Budget 2020 looks to create sustainability

pic by BERNAMA

MALAYSIA’S slashing its operating expenditure in Budget 2020 marks a greater fiscal discipline as the country looks to reverse years of profligacy and plug the billions of ringgits losses due to leakages.

The government largely delivered on expectations of an expansionary budget which at the same time, was mindful of the country’s strained coffers and sizeable debt commitments.

This was the second budget tabled under the Pakatan Harapan-led administration. A total budget of RM297 billion was proposed by Putrajaya for 2020, comprising RM241 billion in operating expenditure and RM56 billion for development.

While the latter registered a marginal increase from the RM54.7 billion planned this year, government operating spending for 2020 showed an 8.1% decline from the RM262.3 billion in 2019.

The reduction was largely due to the absence of the one-off allocation for the outstanding Goods and Services Tax refunds which amounts to RM37 billion.

A market analyst from an investment bank said the lower government operating expenditure for next year is a structural step in the right direction for a country long plagued by government wastage and profligacy.

“For the longest time, we have observed the ballooning of government expenditure vis-à-vis the civil service and a growing government debt pile,” the analyst told The Malaysian Reserve (TMR).

“We have been running a deficit for so long and we finally see the expenditure line coming down, as the government appears to be going down a path of fiscal discipline,” said the analyst.

The greater fiscal discipline should flow down into the ministries and create a more sustainable model going forward for the country.

“Plugging government leakages over the coming years will save the country billions of ringgit, addressing a key concern among foreign investors,” he added.

Finance Minister Lim Guan Eng when tabling the Budget 2020 in Parliament last Friday, said the government is committed to fiscal consolidation despite close to RM1.1 trillion in debt and liabilities.

The huge debt was inherited from the previous administration which included a total of RM5.1 billion in debt interests related to the scandal-ridden 1Malaysia Development Bhd and its former unit, SRC International Sdn Bhd, for 2019 and 2020.

Lim said Malaysia is on track to reduce its fiscal deficit to 3.4% of GDP this year (3.7% in 2018), but had to revise its 2020 target higher from 3% to 3.2%.

Worries over a strong likelihood of a global economic slowdown prompted for greater spending besides the unanticipated funds required to rescue troubled government institutions.

Federal Land Development Authority and Lembaga Tabung Haji were among the institutions that needed bailing out from the government.

But observers are confident the budget will be sufficient for Malaysia to brave the global economic storm.

AxiTrader Asia-Pacific market strategist Stephen Innes said Malaysia’s Budget 2020 provided sufficient buf-fers against global growth and trade risks without denting the government’s coffers.

“It provided just enough expansionary wiggle room to bolster the economy, and the broader deficit target is hardly a concern as the negative knock-on effect from the US-China trade war (means) most governments need to loosen the fiscal purse strings a touch,” he told TMR.

He said Malaysia’s fiscal position is still manageable as the fiscal deficit is on course to decline at an average of 2.8% over the medium term.

Investors were worried about how Malaysia could deliver an expansionary budget without compromising its fiscal position.

Moody’s Investors Service said Malaysia’s fiscal position will continue to challenge its credit profile despite the budget’s emphasis on higher value-added industries and infrastructure development.

“Set against a projected contraction in revenues, the expanded budget puts the government’s original 3% deficit target for 2020 further out of reach,” its sovereign risk group VP and senior analyst Anushka Shah said.

“Fiscal strength will continue to constrain Malaysia’s credit profile, although the focus on some inclusive growth measures will be credit positive for the country if sustained over time.”

The government is expected RM244.5 billion revenues next year, representing a 7.1% decrease from the RM263.3 billion expected to be collected this year.

Lim said the government’s turnover in 2020 represents a RM11.2 billion increase from 2019 after excluding the RM30 billion special dividend to be paid by Petroliam Nasional Bhd — Malaysia’s national oil company.

The tax collection next year is also expected to be higher at RM189.9 billion. Thannees Tax Consulting Services Sdn Bhd MD Thanneermalai said a stricter tax enforcement would be likely as the government appeared to rely on its current tax regime instead of imposing new levies.

“What was surprising or noteworthy (during Budget 2020) was the fact that there were no announcements of new taxes. This means the tax authorities will undertake a stricter enforcement and carry out more audits to achieve its expected tax revenue for 2020,” he said.

He added that the government’s plan to assign a Tax Identification Number for all Malaysians above 18 years of age and corporate entities could expand the country’s tax net by providing a means to track potential taxable individuals and corporations.

The new tax identification system is scheduled to come into effect in January 2021.

The government is also proposing to increase the tax for income in excess of RM2 million to 30% from 28% currently, expected to impact approximately 2,000 of the top income earners in the country.