Budget 2020 to be expansionary but rooted in fiscal discipline, says Affin Hwang

Putrajaya is likely to incur a slightly lower budget deficit of 3.2% of GDP in 2020 compared to an estimated 3.4% in 2019


THE upcoming Budget 2020, set to be tabled on Oct 11, is expected to include expansionary measures to sustain private consumption while maintaining fiscal discipline, Affin Hwang Investment Bank Bhd’s research firm noted.

While an expansionary budget is widely forecast in order to stimulate domestic demand amid global economic uncertainty, Putrajaya is likely to incur a slightly lower budget deficit of 3.2% of GDP in 2020 compared to an estimated 3.4% budget deficit in 2019, slightly above the initial official target of 3% of GDP.

“The increase in the budgetary allocation for operating expenditure (opex) will be gradual, but allocation for development expenditure will likely be increased in Budget 2020,” Affin Hwang Capital wrote in a recent note.

It estimates the government’s opex to be slightly higher by 2.6% at RM235.9 billion in 2020, versus an expected RM222.9 billion in 2019.

“We believe development expenditure plays an important role to sustain the country’s economic growth, where the expansionary impact will help preserve the government’s revenue source (ie direct taxation) generated by economic activities,” it added.

Development expenditure is projected to be higher at RM55.7 billion in 2020, compared to an estimated RM54.7 billion this year — an intentional move as development expenditure on construction-related projects generally has a higher multiplier impact on the economy relative to opex.

In the first four years (2016-2019) of the 11th Malaysia Plan, the federal government has disbursed about 89.9% or RM198 billion of the total RM220 billion allocated for development expenditure.

Government revenue should still outpace opex, thus registering an operating surplus of RM2.8 billion in 2020 against an estimated RM2 billion in 2019, remaining in surplus for 33 years in a row since 1987.

Affin Hwang expects the government to project GDP growth of around 4.5% to 5% in 2020, against its own expectation of 4.5% (estimated 4.7% for 2019).

“In the event the external environment deteriorates sharply and if there is a need to introduce additional fiscal stimulus, we believe the government will allow its fiscal deficit target to be flexible to shore up economic growth, whereby the fiscal deficit may be slightly higher than the deficit target set and revert to the fiscal consolidation path once the global economic environment stabilises,” it said.

Affin Hwang believes the crude oil price assumption in preparing and tabling for Malaysia’s Budget 2020 has been revised higher from an initial figure of US$60-US$65 (RM271.70) per barrel to US$70 per barrel.

Stronger energy prices are set to boost federal government revenue with every US$10 per barrel increase in global crude oil prices, likely to translate into a gain of about RM3 billion per year.

While the additional revenue can help cover the government’s subsidy bill from rising domestic petrol prices, Affin Hwang believes the upcoming implementation of the targeted fuel subsidy scheme will also lower the subsidy amount allocated by the government for petrol (RON95) and diesel.

The investment bank stated corporates will remain free of new taxes next year, as Finance Minister Lim Guan Eng has already said Budget 2020 is not expected to introduce new tax measures targeting the corporate sector and investment community.

“We believe the positive upside surprise to the budget measures will be from an across-the-board 1% cut in taxes on corporate income earned, but the government will likely leave its corporate tax rate unchanged in 2020 to preserve revenue streams from direct taxation,” the research firm said.

Corporate income tax accounts for 51.1% of direct tax and 38.2% of total government revenue. Any cut in the corporate tax rate will likely only be implemented from 2021 onwards, after government revenue begins to increase more steadily, Affin Hwang stated.