By Stephanie Jacob
The Budget 2015 is expected to see the government continue its fiscal consolidation push, raising revenues and cutting costs. But at the same time it needs to juggle things to find new growth sources.
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October is upon us, and everyone knows that means it is time for the federal budget (Budget 2015) to be tabled in Parliament. This year, Prime Minister and Finance Minister Najib Abdul Razak will deliver the budget speech themed ‘Accelerating Growth, Ensuring Fiscal Sustainability and Prospering the Rakyat’ on the evening of Oct 10, 2014.
As the day draws closer, the usual questions are being asked. Will there be a sin tax increase? How many months bonus will the civil service get? Will there be greater tax relief?
In particular focus this year will be the goods and services tax (GST), subsidy rationalisation, the housing and property market, the rising costs of living, and finding new growth areas. Economists say the government’s task at hand will be to balance the need for fiscal consolidation while alleviating the strain felt by the rising cost of living.
Kenanga Research’s economic team summed it by saying that the “government needs to tread carefully, to ensure that they are not blindsided by the need to please rating agencies by sacrificing the needs of the people.” Therefore Budget 2015 will have to be a balancing act for the government, said analysts.
A look back: Budget 2014’s targets and achievements
In Budget 2014, the government laid out several fiscal parameters it wanted to achieve in a push towards fiscal consolidation. Among other things, this included subsidy cuts and the introduction of GST.
Gross domestic product (GDP) growth was projected to be between 5% to 5.5%. However after GDP numbers in 1H14 beat estimates, Bank Negara Malaysia (BNM) governor Zeti Akhtar Aziz said that full year growth GDP growth is now expected to be above the initial estimate.
Following this, the government revised the target range upwards to 5.5% to 6% GDP growth for 2014. Most research houses concurred with this view, with Alliance DBS forecasting 6%, Kenanga with 5.8% and RAM Ratings at 5.6% among others.
Fiscal consolidation was the buzzword in the buildup to Budget 2014 for several reasons. Not least because international rating agency Fitch Ratings had threatened a downgrade of Malaysia’s credit rating should concrete measures not be taken.
The government itself had already outlined a roadmap towards achieving a balanced budget by 2020, and this involved cutting the fiscal or budget deficit to 3.5% of GDP (gross domestic product – sum of goods and services produced) in 2014.
Manokaran Mottain
As we enter the fourth quarter of the year, Alliance DBS’ economist Manokaran Mottain said the government’s initiatives so far, such as trimming subsidies should be sufficient to ensure it meets its deficit target.
The government also reiterated that it would not raise its self imposed ceiling of 55% on the government debt to GDP ratio. In 2013, the ratio was 54.7%, which many felt was uncomfortably close to the limit.
Subsequent subsidy rationalisation and other measures aimed at bringing the ratio down this year has had some effect, with the ratio falling to 52.7% in the first quarter of 2014. However Manokaran maintains that it is still too close, and expects more steps will be taken to reduce the ratio further.
The government’s other big push was in the property market in which it introduced a slew of measures aimed at cooling the sector. This included tighter foreign ownership rules, higher real property gains tax and the removal of the developer interest bearing scheme (DIBS).
These measures were also put into place to address rising household debt level concerns. In mid-August, Zeti said that household debt grew at a slower pace of 10.3% in the first half of 2014. She said that the central bank was satisfied with the pace of the readjustment so far.
Government targets for Budget 2015
Budget 2015 is likely to continue down the path of fiscal consolidation. However with GST coming into effect in April, the government will also have to manage the rising cost of living and the initial effect the new tax will have on domestic consumption.
RHB Research’s economic team said that Budget 2015 is “expected to set out more details on the implementation of the goods and services tax (GST) as well as firm up subsidy rationalisation plans.” It added that the government will also strengthen the social safety net to alleviate the financial burden of households and improve the efficiency of public sector spending.
The budget will be an expansionary one, and analysts are expecting both developmental and operating expenditure to increase.
Given that 2015 is the last year under the 10th Malaysian Plan, the government is expected to utilise the last of the allocated funds under the plan, said RHB Research, with the remaining allocation likely to be added into the developmental expenditure budget.
The government has stated that it wants to reduce the fiscal deficit further to 3% of GDP and continue to lower the government debt to GDP ratio next year. Much of this will depend on the government’s ability to manage its operating expenditure.
Operating expenditure is expected to rise on the back of higher emoluments, pensions and gratuities, and debt servicing requirements in 2015.
In noting that emoluments is an estimated 28.4% of total revenue, and is expected to rise in 2015, RHB Research suggested that it might be time for the government to consider the size of the civil service. While acknowledging there would be political constraints in downsizing the size of the service, it nonetheless said that is was a necessary measure as the proportion of emoluments grows.
The other big operating cost will continue to be subsidies, which in 2013 amounted to 20.3% of total revenue. In light of subsidy rationalisation measures that have already been taken, this is expected to moderate to 17.6% of total revenue in 2014.
Despite this, RHB Research maintains that “subsidies remain sizeable and uncomfortably high, and that there is a need for the government to take tough action to reduce it to a more sustainable level.”
Where will growth come from in 2015?
Despite the strong performance of the GDP so far this year, analysts caution that the momentum will not necessarily carry forward into 2015. Kenanga Research noted that although it is “positive on Malaysia’s exports levels, high costs is a thorn on the side of the domestic economy.”
In 1H14, the manufacturing and construction sectors were growth drivers and were important in delivering the stronger-than-expected mid-year GDP results. Both the sectors were supported by strong exports and the Economic Transformation Programme (ETP), said Kenanga.
But it cautioned that the economy “cannot entirely depend on exports to keep it afloat, nor can it solely lean on projects under the ETP.” With the exception of the mining sector, Kenanga is already anticipating a tapering in growth for the other sectors in 2015 (see table).
It said that “domestic consumption will always be the backbone of the economy, and its strength is what truly proves a country has achieved high-income nation status.” Domestic demand is expected to take a hit next year when GST kicks in and will be compounded if the government continues to rationalise subsidies.
How the government manages the concerns over domestic demand and private consumption will be interesting to see.
Analysts say measures might include introducing a fuel subsidy mechanism, to allow for the government to move from blanket fuel subsidies to a targeted system. Other financial aid measures such as the Bantuan Rakyat 1Malaysia (BR1M) and book vouchers are also expected to be continued.
GST and subsidies to remain big ticket issues
In the coming pieces, KiniBiz will delve further into what Malaysians can expect come Oct 10.
Focus will remain on GST and subsidy rationalisation. For GST the government will likely release the fine print ahead of April 2015, while most analysts are also expecting some details on the fuel subsidy mechanism.
Aside from GST, we will also look at the tax rates and exemptions for individual, corporate and other sectors to see if there are likely to be any changes outlined in Budget 2015.
Tomorrow: How far are we on GST?
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