‘SLIGHT ROOM FOR EXPANSION’
Kenanga sees steadier crude oil revenue, potential asset monetisation gains
THE 2019 Budget is expected to be slightly expansionary as the government is likely to leverage the steadier crude oil revenue and potential capital gains from the proposed asset monetisation exercise, said Kenanga Research.
The research firm said the government was only expected to achieve incremental reduction of fiscal deficit of 0.1 percentage point to three per cent of gross domestic product (GDP) next year, in contrast to the estimated 3.1 per cent of GDP this year.
“We expect the coming budget to remain slightly expansionary as it would be unwise for the government to fully stick to fiscal discipline and set an ambitious target to reduce the fiscal deficit in view of the rising global uncertainty and slowdown next year.
“With steadier crude oil revenue stream, and the potential capital gains from the proposed asset monetisation exercise, there is room for the budget to be slightly expansionary while committing to fiscal prudence.”
Kenanga said Malaysians could expect the prospect of a slowing economy this year and next year as there would potentially be less revenue for the government.
“The abolition of the Goods and Services Tax (GST) doesn’t help. In fact, it would leave a big hole in government coffers that its replacement, the Sales and Services Tax (SST), wouldn’t be able to fully plug.
“While this would mean no increase in corporate and individual income taxes, the government has given some thought to broader tax reforms, namely introducing the inheritance tax, capital gains tax, soda tax and taxes on e-commerce.
“Nonetheless, it would be more effective to deal with wastage and trim unproductive expenditure than to introduce new taxes, which are usually unpopular and likely to raise the cost of doing business,” it added.
The firm said apart from fulfilling promises and proving it could do the job well, the budget’s main focus would be regaining investor and consumer confidence while striking a balance between the need to consolidate and raise development spending to ensure that the economy becomes more resilient to instability in the global economy.
“As we have postulated prior to the 14th General Election, if Pakatan Harapan wins the election, it would create an unprecedented major policy disruption in the short to medium term. The new government did not waste time in replacing the GST with the SST as well as reviewing key development projects, cutting wastage on operating expenditure and reintroducing fuel subsidy.
“Inadvertently, these actions raise the risk on the ability of the government to manage its debt and reduce the budget deficit. Moreover, this would limit its fiscal policy option and resources to support the economy despite higher oil revenue.”
On the upside, the research firm did not discount the possibility that the administration would put in more effort to clean up the public finance machinery and improve governance.
Nonetheless, it would be more effective to deal with wastage and trim unproductive expenditure than to introduce new taxes which are usually unpopular and likely to raise the cost of doing business. KENANGA RESEARCH