Fiscal deficit targeted to narrow to 5% of GDP in 2023 as economic growth is expected to moderate

by HAZATUL SYIMA HARON & ANIS HAZIM / pic MUHD AMIN NAHARUL

HIGHER than expected revenue in the second half of 2022 is among the factors that gave the government confidence to present a bigger 2023 budget despite expectation of moderating growth.

Treasury deputy secretary general Datuk Johan Mahmood Merican said the expansion is in lieu of the forecast for a “slightly higher revenue” this year.

“Because of the higher revenue (as of the third quarter of 2022 [3Q22]) — we have more income to cover the increase in expenditure. The higher revenue enables the higher expenditure,” Johan said at a media briefing last Wednesday on the retabled Budget 2023.

He noted that Malaysia’s economic performance in 3Q22 had yet to be concluded when the original Budget 2023 was presented on Oct 7 last year during the Perikatan Nasional (PN) administration.

Therefore, he said the revised Budget 2023 would see a different amount of allocation supported by the latest GDP projection in 2023.

“In 2022, we underestimated the strength of the revenue projection with not much higher GDP, nor much higher tax revenues.

“So what you will see in the revised Budget 2023 is that it will be somewhat stepped up in terms of the projections for revenues compared to what was in the Oct 7 (old Budget 2023) version,” he said.

Meanwhile, Malaysia’s fiscal deficit is targeted to narrow to 5% of GDP in 2023, from 5.6% last year.

“The prime minister has sent a stronger message about responsible governance, so we are actually reducing our deficit from 5.6% to 5% in 2023,” Johan said.

The revised Budget 2023 also highlights the country’s main challenges including natural disasters and climate crises, high national debt, challenging economic outlook, weak competitiveness, low investment value, bureaucracy and corruption, unequal development, national resilience as well as the cost of living and poverty.

With the Malaysia Madani concept, the revised Budget 2023 lays out a total reform to drive sustainable and inclusive economic growth, reforming institutions and governance to restore confidence and upholding social justice to bridge disparities.

Moderating Growth

Meanwhile, in its “Updates on Economic and Fiscal Outlook and Revenue Estimates 2023” report, the Ministry of Finance (MoF) said Malaysia’s economic growth is projected to moderate amid the signs of weakness in the global growth momentum.

“The growth will be mainly supported by steady domestic demand primarily private expenditure as well as initiatives under the Budget 2023 and development expenditure under the 12th Malaysia Plan, 2021-2025 (12MP). However, a slowdown in external demand is expected to moderate exports growth, particularly in the electrical and electronic (E&E) products and major commodities.”

According to the report, all economic sectors on the supply side are expected to remain on a positive growth trajectory this year, driven by the services and manufacturing sectors. Other sectors, namely agriculture, mining and construction are also expected to grow further alongside improvement in economic activities.

“However, downside risks such as prolonged geopolitical conflict, climate-related disasters and persistently high inflation are expected to further hamper the global economic growth, hence, affecting Malaysia’s performance.

“Overall the nation’s GDP is forecast to grow approximately 4.5% in 2023,” the MoF said in the report.

Despite softened global economic growth and trade last year, Malaysia’s economy recorded a strong growth of 8.7% in 2022, exceeding the initial projection of 6.5%-7%, whereby real output value reached above the pre-pandemic level.

The commendable performance was driven by domestic demand and improved labour market in line with the transition to the endemic phase on April 1, 2022. These resulted from an increase in economic activities which include household spending, investment and tourism.

Subsequently, encouraging expansion in all economic sectors primarily the services and manufacturing segments also provided continuous boost to the significant economic growth in 2022. The growth was also aided by the robust external demand, especially among Malaysia’s major trading partners, as total trade rose by 27.8% to RM2.85 trillion in 2022. Trade surplus gained slightly by 0.6% to RM255.1 billion.

The economy remained resilient last year despite experiencing several challenges with rising inflationary pressures due to high commodity and food prices. These were addressed by the government via various holistic and comprehensive measures to help the rakyat and businesses in dealing with inflation and higher cost of living.

Fiscal Deficit to Consolidate Further

Meanwhile, the MoF said Malaysia’s fiscal deficit is expected to consolidate further to 5% of GDP in 2023, falling to RM93.94 billion from RM99.48 billion in 2022. The primary deficit is estimated to reduce further to 2.5% of GDP to RM47.84 billion from RM58.21 billion previously.

According to the report, the government’s revenue is expected to be lower at RM291.5 billion or 15.4% of GDP in 2023, compared to RM294.36 billion last year, as a result of a slower global economic growth and an anticipated moderation of commodity prices.

Total expenditure is estimated to be slightly lower at RM386.1 billion or 20.4% of GDP, mainly due to the expiry of the Covid-19 Fund and spending optimisation measures.

The operating expenditure (OE) is expected to decrease to RM289.1 billion, mainly due to lower allocation for subsidies following the expected lower crude oil prices and the gradual move towards a more targeted subsidy mechanism. The development expenditure (DE) is estimated to increase significantly to RM97 billion for programmes and projects under the 12MP involving the construction of highways and public transport infrastructure, health facilities as well as educational institutions. In addition, a sum of US$3 billion (RM13.32 billion) is provided for the redemption of 1 Malaysia Development Bhd (1MDB) bonds.

The MoF report also said the fiscal deficit for the Medium-Term Fiscal Framework (MTFF) 2023-2025 is expected to consolidate at a gradual pace with the overall balance

averaging at 4.1% of GDP. At the end of 2025, the fiscal deficit is expected to reach 3.2%, while the primary deficit at 0.6% of GDP.

“The lower deficit signifies the government’s commitment to further consolidate its financial position and rebuild fiscal space towards ensuring the sustainability of public finances in the long-run,” the MoF said.

According to the report, revenue is projected at RM908.5 billion or 15.1% of GDP, contributed mainly by non-petroleum revenue which is estimated at RM734.5 billion or 12.2% of GDP. Petroleum-related revenue is forecast at RM174 billion or 2.9% ofGDP.

The total indicative expenditure ceiling for the three years is estimated at RM1.15 trillion or 19.2% of GDP with OE projected at RM889.1 billion or 14.8% of GDP, while DE at RM264.2 billion or 4.4 % of GDP.

The MTFF 2023-2025 is formulated based on the latest macroeconomic assumptions, revised with underlying assumptions of real GDP growth averaging 4.7%, crude oil prices at US$80 per barrel and stable crude oil production of 530,000 barrels per day.

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