Will Budget 2014 excite?

Govt needs to juggle fiscal issues with helping low-income earners

ADMINISTRATIVE executive Annie L, 35, unabashedly says she hopes there will be more cash handouts or other forms of benefits to help low-income earners like her under the upcoming Budget 2014.

Earning less than RM2,500 per month, and hence, already eligible to receive cash handouts under the 1Malaysia People’s Aid, or BR1M, the single mother says having continuous government assistance to mitigate the rising cost of living is important and would be more meaningful for “desperate” families like hers at this juncture than “sophisticated measures” that could transform the country’s economy.

System analyst JJ Koo, 38, who is not eligible for BR1M, on the other hand, says he hopes middle-income earners like him will not be neglected under the upcoming budget.

While he reckons the need for the Government to implement measures to improve the country’s economic fundamentals as well as to help low-income households, Koo thinks it is also important to consider some form of measures that could benefit middle-class families like his, especially in the current challenging economic environment.

Will Annie and Koo’s wishes come true?

Undoubtedly, most Malaysians from all walks of life tend to look for goodies in the yearly budget to help them improve their living standards and cope with the rising cost of living. With the public pouring out their wish lists on Datuk Seri Najib Tun Razak’s blog at www.1Malaysia. com.my, it is obvious that the Prime Minister is not short of ideas on what to include in the upcoming budget to help the rakyat.

But Budget 2014 is set to be more than a budget to satisfy the expectations or demands of the people.

The upcoming budget, which CIMB Investment Bank Bhd regards as “arguably the most anticipated one in recent years”, is expected to set a new direction for Malaysia, with crucial and tough measures expected to be implemented to reform the country’s economy.

Turning point

Budget 2014, which has been themed “Fulfilling Promises, Accelerating Transformation”, will be tabled in Parliament on Oct 25.

According to analysts, while the upcoming budget will likely include some form of incentives to benefit the low-to-middle income groups, the Government is also widely expected to push through structural reforms and roll out several measures that will prove to be unpopular but necessary for the long-term good of the country’s economy.

As TA Securities Holdings Bhd’s head of research Kaladher Govindan writes in his report, the budget is expected to introduce tough measures to improve the nation’s fiscal credibility, especially after the recent downgrade in sovereign credit rating outlook by international agency Fitch Ratings.

Kaladher, nevertheless, believes the move will come without the Government reneging on its election promises for the people – and certainly not at the expense of the country’s economic growth. The budget, he argues, is expected to have measures that will encourage strong private-sector participation in the economy, while addressing the country’s long-standing fiscal deficit through rationalisation of the Government’s operating costs and lowering of development expenditures.

“With both the general election and Umno party elections over (by Oct 25), Budget 2014 should outline bold measures, akin to swallowing bitter pills, to sustain the nation’s long-term prosperity,” Kaladher says.

As such, he notes, the upcoming budget is expected to address Malaysia’s competitiveness by addressing the long-pending pertinent issues related to subsidy cuts and improving government revenue through, among others, increasing real property gains tax (RPGT) and sin taxes through hikes in both alcoholic and tobacco excise duties, as well as introducing new measures such as the goods and services tax, or GST.

The budget, he says, is also widely expected to see the Government prioritising infrastructure projects by emphasising those with high multiplier effect and low import content to support economic growth and improve the country’s current account balance.

Goodies in store

To cushion the impact of the rising cost of living and the subsidy rationalisation programme on consumer spending and the lowincome group, TA Securities believes the Government would announce an extension of BR1M during the budget.

“While no quantum was indicated, Barisan Nasional has committed to increase BR1M up to RM1,200 for households and RM600 for singles in its last election manifesto. This will affect 5.2 million households earning less than RM3,000 per month,” it says.

“Assuming an equal increase over the five years, this could set the government budget back by an extra RM800mil to RM3.7bil, but it would effectively redistribute wealth to the poor who has higher marginal propensity to consume,” it adds.

According to CIMB Investment Bank, it won’t be surprising to see the Government enhancing the social safety net, focusing on the needs of the low to middleincome households. The move is one of five strategies it expects the Government to adopt for the upcoming budget.

The other four strategies it has identified are (i) fiscal reforms, which will see the Government drawing up a timeline of actions to roll out the GST, subsidy rationalisation and cost-saving initiatives; (ii) sustaining private investment growth, which could involve corporate tax cut and incentives for industries; (iii) ensuring a sustainable external balance, which will see the Government sequencing projects with high import content and low multiplier effect; and (iv) ensuring a healthy property market ecosystem, which will involve some property-cooling measures and affordable housing initiatives.

“As part of mitigating measures to ease the financial burden of households earning less than RM3,000 per month, we expect the budget to increase the one-off cash transfer to RM600-RM700 from RM500 under BR1M,” CIMB’s chief economist Lee Heng Guie writes in his report.

He says there is a high probability that the threshold household monthly income for BR1M eligibility will be raised to RM4,000-RM5,000 from RM3,000. This, he says, will then benefit 5.5 million to 6.2 million households.

“Besides that, we also expect the Government to continue with its financial assistance for unmarried single parents (costing RM675mil) as well as book vouchers for primary, secondary and college students (costing RM865mil). Based on the above assumptions, all these additional commitments will offset the fuel subsidy-cut savings of RM3.3bil for 2014,” Lee argues.

Lee expects relief to the “sandwiched middle-income group” would come in the form of widened tax band, accompanied by a 1% taxrate reduction for all taxpayers with chargeable incomes of RM50,000RM70,000 or less, as well as higher personal tax relief and child relief.

Lee expects measures to address housing affordability and stem excessive speculative activities in the local property market. He says his team expects the budget to allocate funds for various affordablehousing programmes such as those implemented by 1Malaysia People Housing Programme (PR1MA), Syarikat Perumahan Nasional Bhd and Jabatan Perumahan Negara.

Meanwhile, there is high expectation among economists that the Government would implement targeted measures to rein in property price inflation. These include increasing the RPGT and stamp duties for the third property purchase and beyond. They also expect more stringent measures to curb rising household debt in the country.

Strengthening fiscal position

In general, economists expect the Government to unveil a gross domestic product (GDP) growth target of 4.5% to 5.5% for 2014 for the coming budget. This compares with an expected GDP growth of 4.5%-5% this year.

Economists also expect the Government to set a target of improving the country’s fiscal deficit to 3.5% of GDP by 2014 from the estimated 4% of GDP this year. This is in line with the Government’s earlier-set goal of a fiscal deficit of 3% of GDP by 2015.

According to TA Securities, government revenue collection is expected to increase 1.9% year-onyear to RM212.7bil for 2014, while operating expenditure is expected to remain flattish at RM203.2bil as the savings from the cut in subsidies is redistributed to BR1M to support the lower and middle-income households. It expects development spending, on the other hand, to edge down to RM47.1bil from the RM47.8bil allocated for 2013.

“Malaysia is facing a number of domestic and external challenges, which require the fine-tuning of its macroeconomic policy mix for growth and macroeconomic stability over the medium term,” Lee says.

Domestic tail risks, he points out, include a slowing economic growth momentum, persistent fiscal and rising debt situation, a narrowing of the current account surplus of the balance of payments, as well as rising operating cost for companies and cost of living for households. External tail risks, on the other hand, emanate from the recent sharp volatility in equity, bond and foreign exchange markets due to capital reversals, Lee notes.

“Our current fiscal situation and debt trajectory means that Najib, who is also the country’s Finance Minister, is tasked with making some necessarily tough but thoughtful decisions to reassure investors that the Government has the political resolve to address the country’s fiscal issues without delay,” Lee says.