Budget 2020 – a balancing act
Given the weakening market conditions, an expansionary budget has been touted as the way to go. However, the government needs to keep an eye on its spending and the fiscal deficit.
IN exactly two weeks, the Pakatan Harapan government will unveil Budget 2020, against a grim backdrop of a weakening external environment.
With no resolution in sight to the ongoing global trade tensions, and the possibility of a global economic recession in the near future – the government has its work cut out for it.
Economists and analysts have all been weighing in with their opinions about what needs to be incorporated in the upcoming budget announcement, in order to shield and strengthen the local economy.
The general consensus seems to be that the government must take an expansionary approach to Budget 2020, which will also be the last under the 11th Malaysia Plan.
An expansionary fiscal policy refers to efforts by the government to expand the supply of money in the economy.
This can be done by increasing expenditure or decreasing taxes, or both, in order to provide households and businesses with more disposable income.
Pakatan Harapan has also indicated that it could go down the expansionary route, with Finance Minister Lim Guan Eng saying last month that while the government wants to consolidate its debts, it is not completely ruling out an expansionary budget to mitigate the effects of the trade war.
When it comes to increasing expenditure, however, there is also the budget deficit to worry about, and as a consequence, the risk of the country having its credit rating downgraded by international agencies.
The government’s initial target was to bring down the federal government budget deficit to 3% in 2020.
The fiscal deficit was 3.7% last year and is expected to be down to 3.4% this year.
At the same time, Pakatan Harapan is also under pressure due to the many promises in its election manifesto that it is still yet to fulfil, and faces financial constraints given the debt-ridden government it inherited on May 9, 2018.
Affin Hwang Capital chief economist Alan Tan says there is a need to introduce an expansionary budget to sustain economic growth as well as revenue from direct taxation.
Looking at conditions going into 2020, and the recent findings of the Trade and Development Report 2019 published by the United Nations Conference on Trade and Development (UNCTAD), Tan says it is clear that 2020 will be a challenging year.
The report, launched last Wednesday, found that while a global recession was looming, most policy-makers globally were unprepared for the economic downturn.
“We need to preserve our revenue collection from direct taxation.
“Assuming the global economy and the Malaysian economy slows, revenue from direct taxation will also deteriorate,” he says.
To prevent this, Tan says an expansionary budget is necessary, in order to sustain domestic demand and the economy.
Revenue collection from direct taxation, he notes, fluctuates closely with economic performance.
The expansionary measures, he says, will likely come from a possible higher allocation for development expenditure, with a much higher multiplier effect on the economy.
Even with an expansionary approach, Tan expects the fiscal deficit to only rise to 3.2% of gross domestic product (GDP) in 2020.
“When we look at the country’s fundamentals, Malaysia’s current account is still in surplus.
“We also expect oil prices to hover at about US$70 per barrel next year, which will support our oil revenue,” he says.
On risks to Malaysia’s credit rating, he says a downgrade is unlikely.
“Given the uncertainties in the external environment, rating agencies will take note that fiscal measures are needed, and that this will result in some deterioration in the deficit,” he says.
UOB Research senior economist Julia Goh, meanwhile, expects the government to set aside around Rm5bil to Rm8bil in contingency funds to cushion the economy against any adverse impact of Us-china trade tensions and a potential global slowdown.
Early last month, the Finance Minister said the upcoming budget would put in place contingency measures to insulate the country from effects of the ongoing trade war.
Goh, in a note, drew comparison from two stimulus packages that were announced during the global financial crisis in November 2008 and March 2009, which included a direct spending package, other measures and incentives that covered government guaranteed funds, private finance initiatives and off-budget projects.
In the first fiscal stimulus of Rm7bil, announced in November 2008, priority was given to projects with a high multiplier effect, low import content and which could be implemented expeditiously.
These included upgrading, repair and maintenance of public amenities and public transport; building low- and medium-cost houses; and investment funds to attract private investment.
Later, as the global recession deepened and Malaysia’s external sector weakened, a second, more comprehensive stimulus package amounting to Rm60bil was announced in March 2009.
The package, realised over two years, was aimed at stimulating the economy in the short term while building its long-term productive capacity.
Its key measures included a direct fiscal injection of Rm15bil, guarantee funds of Rm25bil and Rm10bil in equity investments, among others.
“We think the priority of contingency measures for 2020 would be on high-impact and high-multiplier projects,” Goh says.
If the contingency funds are fully utilised, she expects that Malaysia’s fiscal deficit could widen to between 3.5% and 3.7% of GDP next year, above the research house’s baseline forecast of 3.2%.
“We do not expect this to necessarily pressure Malaysia’s sovereign ratings in view that these are counter-cyclical measures aimed to stabilise the domestic economy amid a sharp deterioration in the global landscape,” she adds.
Increased assistance required for businesses
The weakening global economy and decline in exports signifies tough times for any business that is involved in international trade.
In Malaysia, it is estimated that about 98.5% of the country’s businesses fall under the SME category.
This, KPMG Malaysia head of tax Tai Lai Kok says, means it is vital that the government puts in place strategic measures to help the group.
“In view of the ongoing challenges, SMES will need more assistance than in previous years,” he says in an interview.
