Consumption boost
Budget 2018 unveils measures to boost domestic demand and private investments.
THE domestic economy will receive a boost from several measures and incentives announced in Budget 2018 benefiting the middle- and low-income earners known as the M40 and B40 respectively.
Analysts believe that consumer stocks will also benefit, especially those catering to the mass market given the extra cash, through new and continuing measures that the Government has announced.
For the M40, there will be a 2% cut to individual income tax for the tax bands between RM20,000 and RM70,000. This move will free up money for cash-strapped middle-class Malaysians, especially those in the lower pay bands of the M40 that have felt the rising cost of living as much as the B40 income earners.
A significant portion of the 2.3 million people who pay tax earn less than RM9,000 monthly. This tax cut will increase the disposable income of earners in these tax brackets to between RM300 and RM1,000. The Government estimates that this will bring an additional RM1.5bil in disposable income that can be spent on the domestic economy. This measure also means that more than 261,000 individuals will no longer be subject to income tax.
Economists who spoke to StarBizWeek say that the tax reduction will help support private consumption. “It’s not just about raising the goods and services tax (GST) collection, but when consumers spend, many companies will benefit, which will mean higher corporate tax collection,” AllianceDBS Research chief economist Manokaran Mottain explains. The Government is estimating corporate tax to grow 6.9% to RM72.47bil next year compared with the 6.6% rise to RM67.82bil this year.
Manokaran does not expect the GST collection to be revised higher in the coming year compared with this year, when the GST collection was revised to RM41.50bil, from the RM40bil estimated in Budget 2017. For this year, the Government expects 5.5% higher revenue from GST collection amounting to RM43.80bil.
Meanwhile, Socio Economic Research Centre executive director Lee Heng Guie says the tax cut should help the domestic economy “quite a bit”. He adds that this will help support private consumption, which is estimated to grow 6.8% next year compared with 6.9% this year.
Besides the reduction in individual income tax, the other two significant measures that will help support the domestic economy include the 1Malaysia People’s Aid scheme or popularly known as BR1M, and a special payment of RM1,500 to the 1.6 million civil servants, of which the first payment of RM1,000 will be made in early January and the balance during Hari Raya Aidilfitri.
The BR1M allocation for the coming fiscal year will be maintained at RM6.8bil, the same amount that was allocated under Budget 2017, which will mean recipients can get a cash transfer of up to RM1,200. To put things in perspective, under Budget 2017, BR1M benefited seven million people.
Moody’s Investors Service sovereign risk analyst Anushka Shah says in a statement that while Budget 2018 is credit-supportive and preserves the deficit-reduction trend that has been underway since 2009, it lacks major fiscal and in particular revenue reforms. The agency has an A3 rating with a stable outlook for Malaysia’s sovereign credit.
“Meanwhile, expenditure measures are targeted at inclusive growth and high-multiplier spending, similar to what other governments are implementing in response to demands from populations and electorates. The full credit implications of the budget will depend on whether the projected increase in revenues – the fastest since 2012 – is achievable since targets rest primarily on a rise in GST collections, which, in turn, rely on relatively optimistic growth projections going into 2018,” Anushka says.
The Government is estimating total revenue to grow 6.4% to RM239.86bil in 2018 compared with the RM225.33bil or 6.1% rise this year mostly on the back of better individual and corporate income taxes, while an oil price assumption of US$52 per barrel for next year will also help boost income.
Singapore-based Nomura Holdings Inc economist Euben Paracuelles expects a sharp cut in
spending in the second-half of 2018 as consistent with the house view of similar cuts in the same period this year in order for the budget deficit target of 2.8% of gross domestic product (GDP) to be met. He says the Government will front-load spending to the start of the year ahead of the looming general election. Nomura forecasts GDP to grow between 5% and 5.5% next year.