Budget 2023: Fiscally responsible with reforms thrust (Part 1)

WE hope that the Budget 2023 which will be presented on Oct 7 is fiscally responsible with reforms thrust while being more focused on development and structural reforms than election-centric.

The renewed commitment on fiscal consolidation (deficit reduction) to rebuild fiscal buffer against future shocks is welcomed news given too much borrowing and too much debt is unsustainable.

It has been a tough two years for Malaysians as we have overcome a crisis in the form of the COVID-19 pandemic.

Amid a still uneven recovery among the economic sectors, domestic economy has been recovering steadily to register a strong annual growth of 6.9% in 1H 2022, and will likely to end the full-year 2022 between 6.0%-6.5%.

Even with the prevalence of external and domestic risks, we are now in a better shape to meet the next set of challenges and being able to ride on the new opportunities to provide all Malaysians with economic security in good times and bad. Make sure we invest in what is needed now without adding to fiscal and debt risk.

As the economy is steadying on a recovery path, it no longer required extraordinary deficit fiscal spending packages as delivered during the COVD-19 pandemic in 2020-2022. Hence, we estimate a deficit budget of 4.5%-5.5% of gross domestic product (GDP) in 2023 compared with an estimated average deficit of 6.2% in 2020-2022.

Setting priorities

The Budget 2023 is being formulated in a difficult time for the global economy and Malaysia. Current adversities include rising inflation, cost challenges, prolonged conflict in Ukraine, the weakening ringgit as well as the higher US interest rate-triggered economic risk and financial volatility.

The Budget’s strategies should focus on implementing credible economic policies, undertaking structural reforms geared towards sustainable subsidy management, ensuring better investment climate as well as making life better for individuals and families.

It must also seek to re-prioritise public spending towards expenditures in infrastructure (5G, communication, transportation, highway), climate change-related projects and ESG (environmental, social and governance), health, skills development, education and supporting the vulnerable segment of the population.

Rebuilding fiscal sustainability for future shocks

We have to re-build adequate fiscal buffers for future counter-cyclical fiscal support. Enhancing the fiscal anchor requires us to address revenue volatility and instability (dependency on oil revenue and a narrowed tax base (tax revenue at 11.2% of total GDP in 2021)); the allocation of spending prioritisation as well as plugging irresponsible and leakages in spending.

Putting the country’s fiscal position on a sustainable path is going to require higher tax revenue. These include making bold tax reforms, improve compliance, and close tax loopholes.

  • Demands of fiscal responsibility have increased to avoid twin deficits if the bulging operating and development expenditures outpace revenues. The Fiscal Responsibility Act must be quickly enacted to deliver better fiscal outcomes, enhance governance, accountability and transparency. The Parliament must debate on the revision of statutory debt ceiling and a full disclosure of contingent liabilities. The Government Procurement Act is equally important.
  • The establishment of a Fiscal Council could provide an added layer of objective impartial public oversight that the Government is indeed planning and spending resources in an accountable manner.
  • Implement a multi-pronged reforms to check on ever rising recurrent operating expenditure. This is to ensure that current revenue can cover current expenditure. The Budget has to embark on subsidy rationalisation based on the principle of needs and income. Switching subsidies from products to households to benefit needy households who would receive cash handouts, and to be specifically targeting those groups that are need of welfare. Design a mechanism making cash handouts conditionality and review the eligibility of cash assistance.
  • Pre-announce re-introduction of the Goods and Services Tax (GST) starting with a 4% rate effective January 2024. This allows a lead time of at least 12 months for businesses in their planning and preparatory work.

Mitigating Malaysians against higher inflation and rising cost of living

Focus on the immediate challenges of mitigating the impact of inflation and cost of living pressures that exist for many people.

While Malaysia’s CPI (consumer price index) growth of 4.4% in July 2022 is low on international comparisons thanks to the subsidies buffer, this does not diminish the impact on the low- and middle-incomes who are currently struggling to deal with rising costs.

Soaring operating and production costs pressures have forced on businesses to pass through increased cost onto consumers. Price increases cover basic necessities, food served in restaurants, street food, services delivery, and consumer durables with bread being the latest casualty.

We expect Budget 2023 to deliver a cost-of-living package targeted at low- and middle-income households:

  • One-off cost of living tax offset or continued cash payment for the poor households in need.
  • Reduce personal income tax rate for low-and middle-income wage earner.
  • Reduce out-of-pocket expenses for elderly care through higher tax allowance.
  • Extend the tax rebate of RM400 to the individual taxpayers with chargeable income not exceeding RM70,000.
  • Increase the personal relief for contribution to the Employees Provident Fund (EPF) to RM6,000 from RM4,000; and to RM6,000 from RM3,000 for life insurance premiums.
  • Increase child relief to RM3,000 from RM2,000. – Sept 8, 2022


Lee Heng Guie is the executive director at Socio-Economic Research Centre (SERC) Malaysia.

The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.

Subscribe and get top news delivered to your Inbox everyday for FREE