Uphill challenge in formulating Budget 2021

by BERNAMA / pic by TMR FILE

THE aspiration was for the country to become a high-income economy by 2020, but this has turned out to be a year in which Malaysia – along with countries around the world – is battling the greatest economic challenge ever.

Hence formulating a national budget has never been this tough. Previously, the government was able to rely on various sources of income, from oil to government-linked companies (GLCs) to individual taxpayers.

However, due to volatile and weak oil prices, a sharp decline in corporate earnings, as well as job losses and pay cuts, the nation is witnessing a large contraction in tax collection.

What is worse, the Customs Department reported RM812 million revenue leakages in the first half of this year due to undervaluation, tax evasion, commercial fraud and excessive tax claims.

Although 85 per cent of the leakage amount may be rescued, some of the cases would take a longer process to settle as they involve going to the courts.

As for the overall economic condition, Bank Negara Malaysia said that while the country is recovering, the pace has been uneven, with tourism-related and services industries being the hardest hit. According to the latest data, the labour market stabilised in August but remained weak with an unemployment rate of 4.7 per cent.

There is a lot of uncertainty both locally and globally due to a resurgence in COVID-19 cases here and in places like the United States and Europe.

Faced with this triple whammy scenario, how would our country weather this economic storm, especially if the national oil company, Petronas, were unable to provide a special dividend to the government after slipping into the red in the first half of the year?

Tax breakdown and implications

During the budget tabling last year, the government projected to register RM244.5 billion in revenue, or 15.2 per cent of the Gross Domestic Product (GDP), in 2020 – RM189.9 billion from the collection of tax revenue while the balance of RM54.6 billion from non-tax revenue.

The tax collection projection was led by corporate tax at more than 50 per cent, followed by individual tax, petroleum tax revenue, digital tax, tourism tax, stamp duty collection, withholding tax, real property gains tax (RPGT), cooperatives tax, and other forms of taxes.

Corporate income tax was kept at 24 per cent while for small and medium enterprises (SMEs), the rate stood at 17 per cent for the first RM600,000 of their chargeable income. The sales and services tax was set at 10 per cent for sales and six per cent for services, the RPGT rates depended on year of asset disposal, and digital service tax was introduced at a rate of six per cent.

However, as COVID-19 continues to plague the global economy, corporates have witnessed a sharp decline in revenue due to measures that led to, among others, reduced production and a sharp dip in fuel demand.

Oil prices have tumbled due to lack of demand since the beginning of the year, starting from China’s economic shutdown to disruptions in global demand for fuel, coupled with the continuous oil price war between Saudi Arabia and Russia.

Malaysia, which is an oil-producing country, had benchmarked its oil price to Brent crude, which had fallen below US$15 per barrel over the past month, the lowest level since 2002. This has a major impact on Budget 2020, which was based on the assumption of oil prices averaging US$62 per barrel.

According to data from the Ministry of Finance, Malaysia’s oil reliance stood at 20.7 per cent.

Based on a research note by Maybank, every decline of US$10 per barrel would reduce fiscal revenue by RM7 billion and raise the budget deficit to GDP ratio by 45 basis points.

According to an analyst, over the 40-day span of the Movement Control Order (MCO), overall tax collection had declined almost 75 per cent, especially as a large part of the services sector such as the hotel and tourism segment recorded zero income.

Even before the MCO started, the industry had experienced a sharp downfall as Chinese tourists recorded an exponential drop due to COVID-19.

Now to worsen the matter, last month Petronas announced that it was in the red, incurring RM16.5 billion net loss due to lower revenue and impairment loss for the first half of this year. On a quarterly basis, it posted a net loss at RM21 billion in the second quarter.

Petronas’ management has said that a special dividend to the government is subject to affordability.

Fiscal pressure and budget formulation

Bank Islam chief economist Dr Afzanizam Abd Rashid said the shocks precipitated by the COVID-19 spread have dragged the economy into recession this year.

“Economic activities were almost paralysed during mid-March and April following the MCO and have gradually improved since May as curbs on human mobility have been relaxed.

“In the absence of a COVID-19 vaccine, it remains to be seen whether the economy would experience a full recovery in the immediate term as international borders are still closed and this would have a severe impact on airlines and the tourism sector,” he said.

In the second quarter of this year, the nation recorded a contraction of 17.1 per cent in its GDP.

He added that the government needs to stay vigilant to ensure that the domestic economy would continue to remain vibrant, which indicates the importance of expansionary fiscal policy being extended in 2021.

“In formulating the budget, the need to narrow the budget gap should not be the key priority although the government would definitely need to be mindful of items that it wishes to spend on,” he said.

He stressed that Budget 2021 must provide context as well as a platform for the economy to accelerate and to manage the transition into the new normal.

Afzanizam stressed that sectors such as construction have experienced lacklustre performance; thus speeding up the implementation of the key projects could be a step in the right direction as this would help stimulate the construction sector and the possible chain reaction to other industries such as manufacturing and services.

“The government should also provide an avenue for businesses especially the SMEs that wish to shift from their focus industries.

“For example, tourism-related SMEs that want to migrate to other industries, say agriculture or other services-related sectors, should be given training and financial grants in order to facilitate the transition,” he said.

Meanwhile, an analyst said that with the current economic condition where the COVID-19 third wave has caused another shock to the economy, the government must be prepared for a worsening situation.

“The tourism industry continues to see muted performance with domestic and international travel restrictions. Small businesses are also put in a tough spot when an area is put under a conditional or enhanced MCO,” she said.

She added that with Sabah being paralysed completely and Selangor in an alarming position, it would stunt the economic growth in the fourth quarter.

“The upcoming budget must be formulated to help small businesses get back on their feet to ensure continuous job creation. It must also put healthcare as the utmost priority in the budget, followed by assistance for those who lost their jobs so that they do not to fall into bankruptcy post-COVID-19,” she said.

On budget funding, she said with taxes down, coupled with low oil prices, revenue for the government’s coffers would be tight.

“I believe the government would source money from dividend returns from GLCs, taxes collected, the bond market as well as reserves.

“To note, the debt-to-GDP ratio might have to be increased to 65 per cent to continue supporting the local economy,” she said.

The 2021 Budget is expected to be tabled in parliament on Nov 6.