KUALA LUMPUR: When campaigning for the May 2018 general election, Malaysia’s Pakatan Harapan (PH) promised to reduce people's burden and implement institutional reforms.
In keeping the pledges shortly after coming into power, Finance Minister Lim Guan Eng announced that the hugely unpopular Goods and Services Tax (GST) would be zero-rated from the initial 6 per cent between June and August, before the Sales and Service Tax (SST) was reintroduced in September that year.
Private consumption rose faster in the subsequent two quarters as a result of the tax holiday and purchases of big-ticket items such as passenger vehicles have soared, as consumers leapt at the opportunity to avoid paying consumption levy.
In his maiden budget speech last year, Mr Lim shared that the administration was committed a path of fiscal consolidation in order to reduce the budget deficit from 3.7 per cent in 2018 to 2.8 per cent in 2021.
Subsequently, public investment has been drastically reined in as several mega infrastructure projects were cancelled or put on hold subject to further renegotiation, following the revelation that the government’s debt, including guaranteed loans and other liabilities, had breached the RM1 trillion mark.
This Friday (Oct 11), PH will unveil Malaysia's 2020 budget. All eyes will be on its fiscal policies and stimulus programmes for signs of which sectors will get support and how much boost the economy might enjoy.
CHALLENGES TO FISCAL CONSOLIDATION
The PH government’s goal to reduce the government deficit and debt is a challenging task in today’s worsening global economic environment.
Since April 2018, the International Monetary Fund (IMF) has made five consecutive downward revisions to global growth projection, citing the ongoing US-China trade tensions as a threat to the global supply chain of intermediate goods, which Malaysia is highly dependent on.
In view of the risks, Bank Negara Malaysia, the nation’s central bank, had in March revised gross domestic product (GDP) growth from 4.9 per cent to between 4.3 per cent and 4.8 per cent.
As such, expectations are high for Budget 2020 to involve expansionary, counter-cyclical measures that buffers the Malaysian economy against further external shocks.
In fact, manufactured goods accounted for some 86 per cent of Malaysia’s total exports. Nearly half are electrical and electronic (E&E) products. A large portion of this are intermediate goods bound for China for further value-add before re-export to the US as final goods.
According to a recent survey by the Federation of Malaysian Manufacturers (FMM), only 25 per cent of members, mostly small and medium-sized manufacturers, expected higher export sales in the second half of the year, signalling weaker business sentiment moving forward. This may provide the case for highly targeted intervention to boost capacity utilisation and private investment.
While no longer the primary source of national income, the downward pressure on global demand for palm oil and crude petroleum products may invite special policy attention, especially for the former, in the upcoming budget.
Small plantation owners from the rural Malay heartland have traditionally wielded enormous clout in local politics.
Weak crude palm oil and palm kernel prices, coupled with anti-palm oil movements, have hit the smallholders hard, prompting them to demand for subsidies and incentives.
Meanwhile, the rising incident of unsold properties, predominantly in the high-end category, has done little to deter property developers from launching new projects, albeit at a slower pace, as they embark on aggressive campaigns to provide attractive financing options to homebuyers.
While property developers look forward to new incentives that can help mop up the excess supply of houses, it is more crucial for the government to ensure that existing demand and supply mismatch in the housing market does not get distorted further through subsidies.
With all these competing demands, does the government have the wherewithal to pursue an expansionary budget?
POSSIBLY NO NEW TAX MEASURES
The abolishment of GST has had the effect of reversing an initial success in broadening the country’s tax base.
As a result, the share of indirect tax revenue is forecast to fall from 28 per cent in 2017 to 15.7 per cent of total tax revenue in 2019, amounting to a potential loss of RM20 billion (US$4.78 billion) in tax revenue every year.
Eyebrows were also raised earlier this year when it was reported that national oil company Petronas would make a one-off special dividend of RM30 billion to the government, prompting concerns over the government not being able to keep their hands off the cookie jar after years of weaning itself off oil riches.
But it may not be as helpful to introduce new tax measures at a time of slow growth, as already strongly hinted by Mr Lim.
As the tax holiday effect dissipates, the chronic failure to address the rising cost of living continues to haunt the government of the day.
The low consumer price index growth belies the reality of persistently high prices of basic food that has more to do with Malaysia’s increasing food import bill and profiteering practices rather than the consumption tax.
The upcoming budget will also be the last for the 11th Malaysia Plan – the country’s five-year development plan. Already, stakeholder discussions have been held nationwide by various ministries and agencies to develop the 12th Malaysia Plan based on Prime Minister Mahathir Mohamad’s new national vision of Shared Prosperity.
As such, the budget will provide clues as to how the government intends to put in practice the elimination of income and wealth gaps across all ethnic groups and regions by 2030.
DIRECT DIVESTMENT OF GLCS
Yet, the huge presence of government-linked corporations (GLC) in the private sector, originally envisioned in the New Economic Policy as a tool to increase indigenous corporate ownership and nurture new industries, has instead been exploited and has morphed into a behemoth that the national economy seems to be defined by it.
The opaque cross-shareholdings of GLCs and its resultant crowding-out of private investors have received heightened policy priority by Dr Mahathir, who has since reshuffled the reporting lines of various GLCs by ministries.
While the government pursued divestment of “non-core” stakes and assets in GLCs in order for them to resume their role in the country’s socio-economic development, national sovereign fund Khazanah also continued to divest assets to focus on strategic projects.
For instance, Khazanah pared down its stake in IHH Healthcare through a direct stock sale to Mitsui, a Japanese conglomerate, for RM8.42 billion in November last year.
Such cases have raised concerns over the government’s divestment strategy. There has been consistent direct transfer of hitherto publicly held assets - acquired via taxpayers’ monies - to private individuals and companies, without also offering the opportunity for the public to acquire those equity stakes.
Since the government is only a custodian of these national assets, there should be emphasis to enhance the process of divestment for transparency's sake.
Meanwhile, Mr Syed Mokhtar Al-Bukhary, a politically well-connected tycoon, has raised his stake in media group Media Prima and has also been linked to a move to acquire FGV Holdings, one of the world’s largest crude palm oil producers.
Ironically, the divestment of both IHH Healthcare and FGV Holdings were first carried out through public share offerings by the previous administration.
It remains to be seen if this public share offering will constitute an integral part of the government’s divestment plan as it may have the potential to deepen Malaysia's capital market while addressing gaps in wealth distribution.
After all, people tend to spend more when they feel wealthier, and that may not necessarily be a bad thing for the economy.
Lau Zheng Zhou is Research Manager in Economics & Business at the Institute for Democracy and Economic Affairs (IDEAS).