Economists say budget revision unlikely

Stronger economic growth will improve Govt revenue

PETALING JAYA: Despite weaker oil prices, higher expenses and drop in revenue collection in the first quarter of the year, the Government is unlikely to revise the budget deficit upwards.

The Government had set the budget deficit to gross domestic product (GDP) at 3% for this year, from a deficit of 3.1% of GDP last year.

Economists at RHB Research Inst Sdn Bhd said in a report that even if oil prices continue to stay at an average of US$40 a barrel in the second-half of the year, prices for the full year would average around US$46.40, which would still be above Budget 2017’s assumption for oil prices to average US$45 this year. Oil prices averaged US$52.80 in the first-half of this year.

“This suggests that there is no need for the Government to make any revisions to its 2017 budget as it did previously when oil prices fell sharply,” the economists said.

Another economist told StarBiz that stronger economic growth would also ensure that government revenue would improve, negating the need for a revision of the deficit higher.

Malaysia posted GDP growth of 5.6% for the first quarter ended March 31 compared with the same quarter a year ago on the back of private sector-led investments, consumption and exports.

However, the run-up to the general election, speculated to be held either later this year or in the early part of next year, has split the views on whether the development expenditure would be cut should the Government be faced with a revenue shortfall, as it did last year by delaying non-priority projects.

“This is an election year and it may not be possible to cut the development expenditure when large infrastructure projects are already being rolled out,” the economist said.

If anything, he said, strategic cuts in the operating expenditure could actually give a better image of a Government making necessary sacrifices in order to stay on-course to meet the deficit target.

But economists at RHB Research felt that the Government would likely cut the development expenditure should the need arise.

“Indeed, in 2016 the Government cut back RM3bil in gross development expenditure to RM42bil, from the Finance Ministry’s estimate of RM45bil for the year. Similarly, it cut the gross development expenditure by RM6.6bil in 2015 and about RM2.7bil to RM2.9bil in 2013-2014 to meet the deficit targets,” they said.

They added that while priority projects such as the MRT continued, cuts to the development expenditure do inevitably pose a drag to overall economic growth.

“We believe the Government is still on track to achieve its budget deficit target of 3% of GDP in 2017 (-3.1% in 2016). It would therefore not have to cut its expenditure akin to what had happened in the fourth quarter of 2016, which posed a drag to the overall economic growth,” they said.

They noted that the more stringent collection of corporate taxes balanced out the drop in personal income and petroleum taxes in the first quarter. Export duties also rose by over 100% in the quarter. They added that net development expenditure also rose in the first quarter, contributing to economic growth after declining in the last quarter of 2016.

We believe the Government is still on track to achieve its budget deficit target of 3% of GDP in 2017. Economists