What’s in store for Budget 2015?

By Chan Quan Min

KiniBiz presents a teaser to the budget speech to be tabled on Oct 10. Experts agree that there will be more fiscal consolidation. This despite there being more cash coming in from the introduction of the GST in April.

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Two words may very well sum up Budget 2015, to be tabled before Parliament next Friday, Oct 10. Those two words are: fiscal consolidation.

Since the 2010 national budget, when Prime Minister Najib Abdul Razak (also finance minister) made major spending cuts, the government has committed itself to gradually cut down to size the annual budget deficit. While the government will still be spending more than it earns in revenue, the difference ought to narrow.

In 2009, the budget deficit was 6.7% of gross domestic product (GDP).  Last year it was down to almost 4% of GDP. This year the budget deficit could fall to about 3.5% of GDP, mostly due to fuel subsidy cuts from late last year.

For the coming year, the federal government has targeted a further reduction in the budget deficit to 3% of GDP. This time round, however, difficult spending cuts may not necessarily be required because of additional revenue from the goods and services tax (GST) and tougher tax enforcement.

Set to come into force from April next year, the GST could contribute an additional RM2.5 billion to government coffers in 2015 and up to RM8 billion in 2016, according to estimates by the Customs Department.

“We expect a flattish Budget 2015 to be tabled on 10 Oct 14, as the government balances the need to support economic growth while staying on track towards trimming the fiscal deficit,” UOB Kay Hian wrote in a report Wednesday.

“GST to the rescue,” another research house, Kenanga, exclaimed in its report. “Combined with enforcement on tax collection, we project GST would help raise total fiscal revenue to RM230 billion in 2015 or a circa 4% increase.”

Some of budget measures experts on fiscal policy predict for Budget 2015 are set out below:

GST

Most economists attached to major local banks expect the GST to feature strongly in Najib’s budget speech next Friday.

“GST to be a central theme, specifically the details of its implementation and impact on various sectors, alongside further potential offsets, for example increased reliefs or further reductions in effective personal and corporate tax rate,” said Vincent Khoo of UOB Kay Hian.

Indeed, as explored in yesterday’s part three of this series of Budget 2015 preview articles, one crucial piece of GST legislation is yet to be gazetted.

That missing piece of the puzzle is a list of goods and services to be excluded from GST, also known as the list of GST zero-rated and exempt supply.

Property

There is word going around that some of the property cooling measures introduced late last year could be relaxed.

Bank Negara’s cooling measures, a combination of higher taxes on property transfers, stricter loan approval criteria and a limit to bulk purchases worked so well that new property sales fell by almost a half earlier this year.

First of the restrictions to go might be the ban on developers’ interest bearing schemes, popularly known as DIBS. UOB Kay Hian believes that the government could give “a small respite for property” by lifting the ban on DIBS for first homebuyers.

Sin taxes

Excise duties on alcohol and tobacco products often see periodic hikes. Numerous increases over the decades have made Malaysia’s sin taxes some of the highest in the region after Singapore.

Smokers will see some respite in 2015 as most analysts believe the government will either hold off or exercise restraint in increasing cigarette prices.

“We do not expect any hikes in the tobacco sector… after the hefty 14% excise duty hike in September 2013,” UOB Kay Hian’s Khoo said.

TA Research believes otherwise. “Tobacco tax will remain off budget, with an anticipated rise by one to three sen per stick in excise duty,” its consumer analyst predicted.

Meanwhile, most analysts agree that breweries will not be stung with higher excise duties. Khoo reckons duties on alcoholic drinks will stay “despite being spared from tax hikes in the last seven years”.

The reason given for this was that earlier this year, the authorities “recalibrated the basis of duly calculation” resulting in higher effective excise duty rates.

Mega projects

Budget speeches and big-ticket announcements go hand-in-hand. Najib will no doubt rise up to the occasion next Friday with at least a handful of multi-million ringgit construction projects.

According to UOB Kay Hian, Budget 2015 could see “potentially higher federal allocation and continued private investment in mega projects such as highways, Tun Razak Exchange (TRX), Petronas Rapid Pengerang, Sarawak Score and Warisan Merdeka (KL118 – to be the tallest tower in South East Asia)”.

The highways mentioned are the West Coast Expressway from the Klang Valley to Taiping, Perak and the planned urban highways Kinrara-Damansara Expressway (Kidex) and Serdang-Kinrara-Putrajaya Expressway (Skip).

TRX and KL118 are large property developments by state-run 1Malaysia Development Bhd and Permodalan Nasional Bhd (PNB) respectively.

Petronas Rapid Pengerang is a massive RM60 billion petrochemical storage and refinery project in Southern Johor. Of the various mega projects in the pipeline Rapid Pengerang is most able to “bring about a favourable multiplier effect to the economy”, Manokaran Mottain of AllianceDBS said.

Urban rail projects such as additional MRT lines could be on the budget speech, Kenanga’s team of economists speculated, in line with construction projects proposed under the government’s Economic Transformation Programme (ETP).

Corporate taxes

Many economists are pre-empting a sooner-than-expected cut in corporate taxes as part of a larger global trend to tax corporations less.

“In the private sector, a recurring wish list includes reduction in corporate and personal income taxes.

“While the government has announced the 1% reduction in corporate income taxes in Budget 2014 to take effect in 2016, we expect the government to bring forward the planned effective date to 2015,” Manokaran said.

Kenanga’s team of economists similarly expect the 1% cut in corporate taxes to be brought forward. “The rationale is that Malaysia is far behind the curve in reducing corporate tax rate in the region. The average corporate tax for the Asian region in 2014 according to Tax Foundation is 20.8%,” they said.

The current rate of corporate tax is 25%. Some small to medium enterprises (SMEs) may qualify for a lower rate of 20%.

Cost of living

Direct payments to low-income households have been a feature of the past three national budgets and there is no reason Budget 2015 will be any different. Most experts expect the government to keep true to its promise to increase such payments, popularly called BR1M, to about RM1,000 per eligible household.

The budget speech is also likely to address housing affordability with an allocation for housing projects under the PR1MA or 1Malaysia People’s Housing scheme.

Yesterday: Increasing revenue and cutting expenditure