Budgeting for the future
Lee Heng Guie 
After cooling off two years in a row, GDP expanded strongly by 5.7% year-on-year in the first half of 2017

The domestic economy has gained ground powered by strong consumer spending, rebounded private investment and surging exports.

After cooling off two years in a row (5.0% in 2015 and 4.2% in 2016), real gross domestic product (GDP) expanded strongly by 5.7% year-on-year in the first half of 2017, and is estimated to close the year at 5.5%. It is estimated to grow by 5.1% next year.

Cost-induced price pressures continued to linger even though CPI-based inflation eased to 3.7% in August from 5.1% in March.

Current account surplus improved to RM14.9 bil or 2.3% of GDP in H1 2017, but foreign direct investment declined 25.1% to RM19.4 bil (RM25.8 bil in H1 2016). Foreign exchange reserves crawled back to exceed the US$100 bil mark to hit US$100.8 bil as of Sept 30.

The ringgit somewhat stabilised to around RM4.20 per US dollar amid facing headwinds from the continuing US Federal Reserve’s interest rate normalisation and winding down of its balance sheet.


Challenges next year

The International Monetary Fund expects the global economy to continue growing by 3.6% next year (estimated at 3.5% in 2017). US economic growth is expected to remain stable at around 2.1%, the same as last year’s, on less expansionary fiscal stimulus. China’s growth is likely to soften a little to an estimated 6.4% (6.7% in 2017).

Policy uncertainty will remain with risks such as unexpected monetary changes and financial sector uncertainty in major economies, as well as geopolitical turmoil. Pressures for protectionism are also building up.

On the domestic front, economic and social issues are rising cost of living and prices despite receding CPI readings, housing affordability and employment opportunities for jobless graduates. Businesses, especially SMEs, are still struggling with high cost of doing business and compliance.

There remain lingering concerns about the employment of foreign workers, including levies, and the Employee Insurance System.

About seven million recipients of 1Malaysia People’s Aid (BR1M)will continue to benefit from higher cash handouts. Households earning below RM3,000 will see their BR1M payments increase by RM100 to RM1,300 each, while those in the RM3,000-4,000 bracket will also enjoy a similar increase to RM1,000.


Roadmap and priorities

The upcoming 2018 Budget, to be presented on October 27, should contain short-and medium-term initiatives and action plans to reposition the country for the future. It’s about continuing strategies to reengineer and reshape competitiveness in the digital era and quicken the pace of technology disruption. Tax certainty continues to play high on the people’s wish list.

The government should continue to stay on the path of fiscal consolidation to ensure optimal deployment of resources and preserve fiscal stability. With a broad-based consumption tax in Goods and Services Tax (GST), the government does not lack revenue and thus it is important not to overspend, besides plugging leakages.

Oil-related revenue is projected to improve further given firmer oil prices. The positive lead is that Petroliam Nasional Bhd (Petronas) has bumped up its dividend contribution to the government by RM3 bil to RM16 bil this year.

The fiscal deficit is estimated to narrow further to -2.8% of GDP in 2018 from an estimated -3.0% this year. The deficit trend has been narrowing for eight successive years since 2010.

Government debt stood at RM685.1 bil or 52.3% of GDP as of June 30, and the rise in contingent liabilities (RM195.7 bil or 15.0% of GDP as of March 31) must be closely monitored.


Competitive tax system

It is vital to push tax reform to create a simpler, fairer system with lower rates and fewer brackets. Inaction in making Malaysia’s tax system more competitive would have significant impact on our economy, businesses, investors and households.

Lower corporate tax rate increases the country’s competitiveness while providing a higher flow of tax-free capital that will boost investments and production. Reduction of personal tax rate serves to increase disposable income of wage earners and households, as well as lift consumer purchasing power.

Global competition to cut corporate tax rate is growing. The average corporate tax rates worldwide declined from 30% in 2003 to 22.8% in 2015, demonstrating a growing consensus on the disruptive and detrimental impact of excessive taxation.

If revenue permits, the Budget may consider an outright reduction in corporate tax rate by 1% to 23% for large companies and to 17% for SMEs (on the first chargeable income of RM500,000), and personal income tax rate by 1-2%.

Alternatively, the Budget may consider providing tax reliefs and rebates on medical expenses on chronic diseases, aged-caring or parents’ medical expenses as well as children education. At the least, medical or healthcare insurance should be exempted from GST.


Shaping connected and digital economy

The government should take proactive steps to build a vibrant national innovation system. Identify frontier areas such as artificial intelligence and deep learning, 3-D printing, biotechnology and human-machine interaction that can significantly reshape the economy and business model, and offer tax breaks and incentives to private players committed to embracing as well as conducting research in these fields.


Harnessing power of Industrial Revolution 4.0

While most manufacturers are aware of the Industry Revolution 4.0 concept, only 30% have started to invest and leverage on modern technology. The “revolution” is essentially about smart factories, leveraging on robotics, digitalised data censoring and the Internet of Things to reap cost savings in real-time quality control and maintenance.

This calls for targeted incentives and grants, investment capital allowance and high-tech Industrial Adjustment Fund to facilitate more manufacturers, especially SMEs, to automate and embrace industrial internet.


Youth employability and creating future workforce

Youth unemployment hit 10.5% last year, more than three times higher than the national unemployment rate of 3.3%. Graduate unemployment is an increasing concern with about 23% of gradulates jobless.

Youth employability must be tackled from both the supply and demand sides, as the problem is not just a simple mismatch of training and job requirements. Besides Skim Latihan 1Malaysia and Technical and Vocational Education and Training, we must assign policies priority for job creation, including wage and training subsidies, youth entrepreneurship interventions, specific skills and labour-market training, job search assistance, and promoting quality apprenticeships, both informal or formal.  

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

This article first appeared in Focus Malaysia Issue 253.