Restoring fiscal health, refocusing priorities

WE understand the government has to make choices and trade-offs to manage the medium-term fiscal challenges and limitations. It is indeed a tough and challenging political balancing act for the Finance Minister to craft a responsive budget without impairing growth and worsening the fiscal deficit.

It is a responsible, bold and balanced budget for 2019. It’s a well-crafted budget to rebuild trust in the government, restoring fiscal health and prospering the people.

With no major negative surprises, we regard this budget, at best, as growth, private investment and businesses supportive. It is also an inclusive budget in terms of strengthening the social safety net for vulnerable groups, especially for B40 income households.

Faced with increasing downside risks to global growth and lingering concerns over domestic policy uncertainty, the budget did not drastically seek to curtail public spending while ensuring that spending is targeted at productive sectors that will not impair economic growth.

The budget’s allocations will be prioritised to sectors (education, tourism, transport and housing) where they are needed the most. In particular, there are policies and initiatives to promote entrepreneurship, ensuring domestic small and medium enterprises (SMEs) and businesses are digitalised with ICT adoption and our workforce are skilled and adaptive to embrace the fourth revolution revolution (IR4.0), which are crucial to the future of the economy. Admittedly, the government currently faces fiscal limitations. A credible, sustainable and transparent fiscal discipline and sound debt management would enhance the resilience of macroeconomic stability and thus, creating the fiscal space for counter-cyclical measures to wean off external shocks down the road. The government reset its fiscal consolidation path on a clean slate, starting from 2018 to account for narrow revenue base, additional provision for off-budget items and tax refunds. Following eight consecutive years of fiscal deficit reduction since 2009 from -6.7% of GDP to -3.0% of GDP in 2017, the deficit to GDP ratio reverses trend to a higher ratio of 3.7% of GDP (RM53.3bil) from -2.8% or RM39.8bil previously in Budget 2018. For 2019, the deficit is budgeted to reduce to 3.4% of GDP at RM52.1bil, which is line with market expectations (between -3.5% and -3.7% of GDP). This marks the first departure from the previous trend of steady fiscal deficit reduction since 2019. The factors causing the fiscal slippage are: > the disruption of revenue (an estimated revenue shortfall of RM21bil) caused by the replacement of the goods and services tax (GST) with the sales and service tax; > the GST and income tax refunds amounting to RM3.9bil or 0.3% of GDP in 2018 and RM37bil or 2.4% of GDP in 2019; and > restating of off-budget items and unbudgeted expenses as well as reclassification of capital expenditure in operating expenditure to development expenditure.

The government’s ability to honour the GST and income tax refunds totalling RM37bil in 2019 is made possible by a special dividend payment of RM30bil from Petronas in addition to the yearly dividend of RM24bil (RM26bil in 2018). The GST and income tax refunds come handy to ease the cashflow of businesses and some funds can be rechannelled to capital spending. But, over-dependency on oil revenue would expose the budget to the variability in oil prices.

Global rating agencies are not expected to downgrade Malaysia’s sovereign rating in a hasty manner, allowing time to review and assess our fiscal commitments though there is likelihood of a cut in rating outlook if the credit risks and rating dynamics under threat.

A clear plan and timeline to return the budget to balance is important to restore the government’s credibility in ensuring sound fiscal and debt management. The Finance Minister indicated that the deficit-to-GDP ratio will come down to 3% in 2020, 2.8% in 2021 and in the region of 2% over the medium term.

The Fiscal Policy Committee and Tax Reform Committee will be tasked to rebuild a sound fiscal position through the rationalisation of expenditure, revenue enhancement and the containment and reduction of debt and liabilities estimated at RM1.124 trillion or 73.5% of GDP at end-2019. It is imperative that the government commits to a sustainable and broadening revenue goal.

It’s obviously a political commitment to set out a reasonable timeline for returning to budgetary balance. While instilling fiscal discipline requires tough decisions, fiscal recon- struction measures and reforms must be incremental and implemented realistically and rationally to avoid over-adjustment in the economy.

Although the budget does not seek to immediately implement significant areas of tax reform, there were initiatives and measures to raise revenue such as paring down the government’s stakes in non-strategic companies, planned scheduled and staggered land sales and the privatisation of infrastructure assets.

Some have made reservations that the budget does not address the issues of drawing investment and foreign direct investment (FDI) into Malaysia, which we beg to differ. There were initiatives to carry out a thorough review of the over-130 types of fiscal schemes to support investments. The Finance Ministry and the International Trade and Industry Ministry form a joint task force to drive regulatory reform, particularly in the areas of improving trade processes and tax administration.

We believe that strengthening of government fiscal management, fundamental economic and institutional reforms would sustain the economic growth and attract foreign investments.

We believe that the streamlining of regulatory and compliance costs, the removal of impediments and redefining the role of government in business to avoid “crowding out” along with the institutional and economic reforms would increase domestic investment and FDIs.