Budget 2023: Economists seek fiscal buffers amid economic slowdown

Govt will need to loosen its purse strings to engender a feel-good factor on the back of the current political dynamic and the impending election 


THE World Bank has warned of a possibile global recession next year as central banks around the world have been raising interest pace at the fastest rates in decades. 

Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz warned that next year will be a challenging one for all countries. Thus, he said, Budget 2023 will need to include measures to mitigate the coming slowdown in the global economy. 

RHB Investment Bank Bhd analyst Alexander Chia was of the view that the government will need to loosen its purse strings to engender a feel-good factor on the back of the current political dynamic and the impending election. 

“Expectations are for a market-friendly Budget 2023 containing ‘goodies’ for individuals and businesses, but the quantum of hand-outs and pump-priming initiatives will be tempered by the lack of fiscal headroom. 

“This considering the expectation of a slowing economy in 2023F, with investors also looking out for additional taxes on the private sector,” Chia said in a recent research note. 

The analyst expected the up-coming budget to emphasise automation, technology and sustainability. 

“The automotive sector may receive a fillip from incentives to expedite electric vehicle production and adoption, with an outside chance of greater clarity on the forthcoming excise duty reform,” he said. 

He also expected more punitive taxes on the brewery and tobacco sectors but these will likely prove to be counterproductive. However, Chia had low expectations of any significant incentives for the property sector. 

“Construction may see headlines from some pre-polls pump-priming but this is likely to be skewed towards smaller contractors. Larger projects could still be announced, but these would require private funding requirements,” he added. 

He also opined that the government is unlikely to increase gaming taxes as the industry was badly affected by the pandemic. 

“We also believe the numbers forecast operators will get to maintain 22 special draws in 2023 to maximise tax revenues,” he said. 

Meanwhile, Socio-Economic Research Centre ED Lee Heng Guie suggested that the up-coming budget should focus on several schemes including building fiscal buffers, mitigating inflation, reviving private investment, promoting green investment, lifting small and medium enterprises’ competitiveness and supporting the tourism industry. 

He noted that Malaysia’s small open economy remains vulnerable to shocks, thus, it must build adequate fiscal buffers for counter-cyclical fiscal support. 

As of June 2022, the country’s public debt reached RM1.04 trillion or 63.8% of GDP, while debt and liabilities were at RM1.35 trillion or 82.5% of GDP. 

He said Budget 2023 must be fiscally responsible with reforms thrust to keep the fiscal consolidation on track. 

“As the economy has moved out of the economic contraction, it no longer requires extraordinary massive deficit fiscal spending packages as during the Covid-19 pandemic in 2020 to 2022,” Lee said in a media briefing recently. 

The economist estimated a deficit budget of 4.5% to 5.5% of GDP in 2023 compared to an estimated average deficit of 6.2% in 2020 to 2022. 

Additionally, he saw that the consumer inflation pressures and high cost of living are a major concern for next year, especially with the weakening ringgit causing higher imported inflation. 

“Consumer inflation is our main concern because there will be less spending power, which will also impact business sales.

“So, I think the government will have to address this in the coming budget,” he added. 

He also opined that the government must revitalise private investment, especially with the concerns about the global economy, increased business costs, worker shortages, rising consumer inflation, higher interest rate and the weakening ringgit, as well as lingering uncertainty about domestic political conditions. 

Moreover, the government should encourage more businesses to adopt environmental, social and governance (ESG) to promote green investment by introducing more ESG adoption incentives, including tax, grants and funds. 

“According to the Economist Intelligence Unit, about half of the respondents weighted ESG factors as equally important in the investment decision-making process while 24% placed the greatest emphasis on ESG factors in Asia,” he noted. 

Meanwhile, he said, the government needs to provide continuous support for the tourism industry as it is an important revenue source for Malaysia, contributing an average share of 6% per annum of the national GDP in 2015 to 2019. 

On taxes, he said that most business players are hoping that no new ones will be introduced in Budget 2023. 

“If we look at the full business sentiments and conditions, they are currently managing the cost. So, we should not have any new taxes,” he said. 

Nonetheless, he said the government should take at least one year before it implements any taxes such as the GST. 

The finance minister had also been quoted as saying that the government will continue to look into ways to widen the country’s tax base as part of its Medium-Term Revenue Strategy. 

However, he said that the government is not keen on implementing the one-off windfall tax or Cukai Makmur due to its ineffectiveness as it levied on a company’s charge-able income and not its net profit. 

This article first appeared in The Malaysian Reserve weekly print edition.