Economists: Govt likely to cut operating, development expenditure

KUALA LUMPUR: The Pakatan Harapan government is expected to trim allocations for both operating and development expenditure amid lower revenue collections under its inaugural budget to be tabled on November 2, said economists.

They believe that investors would be looking for recurrent measures by the administration to replace the loss of Goods and Services Tax (GST) revenue, as the Sales and Services Tax would still leave an annual revenue shortfall of about RM2 billion.

Finance Minister Lim Guan Eng had earlier said the 2019 Budget would be a difficult one as it would entail belt-tightening measures.

UOB senior economist Julia Goh said the government was expected to stay the course of fiscal and debt consolidation.

“This infers fewer goodies given the government’s financial position. On a positive note, it should reflect efforts to restore public finances and good governance.

“This will help the country find balance during volatile times, especially to adopt more cost-effective ways of spending and ensure sufficient fiscal buffers are in place,” Goh wrote in UOB’s 2019 Budget preview report yesterday.

She said measures to restructure the government’s overall debt and pare down the size of contingent liabilities would be ringgit-positive.

Goh said this year’s fiscal deficit was likely to meet the budgeted 2.8 per cent, or RM40.3 billion, of gross domestic product (GDP). This was based on the cumulative fiscal shortfall at RM32.9 billion, or 2.3 per cent of GDP, from January to August this year.

In the first half of the year, the government’s revenue flows grew 10 per cent, or RM9.7 billion, over the same period a year ago.

UOB’s base case fiscal deficit projection for Malaysia was three per cent of GDP next year.

Goh said she did not expect any adjustments in the corporate and individual income tax rates, adding that new taxes, such as soda or digital economy taxes, were possible, but bulk of efforts would focus on trimming unproductive spending.

“Given lingering risks on the global front and signs that the domestic economy is moderating, we expect the government to announce measures to spur investments and growth.

“This includes initiatives to incentivise automation and modernisation, Industry 4.0, and higher value-added segments. Areas of focus are likely to be affordable housing, automotive, transportation, tourism, e-commerce and renewable energy,” she said.

Meanwhile, Standard Chartered Bank (StanChart) said spending rationalisation would cause government expenditure growth (as calculated under GDP) to ease to 0.6 per cent yearon-year this year from 5.4 per cent last year.

“The government has cited concerns about the high level of public debt, and stated its commitment to preserving fiscal discipline and rationalising expenditure. This has resulted in the review, postponement and cancellation of some major infrastructure projects.”

The bank raised its budget deficit forecasts to three per cent for next year and 2020 (versus 2.4 and two per cent, respectively, before) as the loss of GST revenue was likely to make it more difficult to keep fiscal consolidation on track.

On a broader term, StanChart expects Malaysia’s GDP growth to moderate to 4.8 per cent this year, from 5.9 per cent last year.

This is slightly lower than Bank Negara Malaysia’s revised forecast of five per cent from a range of 5.5 to six per cent previously.

This infers fewer goodies given the government’s financial position. On a positive note, it should reflect efforts to restore public finances and good governance. JULIA GOH

UOB senior economist