By Khairie Hisyam
Najib Abdul Razak
The federal government will trim expenses by some RM5.5 billion this year with a slew of expenditure cuts, although allocated development expenditure will remain as is.
Speaking in front of assembled Cabinet members, Parliament representatives and the media in Putrajaya today, prime minister Najib Abdul Razak said the measures represent proactive adjustments in the face of changing global conditions beyond the government’s control.
“This is a reality check following, among others, declining global crude oil prices,” said Najib today.
The biggest saving avenue outlined by the prime minister today is the review of transfers of grants to statutory bodies, government-linked companies (GLCs) and government trust funds, especially those with steady revenue stream and high reserves, said Najib, adding that this will save some RM3.2 billion.
Putrajaya is also eyeing some RM1.6 billion in savings by optimising outlays on supplies and services which include overseas travel, events and functions as well as the use of professional services by the government.
The government will also defer the National Service Training Programme or PLKN this year “to enable the programme to be reviewed and enhanced, with savings expected at RM400 million”.
Najib also said the government will reschedule the purchase of non-critical assets, especially office equipment, software and vehicles, which is expected to free up RM300 million.
Three strategies
The austerity measures are part of Putrajaya’s strategy to continue its fiscal reform and consolidation drive, one of three strategies outlined to strengthen the nation’s economic resilience. The other two strategies focus on keeping the economy growing as well as rendering aid for flood-affected communities.
Alongside the operating expenditure rationalisation are revenue enhancement measures, which include the broadening of the tax base.
“(This will be done) by encouraging companies to register with the Royal Malaysian Customs to enable them to charge and collected GST (goods and services tax),” said Najib. “This is expected to contribute an additional RM1 bilion in GST collection.”
The prime minister added that as of the middle of this month, more than 304,000 companies have registered ahead of the GST effective date of April 1 this year.
Putrajaya is also looking at GLCs, government-linked investment companies (GLICs) and other government entities for more dividends in shoring up its income, eyeing an additional RM400 million this way.
The Budget 2015 review today followed a sharp tumble in global crude oil prices, which peaked in June 2014 before falling due to a supply glut in the global markets. From a high of US$115 per barrel on June 19 last year, Brent crude is now below US$49 per barrel as of this morning, according to Bloomberg.
‘Cheap oil good for Malaysia’
This led to concerns over the domestic economy as some 30% of government revenue is oil-based, leading to worrying implications from lower revenue to overall economic growth.
“The government has consistently reiterated that crude oil prices are beyond its control,” said Najib today, adding that “lower crude oil prices benefit net oil importing countries like Malaysia.”
Speaking to a full hall, Najib said the recent reduction in pump prices for petrol and diesel by 35 sen and 30 sen per litre respectively will increase the overall disposable income of consumers by RM7.5 billion.
In turn, this will boost private consumption by RM3 billion, said Najib, assuming that 40% of the additional disposable income is spent.
The prime minister also cited the World Bank’s estimation that lower crude oil prices will boost global domestic product (GDP), which he said would rise 0.5% with a 30% decline in oil prices.
“This bodes well for Malaysia’s manufactured products,” said Najib. “Further, with the US economy strengthening, there will be sustained demand for our exports, in particular electrical and electronics products.”
Cheap oil hurts govt pocket
On the other hand, the prime minister acknowledged that falling crude oil prices will in turn result in less income for the government.
When tabling the 2015 budget in October last year, the government’s forecasts had been based on Brent crude prices holding at US$100 per barrel as well as GDP growth between 5%-6%.
The government had also expected a stable Ringgit with an exchange rate at RM3.20 per US dollar, said Najib, adding that Putrajaya had also relied on the World Bank and the International Monetary Fund (IMF)’s forecasts of projected global economic growth at 3.4% and 3.9% respectively.
“It should be noted that Budget 2015 was formulated based on strong economic fundamentals in 2014,” said Najib. “Therefore, the fiscal deficit was forecast from 3.5% in 2014 to 3% of GDP in 2015.”
“However the external situation has changed lately and we are impacted directly as Malaysia is among the largest trading nations in the world. “The global economic landscape has since changed significantly (in a few months) and this necessitates us to review and clarify some of our earlier macro and fiscal assumptions.”
For 2015, Putrajaya is revising its average baseline oil price downwards to US$55 per barrel this year, in line with changing consensus among economists who now estimate global oil to trade within the US$40-US$70 per barrel band in 2015.
With cheap oil, RM8 bil shortfall
The government had earlier expected an operating surplus of RM3.7 billion, said Najib, based on crude oil prices at US$100 per barrel as well as savings from the implementation of the managed float pricing mechanism for retail fuel prices beginning last December.
However, with a shift in forecast to US$55 per barrel of oil, Putrajaya is now staring at a revenue shortfall of RM13.8 billion in terms of accommodating the measures announced in Budget 2015.
This is counterbalanced by savings of RM10.7 billion from the managed float mechanism, resulting in total revenue shortfall of RM8.3 billion to accommodate all Budget 2015 measures, said Najib.
Despite lower revenue from cheap oil, Malaysia is neither facing a crisis nor a recession, said Najib, unlike the situations in 1997/98 and 2009 which he said warranted stimulus packages.
“Without any fiscal measures, the deficit will increase to 3.9% of GDP against the target of 3% for 2015,” said Najib. “This requires the government to take measures to reduce the deficit, in line with the government’s commitment towards fiscal consolidation.”
For 2015, Putrajaya is revising its fiscal deficit target to 3.2% of GDP, which Najib noted was still lower than the fiscal deficit of 3.5% seen in 2014.
“In view of the external factors, we have to acknowledge that we may not be able to achieve the earlier fiscal target of 3% of GDP as announced,” said Najib. “Of importance is our commitment to continue reducing the fiscal deficit from 3.5 of GDP.”
“More importantly, we will not compromise on national development planning as it will enhance productive capacity of the economy,” said Najib, who is also finance minister, further. “We will not neglect the Rakyat’s welfare, particularly the bottom 40% of households.”
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