The State Of The Nation: Smaller Budget 2021 despite Covid-19 stimulus flags need for more revenue

This article first appeared in The Edge Malaysia Weekly, on September 6, 2021 - September 12, 2021.
The State Of The Nation: Smaller Budget 2021 despite Covid-19 stimulus flags need for more revenue
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PUTRAJAYA needs more revenue to fund growing expenses and development needs on top of the desire to cast a wider social safety net, despite Malaysia not being a welfare state.

That known fact is made even clearer by how the size of Budget 2021 was trimmed 2.4%, or RM7.7 billion, to RM314.8 billion in the country’s maiden pre-budget statement (issued on Merdeka Day) from the RM322.5 billion tabled last November.

And this was despite Covid-19 requiring more public expenses and there being RM7 billion in additional dividend payment from national oil company Petroliam Nasional Bhd (Petronas), which is raising its dividend payment to the government to RM25 billion for 2021 compared with RM18 billion pencilled in previously.

Traditionally, the size of the national budget is only revised lower if there is a significant shortfall in revenue — expected or otherwise. More on this later.

According to the pre-budget statement, operating expenditure (OpEx) for 2021 was lowered by RM16.9 billion or 7.1% to RM219.6 billion under the revised allocation while development expenditure (DevEx) was trimmed by RM800 million to RM68.2 billion from RM69 billion.

The special Covid-19 Fund — which allows the government to borrow to fund operating expenses — saw allocation raised from RM17 billion to RM27 billion for 2021, the maximum allowed unless the fund’s RM65 billion ceiling is raised further as RM38 billion had already been used last year (2020) when the pandemic first hit.

As at end-July, some 75.2% (RM20.3 billion) of the allocation under the Covid-19 Fund for 2021 had been spent compared with 61.3% (RM134.6 billion) for OpEx and only 45.4% (RM31 billion) for DevEx. “A key factor affecting development expenditure performance is the implementation of MCO 3.0 that disallowed selected economic activities to operate,” the statement read, noting how only 16% of the construction sector could operate during MCO 3.0.

2021 revenue unknown

Tellingly, the pre-budget statement noted the broad changes in allocations for expenditure for 2021 but was silent on the federal government’s headline revenue this year.

Federal government revenue was RM106.4 billion as at end-June, 44.9% of the RM236.9 billion estimated when Budget 2021 was tabled.

Our back-of-the-envelope calculations estimate revenue coming in at between RM212 billion and RM219 billion for 2021, based on the revised expenditure, revised budget deficit of 6.5% to 7% of gross domestic product and a projection of 3% to 4% GDP growth for 2021. Nominal GDP was RM1.417 trillion in 2020.

Our back-of-the-envelope workings also show the fiscal deficit possibly rising to between RM96 billion and RM103 billion this year compared with RM84.84 billion initially estimated for Budget 2021.

If Malaysia’s GDP grows at least 5% next year, however, a 6% fiscal deficit would imply additional leverage of RM92 billion for 2022 even if the economy only grows 3% this year.

With direct federal government debt alone (excluding other liabilities) reaching RM958.39 billion (more than 65% of GDP) as at end-June, it is clear that parliament’s approval will need to be sought to raise the statutory debt ceiling from 60% of GDP.

“We expect the government to propose a higher statutory debt limit of 65% of GDP when Budget 2022 is tabled on Oct 29,” Maybank Investment Bank chief economist Suhaimi Ilias wrote in a note dated Sept 1.

Raising the RM65 billion ceiling for the special Covid-19 Fund would also allow the government to borrow to fund operating expenses. Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz had previously indicated that both options were possible, even though this was not specifically mentioned in the pre-budget statement.

Tempering expectations

In the face of demands for “RM1 billion here and a RM500 million there” as next year’s estimates are worked out, it may well be that the government is tempering expectations for Budget 2022, which needs to be expansionary but may or may not be a pre-election budget given that the 15th general election only needs to happen in or by July 2023.

After all, the government has options to raise non-tax revenue from government-linked institutions like Kumpulan Wang Amanah Pension (KWAP) to bolster its revenue for this year as well as next. There should be at least RM14.5 billion more in the National Trust Fund (KWAN) — about 1% of GDP — even after the RM5 billion withdrawal this year for vaccines and vaccine-related expenses.

The pre-budget statement did not elaborate on its non-tax revenue stream, which includes investment income, the largest of which is dividends from Petronas that were subsequently increased by RM10 billion to RM34 billion for last year, compared with the RM24 billion initially estimated when Budget 2020 was tabled in October 2019.

