IF the mid-term review of the 11th Malaysia Plan is a gauge of how the Pakatan Harapan government will frame economic policies, then Budget 2019, to be unveiled tomorrow, will be different.
The tone of Budget 2019 is expected to be one where the government keeps a tight lid on the purse strings, as it is down by some RM35bil due to unpaid taxes this year.
On top of that, Pakatan Harapan has declared that the federal government debt stands at RM1.087 trillion and not RM686.8bil as stated by the previous government.
Below are 10 things that one should look out for in the Economic Report and Budget 2019.
Under the old government, the federal government’s fiscal deficit for 2018 was projected at 2.8% of gross domestic product (GDP). The deficit, which is the shortfall between government revenue and spending, was expected to reduce until 2020.
However, the Pakatan government has scrapped the Goods and Services Tax (GST) and replaced it with the Sales and Service Tax (SST), which will bring less revenue.
On top of a shortfall in revenue, the government is also expected to incur a larger subsidy bill because it has maintained the pump price of RON95 and diesel despite the global oil price rising.
The government is unlikely to cut down much on the current operating expenditure, hence the fiscal deficit is expected to be about 3.5% for this year and next year.
Malaysia’s current account in the balance of payments is expected to be a surplus of 2% or more this year and next year.
In the wake of a deficit in the fiscal account of the federal government, it is imperative that the current account remains in surplus position to avoid pressure on the ringgit.
A deficit in the current account can only happen if exports completely collapse, which is not likely to be the case. Generally, a larger surplus of the current account would be better for the ringgit.
In the last few months, government spending has come down as reflected in the lower public consumption and public investment numbers. It has contributed to the slowdown in the domestic economy.
In the wake of the global economic slowdown, the view is that the government has to start spending. Hence, more public consumption and investment will augur well for the economy.
Debt to GDP ratio
Under the previous government, the debt was at RM686.8bil and the ratio to GDP was 50.6%. However, the new government has said that the actual debt level is RM1.087 trillion and the ratio is more than 80%.
However, rating agencies view Malaysia’s debts at RM886bil and not RM1.087 trillion. What will the ratio be next year and the year after, considering that the globally acceptable threshold is 55% of GDP?
Oil price assumption
Under Budget 2018, which was unveiled in October last year, the oil price was assumed at US$52 (RM217) per barrel. However, the average price was higher this year, giving the government leeway in its spending.
The federal government gets an additional RM300mil for every US$1 (RM4) increase in the price of Brent crude. The price now is about US$78 (RM326) per barrel. The assumption of oil price used in preparing Budget 2019 will be a guide to the government’s coffers for next year.
Finance Minister Lim Guan Eng has already alluded to some form of new taxes. Towards this end, the sector likely to be taxed is companies operating in the new economy.
Even the United Kingdom has introduced the Digital Services Tax which will impact Google, Amazon, Netflix and others.
In Malaysia’s case, apart from the US-based big names, companies providing online sales are likely to be taxed.
This comes as Singapore has already taken steps to tax businesses operating in the online space.
Another area where additional tax is likely to be imposed is on foreigners’ purchase of property in Malaysia. Other countries have already imposed additional stamp duties on foreigners purchasing property.
Despite speculation on other forms of taxes such as the Inheritance Tax and the Capital Gains Tax, they are not likely to happen.
Income from the SST
Since Sept 1, the government has imposed the SST. The previous government estimated the GST collection at RM42bil for this year.
The collection from the SST will be lower than the GST. But how much lower will it be? The Economic Report will give an estimate on the shortfall.
The federal government’s operating expenditure increased again in 2017. For two years – in 2015 and 2016 – it came down after the government removed subsidies for petrol and electricity. The Pakatan government has brought back subsidies for one type of petrol and diesel at the pump.
Also, the government has said that it would be able to make up for the shortfall in revenue from the abolition of the GST by cutting down on excessive operating expenditure.
Hence, the size of the operating expenditure will be watched to see how it contains expenses. The biggest item in operating expenditure is emoluments, followed by debt servicing charges.
Development expenditure for 2017 fell once again after seeing increases in 2015 and 2016.
Prior to 2015, the amount set aside for development expenditure as a percentage of federal government revenue was shrinking until 2016 when it saw a hefty jump, thanks to extra income from the GST. But in 2017, it fell again.
The amount set aside for this year is expected to shrink further before some pick-up in 2019.
Payouts to the B40 group
A regular feature in previous budgets has been cash payouts to those in the bottom 40% (B40) of the population. Civil servants are normally given a half-month bonus or a lump sum payment.
Even though the government has said that spending in the budget will be tight, so far the message is that the cuts in the excesses will be channelled to the B40 segment.
Hence, it remains to be seen how much will be allocated to the B40 group in the form of Bantuan Sara Hidup, housing and other forms of payouts to select groups such as fishermen and those in the agriculture sector.
Source: The Star