Budget 2018: Making impact where it matters
Lee Heng Guie 
The tax cuts also mean that 261,000 individuals are no longer subjected to income tax

Budget 2018 has broad-based allocations and policy initiatives, covering agriculture, tourism and medical tourism, logistics and infrastructure, housing, capital market, SMEs, Industry Revolution 4.0 and Digital Free Trade Zone.

The ultimate test is whether the budgetary operations will be fiscally responsible and the development programmes will make the intended impact.

The government and implementing agencies must not have only good execution and implementation capacity, but also strong political will to plug leakages and wastages.

Besides the continuation of BR1M cash handouts totalling RM6.8 bil to seven million recipients, 2.37 million public servants and pensioners will enjoy special payments amounting to RM3 bil plus a host of enhanced benefits.

Some 2.3 million taxpayers, especially those in the middle-income (M40) group with chargeable income of RM20,000- 70,000 per annum will enjoy a 2% cut in personal income tax rates, putting RM300 (RM25 per month) to RM1,000 (RM83.33 per month) in each middle-class pocket.

Tax savings of RM1,000 will also fill the pockets of each individual earning between RM70,000 and RM1 mil per annum. The tax cuts also mean that 261,000 individuals are no longer subjected to income tax.

While some argue the tax savings are too small to impact consumption, it does matter for those with little savings. For the BR1M cash handouts, a Bank Negara Malaysia study indicated that low-income households earning less than RM1,000 have high marginal propensity to consume, that is, they will spend 81 sen of each extra ringgit earned.

Between 2012 and 2015, BR1M resulted in a 0.3% point increase  in private consumption growth to 7.1% on average compared with 6.8% without the cash transfer.

The government also continues to stay firmly on the path of fiscal deficit reduction to reassure rating agencies that it is committed to meeting a near-balanced budget by 2020. However, looking at the pace of fiscal reduction, the government is unlikely to meet the set fiscal target of -0.6% of GDP in 2020.


Limited fiscal restraint

The fiscal deficit target of 2.8% of GDP marks little reduction from 2017’s estimated 3%, reflecting somewhat limited fiscal restraint despite projecting 6.4% higher revenue to RM239.9 bil.

This calls for further expenditure rationalisation to achieve the medium-term objective of a near-balanced budget. In addition, the government should resolve to curtail leakages and wasted spending as well as curb excessive growth in non-core and recurrent areas.

Prioritising of expenditure needs is a must. A system of financial control on budgetary allocations to ensure expenditure is not incurred in excess of the budget allocation.

Operating expenditure is budgeted to rise further by 6.5% to RM234.2 bil (83.6% of total expenditure) in 2018 for two successive years, reflecting a lack of fiscal commitment to restrain operating expenditure to keep pace with revenue growth.

With close to 98% of total revenue going to operating expenditure, operating surplus has been shrinking to an average of RM3.6 bil per year in 2008-2018, from RM13.9 bil per year in 2001-2007.

Expenditure restraint measures for consideration include keeping a lean and efficient civil service, supported by E-government; phased implementation from a defined-benefit to a defined-contribution of public sector pension; continued stringent enforcement of competitive tendering of public supplies and services; reprioritising of expenditure in non-core areas and a review of grants to statutory bodies.

Admittedly, the state of our economy is not fully insulated from external risks. The Treasury’s growth estimates of 5.2-5.7% this year and 5.0-5.5% for next year are in line with ours (5.5% and 5.1% respectively).

These estimates could go off tangent from unsustainable global growth inflicted by the impact of the US Federal Reserve’s interest rate hikes and shrinking of balance sheet; as well as consumer spending succumbing to rising cost of living while private investment lose growth traction due to increased cost of doing business and ahead of the impending general election.

Lee Heng Guie is executive director of Socio-Economic Research Centre, an independent research organisation

This article first appeared in Focus Malaysia Issue 257.