Additional revenue could also come from a Special Voluntary Disclosure Programme (SVDP), which the statement said the government was considering, without elaborating. The Inland Revenue Board (IRB) reportedly collected RM7.88 billion in taxes, extra taxes and (lowered) penalties from 286,428 contributors (including 11,176 new taxpayers) through a SVDP implemented from Nov 3, 2018, to Sept 30, 2019.

It is not immediately certain if the government had revised higher the oil price assumption of US$43 a barrel when Budget 2021 was tabled to be more aligned with that of the International Monetary Fund’s (IMF) projection of US$65 a barrel for 2021 and US$63 a barrel for 2022 mentioned in the statement.

What the pre-budget statement did say was that the estimated target for 2021 tax revenue collection is lowered to RM162.1 billion, down RM12.27 billion or 7% compared with RM174.37 billion tabled in Budget 2021.

Based on the appended numbers, the lower tax collection is largely due to an expected decline of direct tax collection, likely both from corporates as well as individuals, probably only partly cushioned by a higher petroleum income tax. The pre-budget statement did not go into the specifics but did mention that movement restrictions “affected business activities and income of traders, leading to an increase in the number of those who have lost their income”.

On top of the RM3 billion tax revenues forgone as incentives, rebates and exemptions, the government had, as at July 2021, only collected RM67.4 billion of direct taxes (51.1% of RM131.87 billion initial budget estimate or 56.2% of RM120 billion revised estimate) and RM24.8 billion of indirect taxes (58.4% of RM42.5 billion initial budget estimate or 58.9% of RM42.1 billion revised estimate).

GST and corporate tax

Apart from the need to minimise revenue leakages, and reiterating its commitment to “pursuing fiscal consolidation measures guided by the Medium Term Fiscal Framework and supported by the Medium-Term Revenue Strategy to broaden the tax base and enhance the government’s indebtedness capability”, the pre-budget statement made no mention of changes to consumption taxes, specifically the Sales and Service Tax (SST), which replaced the Goods and Services Tax (GST) in September 2018 and is an indirect tax.

Whether it is the need for the government to bolster and diversify its revenue sources or upping the country’s relative competitiveness in terms of taxes, it is clear that a long-talked-about broad tax reform is overdue.

When asked if Malaysia will consider lowering its corporate tax rate nearer to 15% over three to five years, Zafrul reportedly told Singapore’s Straits Times on Sept 2 that Malaysia cannot afford to cut corporate tax from the current 24% unless it can successfully broaden its tax base.

Malaysia’s corporate tax is currently among the highest of the Asean members, the lowest being Singapore’s 17%. Indonesia’s is 22% while Vietnam, Thailand and Cambodia’s are at 20%. Incidentally, Malaysia, along with Brunei and Myanmar, are the only Asean countries that do not have a broad-based consumption tax like GST.

No one expects GST to be implemented while economic recovery is still nascent but expectations are for clear guidance to be provided on this front, especially if there are no better alternatives to sustainably broaden the country’s revenue base.

Insight on Budget 2022?

Sorely missing from the pre-budget statement is guidance for 2022 — a shortfall that puts it closer to a status update or revision to Budget 2021 rather than one that provides data watchers additional guidance on Budget 2022. After all, the three key priorities of Budget 2022 — to drive economic recovery, rebuild the country’s resilience and catalyse reforms — is already known.

“What remains unknown is whether the government will raise the statutory debt-to-GDP ratio from 60% to 65%, and more importantly, how it will lower it back down,” RHB Research economist Nazmi Idrus wrote in a note dated Sept 1. “Raising it further to 65% of GDP implies that either fiscal consolidation will be sharper or the timeframe is prolonged leading to either a sharper pullback to growth or leaving the debt ratio higher for longer, displeasing the rating agencies. So far, we await more information on this front,” he added, noting that the Temporary Measures Act 2020 allows the debt limit to be raised from 55% to 60% of GDP only until end-December 2022.

Still, economists expect Budget 2022 to be expansionary while maintaining the fiscal deficit below this year’s 6.5% to 7% of GDP.

Given that GDP is expected to rebound stronger next year, Budget 2022 can still be the country’s biggest ever — bigger than the revised Budget 2021’s RM314.8 billion, which incidentally is just ahead of Budget 2019’s RM314.55 billion, which was bolstered by a RM30 billion special dividend from Petronas (on top of a RM24 billion normal dividend) to repay owed taxes.

To be the undisputed biggest budget to date, however, Budget 2022 would need to beat the actual spending of RM317.5 billion for Budget 2019.

 

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