Budget 2012 a delicate balancing act

The Edge Malaysia
By Joyce Goh


As budget day - Sept 28 - draws near, all eyes will be on how Prime Minister Datuk Seri Najib Razak juggles the goals of shoring up government finances, maintaining economic growth in a weak external environment and keeping the electorate happy by dishing out goodies ahead of what is expected to be a tightly fought general election.

Given the short period of time before the 13th general election, which must be held by May next year, many expect Budget 2013 to be filled with people-friendly measures.
Manokaran Mottain, chief economist at Alliance Research, expects Budget 2013 to be one for the rakyat with lots of goodies in view of the forthcoming polls.

"As in the past, we expect another round of handouts for target groups like the low-income group. For the middle to high-income households, the government may introduce a 1% cut in personal income tax, streamlining it with the corporate tax structure that has a maximum of 25%. Currently, the personal tax maximum is 26%," he says.

Manokaran also expects more tax relief this year, including higher rebates for children -  RM1,000 to RM2,000 - and higher allowance for parents' medical bills – RM5,000 to RM7,000.

There is also wide-spread expectation of a second round of the Bantuan Rakyat 1Malaysia payment of RM500 to households earning less than RM3, 000 a month.

In fact, the government has already started dishing out goodies. In July, a half-month bonus with a minimum payment of RM500 was announced for civil servants together with a special payment of RM500 for pensioners, which were paid on Aug 9.  The total payout amounted to RM2.2 billion and would have benefitted 1.27 million civil servants and 657,000 pensioners. This expenditure was not part of Budget 2012.

With a growing fiscal deficit, can Malaysia afford to continue to be generous?

As it is, two international rating agencies have already warned that Malaysia's sovereign credit rating may be cut if the government does not rein in its spending to reduce the fiscal deficit.

In August, Fitch Ratings maintained Malaysia's strong sovereign ratings, but also warned of a possible downgrade if the country's "deteriorating" public debt ratios were not reversed. The rise in the federal government's debt-to-GDP ratio pushed Malaysia's debt/revenue ratio of 246% in 2011 well above the "A" range median of 137%.

Earlier this month, Standard & Poor's warned that Malaysia's sovereign credit rating may be cut if the government does not deliver promised reforms to cut spending to reduce its fiscal deficit.

The Federal Treasury's Economic Reports reveal that the federal government's domestic debt almost doubled in less than five years to an estimated RM421 billion in 2011 from RM247 billion in 2007. This 70% uptick is noticeably more than the 31% growth in the government's revenue from RM140 billion to RM183 billion in the same period.

At its current level, the government's debt stands at 53.8% of gross domestic product (GDP) - small compared with ailing Greece's 117% but still the second highest in Asia.

The worrying pace at which Malaysia's domestic debt has grown is in stark contrast to what it was just a couple of years ago. From 2001 to 2005, domestic debt grew 56% to RM189 billion from RM121.4 billion.

The last time Malaysia ran a budget surplus was in 1997, which means the country's finances have been in deficit for 15 straight years and are likely to remain so for the 16th year.

Last Tuesday, Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah said the government will announce a lower budget deficit in Budget 2013, in line with its target to achieve a 3% deficit by 2015.

"In Budget 2013, we will reduce our deficit from the one this year, which we have estimated at about 4.7%," he said.

Jagdev Singh, senior executive director and tax leader at PwC Taxation Services Malaysia, expects the upcoming budget to focus on three broad areas - ensuring sustainable growth, developing human capital and reducing the deficit.

He says ensuring sustainable growth means reducing Malaysia's deficit or, at the very least, ensuring that the deficit does not rise to unmanageable levels. "Curbing the deficit doesn't mean compromising the people's concerns, such as rising house prices. The government could take a two-pronged approach to addressing rising house prices: provide incentives and support to increase affordability and put in measures to curb spiralling property prices."

A fund manager with a local fund says Budget 2013 will no doubt be a predictable election budget. "If anything, they could hike the revenue estimates to bring down the net deficit figure."

Clearly, Najib will walk a fine line between financial discipline and pleasing the people in an expected election budget.

As it is, there could be a blockage in one of the government's revenue pipelines. Petronas recently reported a 29.8% fall in earnings to RM15.22 billion for its second quarter ended June 30. Moving forward, the national oil corporation is expecting a tough year ahead.

Nevertheless, Manokaran of Alliance Research says although domestic debt has been a concern for some time now, he does not think the debt-to-GDP ratio will exceed the self-imposed psychological limit of 55% of GDP in 2013 or 2014.

"Latest data show that the federal government’s debt-to-GDP ratio reached 51.8% at end-2011," he says, adding that he estimates the ratio to remain steady at around 53% in the current year.

"As for the fiscal deficit, we reckon that the government will likely meet its target of 4.7% of GDP in 2012 and will be able to maintain this level in 2013 despite domestic and external challenges."

Manokaran believes the government will likely introduce a series of reforms in 2013 after the 13th general election. This, he says, will include a subsidy rationalisation plan that will streamline the prices of petroleum products with global crude oil prices.

"As it’s an election period ahead, we don’t expect any unfavourable measures like higher sin taxes or even the introduction of the Goods and Services Tax in 2013. The government has promised more information in the year ahead before the GST is finally implemented. We believe 2015 is the most likely date,", he adds.

PwC’s Jagdev points out the Fitch and S&P have cited the introduction of GST and subsidy reforms as key measures to reduce the government’s debt. "I think it is time the government reconsidered these two measure to address its fiscal deficit."

As always, speculation and theories abound as to what to expect in Budget 2013. What is certain is the balancing act Najib will have to perform between winning votes and keeping the deficit down.