Tai also notes that, given the weaker ringgit at the moment, SMES could be provided with assistance to boost exports.
“We must intensify efforts to provide funding support for SMES, perhaps even providing micro-financing - we must do all we can to make it easier for them to compete in a tough market,” he says.
On another note, he says the government should also consider tightening its belt, given that about 83% of the expenditure in Budget 2019 was allocated for operating expenditure, and only 17% or Rm54bil was used for development.
He suggests that a higher allocation is provided for development in Budget 2020, while not causing too much of an impact on the deficit.
The government, he says, can do this by reviewing how much is spent on subsidies, given that Rm22bil was spent on this in Budget 2019 on petrol subsidies and cash handouts.
“Although this is a contentious issue, it must be noted that many economies have taken the position that subsidies are not an effective measure.
“People will continue to expect handouts and this is not an effective way to utilise government resources,” he says, adding that providing more targeted assistance to those in need would be a better option.
Another area to consider, Tai says, is the country’s debt service charges or interest payments, which amounted to Rm33bil in the previous budget.
“If we continue to have a deficit, we will continue to incur these costs.
“While we do need an expansionary budget, we must ensure that our revenue goes up,” he says.
Noting that while the government’s efforts to increase revenue via the ongoing tax amnesty programme have raked in significant revenue, it is a one-off measure.
The Special Voluntary Disclosure Programme (SVDP), which will come to an end on Sept 30, was introduced in Budget 2019 to coax taxpayers to voluntarily declare any unreported income, including in offshore accounts, by promising a low penalty rate of only 10% to 15%.
The tax amnesty offer was to have ended in June this year, but was extended to Sept 30.
Tai says the government needs to explore other ways to improve tax revenue while not increasing tax rates or introducing new taxes that will burden taxpayers.
“We can look at defaulters - those who have never submitted tax returns.
“The government, via the goods and services tax (GST) database, has a wealth of information on businesses that had registered for the GST in the past,” he says.
Tai says some of the businesses that had registered for the GST may never have filed income tax returns before.
The government, he says, could cross-check its income tax database against its GST database to identify likely defaulters and pursue them.
“At the same time, the government must act responsibly to gain the confidence of taxpayers.
“While increasing enforcement is necessary, the government must also be quick when needed to provide refunds to taxpayers,” he says.
In a contrarian view on taxes, meanwhile, economist Prof Dr Hoo Ke Ping says that the only way to ride out the impending storm is for Pakatan Harapan to bite the bullet and reintroduce the GST.
This, he says, is a necessary move to bring in much-needed tax revenue for the country.
He suggests, however, that the tax is brought back at a lower rate of about 4% instead of the previous 6%.
Hoo says the implementation of the tax would not be difficult as all the systems are already in place, and businesses would not be burdened.
“Desperate times call for desperate measures.
“The government needs to swallow its pride and bring back the GST, which could easily generate RM25bil for government coffers next year,” he said.
While it may not be a popular move, she said, it is necessary given he weak economic conditions and he government’s financial conraints.
Instead of going after taxpayers, such as through the amnesty programme, Hoo says bringing back the GST is a much better solution.
It is worth noting, however, that the Finance Minister recently said that the government will not be proposing an increase in taxes in the upcoming budget.
He was quoted as saying that while increasing taxes, including the corporate tax, was the global trend, the government would not propose it for the time being. Hoo, in an interview, adds that another measure the government must consider is improving and increasing tax incentives to spur domestic and foreign investments. “Malaysia is losing foreign investors to neighbouring countries – we need to go all out to fight for these investments,” he says, adding that the capital market is also in need of a boost.
Datuk Harjit Singh Sidhu, CEO of business consultancy HSS Advisory Sdn Bhd, on the other hand, is of the opinion that a tax exemption is the way to go.
To help Malaysians deal with an impending rise in the cost of living, and to boost their disposable income, he says the government could consider exempting tax payments for those earning monthly salaries of RM8,000 and below
“Instead of collecting taxes from individuals with an annual income of RM96,000 and below, the government can consider exempting these individuals to increase their disposable income.
“This can create a ripple effect of increased spending throughout the economy,” he says.
Harjit estimates that this would give these individuals an additional disposable income of RM5,000 to RM7,000 which could be put towards household spending on goods and services.
The tax collected from the individuals under this tax bracket, he says, is negligible compared to corporate and other taxes.
Another measure, he says, would be to stimulate the property market as the number of unsold units continues to rise.
“With this in mind, the government can propose a tax exemption for a year or two on the disposal of any assets or shares in a real property company to further stimulate the property market.
“This means that there will be no real property gains tax (RPGT) for the period,” he says, adding that the collection from the RPGT market in 2018 was also relatively insignificant at Rm1.47bil.
Third, he suggests that targeted tax incentives, such as 10-year tax breaks can be introduced for foreign companies, such as Fortune 500 companies.
For these companies to qualify, they must fulfil certain conditions such as a strict employment of 95% Malaysian workers and professionals and a requirement to buy Malaysian produce or products.
The Finance Minister is scheduled to table Budget 2020 in Parliament on Oct 11.