Time to bite the bullet

KUALA LUMPUR (Nov 2): It might be wishful thinking to expect the government to be able to rein in fiscal deficit while generating decent economic growth in the upcoming budget, which will be tabled by the Finance Minister Lim Guan Eng at Parliament this afternoon.

The public is aware that the government’s fiscal health is far from great given the RM35 billion outstanding tax refund and the whopping interest expenses on the RM1 trillion in national debts, in addition to the revenue shortfall due to the removal of the goods and services tax (GST).

There are concerns that this might be an austerity budget, which means very minimum “pump priming” measures by the government to stimulate economic growth, no thanks to the fiscal constraints.

In the Mid-term Review of the 11th Malaysia Plan (11MP), the government had already cut RM40 billion, or 15%, to RM220 billion, from the original allocation of RM260 billion.

This raises a pertinent question: What would drive the domestic economic growth against the backdrop of lackustre private investments in recent years? Also, how strong could consumer spending be as the locomotive of growth with the high household debts? As for exports, the trade war drum is being hit harder by the day.

To the business community, particularly the small and medium entrepreneurs whose cash flows are getting tight, the one important issue to be addressed in the upcoming budget is the outstanding tax refund. The RM35 billion, which was previously removed from the economic system, could be a powerful stimulant to the economy in the absence of generous public spending, said an economist.

Some quarters get clues from the review of the 11MP, for instance the healthcare insurance scheme. There was mention of the setting up  of a healthcare insurance scheme for the low-income group. Economists commented that if the healthcare scheme is a private-sector initiative, it would help to lighten the government’s healthcare burden, which is ballooning as the population is ageing.

When contacted, MIDF Research chief economist Dr Kamaruddin Mohd Nor said Budget 2019 is expected to be “a mix between balancing reform, fiscal and growth aspirations”.

“The priority will be skewed toward high-impact people-oriented programmes. Social programmes such as housing, health, and education will be getting bigger allocations. Multi-dimensional goals in addressing the income gap between people will be top of the list. It is still a pro-growth budget,” he said.

Kamaruddin said the government could provide impetus to boost domestic consumption, by creating more income-generating opportunities for the rakyat.

Sunway University Business School professor of economics Prof Dr Yeah Kim Leng expects a “mild austerity” budget.

“We are expecting wider fiscal deficit because the government needs to continue its spending, especially on the low-to-medium income group. They cannot have too sharp a cutback, as it will dampen growth, given the gathering headwinds in the external environment, especially the escalating US-China trade tensions,” he said.

“We are not in dire straits, we have seen moderately strong growth in 2017, now we are tapering off, so we do not need strong stimulus or pump priming now. Our employment and wage growth have remained stable, and given the reduction in tax burden, private consumption will be able to give some help on the economy,” Yeah added.

Independent economist Dr Chung Tin Fah noted asset sales could be a remedy to ease fiscal constraints.

“Government spending is crippled by fiscal deficit, so they might adopt a selective spending manner, focusing on areas they want, while spearheading economy growth by promoting foreign direct investment through certain tax measures,” Chung explained.

Asset sales by the government are likely; hence some economists believe that the government might not impose a capital gain tax nor raise the real property gain tax.

Malaysia has been put on the watchlist by credit rating agencies amid concerns over whether the new government could address the fiscal problems without dragging the domestic economy into the doldrums, or, worse, defaulting on debt repayment.

“Fiscal targets aside, global credit rating agencies are awaiting clarity of new government policies in the coming budget this Friday (today), especially steps to consolidate its fiscal position, including how to strengthen its revenue base after the removal of GST and reintroduction of SST (sales and service tax), for their credit review.”

According to Julia Goh, senior economist of UOB Global Economics & Markets Research, the positive ratings factors include efforts to restore public finances, and improve transparency and governance standards.

“However, negative factors are the higher headline fiscal trajectory, execution risks and revenue uncertainties,” she wrote in a pre-budget review.

Certain numbers had not been presented accurately in the past, for instance the public revenue which included the outstanding tax refund. To uphold transparency and good governance, the new government is expected to bite the bullet and give the true picture of the domestic economy and the government’s fiscal position.

By the same token, however, there are also concerns that the reality might be too hard to face for certain parties.

This article first appeared in The Edge Financial Daily, on Nov 2, 2018.

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