (Petronas).

Even with extra dividends, the sheer size of the unbudgeted amount means that Budget 2022 allocations will need to be redistributed where possible.

As such, Treasury secretary-general Datuk Seri Asri Hamidon’s circular dated July 14 asking the various government ministries, departments and agencies to propose ways to save at least 5% of operating expenditure allocated to them (but had not been spent) for 2022 should come as no surprise.

We know that at least RM158 billion, or 68%, of the originally budgeted operating expenditure (opex) for 2022 goes to pay emoluments, pension and gratuities for the civil service as well as debt service charges, which are more likely to be slightly higher than what was originally budgeted, based on past records.

Given that the government had already spent RM25 billion in the first quarter of this year on opex (other than what was required for emoluments, pension and gratuities plus debt service charges), the government is likely to have needed more revenue to maintain its fiscal deficit at its targeted 6% of GDP, even if it does not spend another sen on anything else — which is impossible, as the rest of the opex also includes the headline RM17.35 billion budgeted for subsidies (RM7.55 billion, or 43.5%, spent in 1Q2022).

All else being equal, to cover the entire RM77.7 billion, the government would already be at least RM13 billion short even if it were not to spend on anything else apart from salaries and pensions and pay interest on its debt, back-of-the-envelope calculations show.

The shortfall is likely to be at least twice that amount, given that Finance Minister Tengku Datuk Seri Zafrul Aziz (prior to tabling Budget 2022) had already told editors that easily 80% to 90% of opex is “fixed” or comprises dues that have to be paid one way or another.

Savings are not impossible but would not be easy to squeeze out, which is why pundits have long called for the need to broaden government revenue on top of rationalising opex where possible.

The saving grace is that Malaysia does benefit from higher prices of commodities including crude palm oil (CPO), petroleum as well as natural gas.

At least RM10 billion in additional revenue should come from higher oil prices alone, with Brent crude oil hovering at US$100 a barrel, instead of the US$67 a barrel assumed in Budget 2022. As that is based on the government’s previous guidance of every US$1 increase in oil prices adding RM300 million to government coffers provided that, when the ringgit was stronger against the greenback, the actual benefit could well be higher.

The one-off Cukai Makmur, or prosperity tax (for which income is said to have not been counted in the tabled Budget 2022 revenue of RM234.46 billion), is expected to add some RM5 billion and analysts expect RM2 billion to RM5 billion extra from windfall tax collections on CPO.

Lower Budget 2023 deficit

There is still a need to pay for Budget 2023, which is slated to be tabled in three months on Oct 28, according to the current parliament calendar.

The special Covid-19 Fund, which allowed Malaysia to borrow to fund extra opex during the past two pandemic-hit years (2020 to 2022), will no longer be available for Budget 2023 unless lawmakers apply for an extension. About RM38 billion a year had been spent under the Covid-19 Fund in 2020 and 2021, leaving about RM34 billion for 2022 (based on its RM110 billion ceiling) — only RM23 billion was pencilled in when Budget 2022 was tabled, which is supposed to be the third and final year of its existence.

Expectations are for the fiscal deficit to fall closer to 5% of GDP in Budget 2023, at least at the point of tabling, given that Malaysia has committed to gradually reducing its fiscal deficit — once the economy recovers — towards a goal of 3% to 3.5% of GDP by 2025 under the Medium-Term Fiscal Framework (MTTF).

UOB Bank Malaysia senior economist Julia Goh says: “[For Budget 2023,] a narrower fiscal deficit is on the cards, but it will be a tight fiscal rope, owing to growth uncertainties that could affect revenue, against a higher spending bill to strengthen the recovery or support the economy in the event of a global recession. The country has utilised sizeable fiscal buffers over the last two years to get through the pandemic.

“The government has mentioned efforts to facilitate reforms in the coming budget that would improve the country’s resilience against future shocks. These include broadening the revenue base and implementing a more targeted subsidy system. While many have speculated about the return of the GST (Goods and Services Tax) in some form or other, the timing and details are still uncertain.”

Given that it would take at least six to nine months to implement a broad-based consumption tax like GST, even if there is political will to implement it today, taking small steps towards targeted subsidies may help ease some of the pressure.

RM5 bil savings with every 20 sen cut

With Brent crude oil still hovering near US$100 a barrel at the time of writing, one way to gain significant savings is to make small increases to the current retail price ceiling of RM2.05 a litre for RON95 petrol and RM2.15 a litre for diesel.

The government stands to save as much as RM5 billion a year with every 20 sen reduction in subsidies for RON95 petrol and diesel, UOB’s Goh calculates based on fuel consumption patterns. Part of those savings can be redistributed via targeted aid to those who are more deserving.

Indeed, a gradual approach makes more sense. A sudden removal may well deliver unintended shocks to the economy and consumers who have become so used to vast amounts of subsidies, even if targeted aid programmes were near-perfect. After all, the prices of RON95 fuel and diesel are still easily 50% subsidised — the gap versus unsubsidised RON97 remains at M2.70 a litre even after retail prices eased nine sen to RM4.75 a litre from July 14 (to July 20) compared with RM4.84 a litre as at July 6.

What is certain is that the country cannot go on spending RM77.7 billion, or 5% of GDP, every year on subsidies alone, especially when the amount already trumps the RM75.6 billion development expenditure originally planned for Budget 2022.

Even with additional revenue, it is likely that development expenditure will fall closer to RM70 billion, which is still above the RM64 billion actually spent in 2021 (RM69 billion originally budgeted) on development expenditure last year.

Data watchers would have noticed that the actual size of Budget 2021, at RM333.49 billion, is 3.4%, or RM11 billion, more than the original RM322.5 billion when it was tabled in November 2020. That would put actual spending in Budget 2021 at least RM1.4 billion above Budget 2022’s RM332.1 billion when it was tabled on Oct 29, 2021.

To be sure, the actual size of Budget 2022 is likely to be a lot higher than what was tabled, given that only RM31 billion, or 40%, of the RM77.7 billion subsidies bill had already been accounted for.

With the rumour mill in overdrive regarding the likelihood of the 15th general election (GE15) happening as early as November, Budget 2023 is widely expected to be expansionary. It is likely that Budget 2023 will be bigger than the actual spending of RM333.49 billion for 2021, even if the budget deficit falls to 5%, given that the economy is still expected to grow at least 5% in both 2022 and 2023.

Yet, it would be tough for Budget 2023 to be bigger than the actual size of Budget 2022 without substantial streams of new revenue, especially after substantial amounts of additional debt were taken to save lives and livelihoods against Covid-19. Debt service charges alone look set to rise above RM46 billion (nearly 3% of GDP) in 2023 after reaching RM43 billion in 2022 and RM38 billion in 2021, The Edge’s back-of-the-envelope calculations show.

Expectations are for targeted subsidies to take place soon, if not in Budget 2023, given that targeted subsidies and assistance were mentioned no fewer than 12 times in the June 3 pre-budget statement.

The Ministry of Finance has said Budget 2023 will be formulated to reinforce the momentum of economic recovery, not just headline GDP but also jobs and incomes of individuals and businesses. Budget 2023 will also seek to strengthen Malaysia’s economic resilience against future shocks through reforms for better social protection, especially for vulnerable segments of society, as well as to implement comprehensive reforms for the nation to emerge more competitive globally while advancing its sustainability agenda.

With the likelihood of the world going into a recession growing, the government will have to plan to bolster Budget 2023 after it is tabled, should the need arise.

 

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