Despite deficit cut, Budget 2018 lacks revenue reforms

By AFIQ AZIZ / Pic By BLOOMBERG

WHILE Budget 2018 recorded a deficit reduction of 3% for the year 2017, it still fails to include concrete policy measures in increasing the government’s revenue.

Moody’s Investor Service Inc said the budget relies much on the economy to boost income and contribution from the Goods and Services Tax (GST) collection instead.

As such, Moody’s stated that the strategy might cost the country’s gross domestic product (GDP) to continue its falling graph levels among the lowest of A-rated sovereigns.

Moody’s said in a statement yesterday that while revenue collection increased by 2.6% between January and August 2017 compared to the same period last year, the revised assumptions had implied a 14.2% year-on-year (YoY) increase until the end of this year.

The budgeted pace of revenue growth, if achieved, would be the fastest since 2012. This is driven by a 6.9% YoY increase in corporate tax compared to 6.6% in the previous year, as well as a 5.5% YoY increase in GST in 2018 against a relatively low 0.7% rise in 2017.

“There are no explicit measures to support an increase in collection and targets, instead reliance is on relatively strong consumption growth,” the statement read.

Moody’s added the budget also relies on underlying assumption in GDP to the tune of 5.5% in 2018, from 5%-5.7% in 2017.

“Our own 2018 GDP estimate is at the lower end of this band, based on consumption growth of 6.4%.

“As a result, we think that the risks to revenue collection are skewed to the downside,” Moody’s said.

It added that total spending is budgeted to rise by 5.4% next year, but a percentage of GDP will also fall for the seventh consecutive year.

The statement said that oil-related items would be the major support of revenue collection this year.

“The target is likely to be achieved due to some anticipated inflows yet to be counted in, such as dividends from Petroliam Nasional Bhd (Petronas) which are yet to be fully reflected in the revenue data year-to-date,” the statement said.

It added that oil-related items are one of the most supported revenue collections in 2017.

Healthy corporate profits, coupled with an upturn in petroleum-related revenues contributed to a marked increase in overall revenues in 2017.

“Total collections are expected to rise 6.1% YoY, nearly double the 3.4% increase budgeted ori- ginally,” Moody’s said.

The main driver of the upside revenue relative to the original budget was investment income from Petronas and Bank Negara Malaysia.

Petroleum income taxes are projected to increase by 30% this year, compared to a 25% rise originally budgeted, with crude oil prices now assumed to average US$50 (RM211.75) per barrel compared to US$45 assumed earlier.

“While we expect the deficit target to be met given the supportive growth and commodity price environment, risks to the budget assumption for GDP growth and revenues are skewed to the downside,” Moody’s said.

Corporate tax revenues, which comprise over a third of total revenues, are estimated to rise 6.6% compared to last year.

“We believe this target will be achievable given the uptrend in commodity, particularly palm oil and crude oil prices,” Moody’s said.

According to the budget assumptions by the firm, revenues will continue to decline 0.2% as a proportion of GDP from 16.8% in 2017 to 16.6% in 2018.

Moody’s added that the rising spending in the election next year will further slow down the pace of deficit reduction and also undermine the government’s objective of a balanced budget by 2020.