WITH the global economy subject to downside risks and slowing domestic economic conditions, the 2024 National Budget is framed as fiscally sustainable and responsible for sustaining economic growth, addressing cost of living pressures, and reforming for future-proofing Malaysia.
Budget 2024 has a wide range of measures, initiatives and incentives as well as providing allocations to support economic growth, build capabilities, drive technology and make new investments in emerging sectors as well as continuing assistance for lower-income households to cope with the rising cost of living.
It focuses on education and health-care services, food security, clean energy transition, ESG initiatives, human capital formation and the elderly community.
Real GDP (gross domestic product) growth is expected to expand by 4.0%–5.0% in 2024 (estimated at 3.9% in 2023), which is in line with SERC’s estimates of 4.5% for 2024 and 3.8% in 2023.
Downside risks to the global economy could come from the persistently high level of interest rates, inflation risk, global trade tension and geopolitical conflict. Domestic risks include inflationary and cost pressures on consumers and businesses, as well as ineffective implementation of the Budget 2024’s projects and measures.
The Finance Ministry (MOF) expects private consumption growth to be sustained at 5.7% in 2024 (5.6% in 2023) vs SECR’s 4.6%, and we caution that the subsidy rationalisation and ensuing inflation could bite into consumer spending.
While Budget 2024’s measures and catalysts from the NIMP (new industrial masterplan) and NETR (national energy transition roadmap) are expected to drive private investment growth (estimated 5.4% in 2024 vs. 4.3% in 2023) vs. SERC’s 5.5%, we are concerned that cost pressures from subsidy rationalisation and the impact of weakening Ringgit will dampen business spending.
The Budget 2024 deficit repair continues with an overall budget deficit targeted to reduce further to RM85.4 bil or 4.3% of GDP in 2024 from -5.0% of GDP (-RM93.2 bil) in 2023, which is a shade lower than our projection of 4.5% of GDP.
We view the passing of the Public Finance and Fiscal Responsibility Act (FRA) as making the government accountable to fortify fiscal discipline and contain fiscal risks. The tabling of the Government Procurement Act in 2024 would make every minister accountable for complying with finance regulations and better managing procurement.
The Budget 2024 proposed an appropriation of RM90 bil DE for 2024, a decline of 7.2% from RM97.0 bil in 2023, partly due to the absence of the US$3 bil allocation for the redemption of 1MDB Bond in 2023. Of the total DE allocation, there are about 2,000 new projects with an estimated initial cash flow of RM8.0 bil in 2024.
We have always questioned the effectiveness of public spending and the ministries and agencies’ implementation capacity. The government must institutionalise results-oriented approaches to budgeting and management of budget allocations for ministries.
It is reassuring that targeted subsidy rationalisation will be rolled out, starting with diesel to help reduce the fiscal burden. Subsidies and social assistance are expected to decline by RM11.6 bil or 17.9% to RM52.8 bil in 2024 (estimated RM64.2 bil in 2023).
Subsidy rationalisation is estimated to save at least between US$1 bil (RM4.73 bil) to US$2 bil (RM9.47 bil) a year. The targeted subsidy mechanism will be based on PADU (a centralised database) to identify eligible recipients.
The public’s buy-in is crucial to ensuring the successful implementation of targeted subsidies. The 3Cs to implement price subsidy reforms are credibility, comprehensiveness, and communication. Effective communication is needed to explain the reasons for shifting to targeted mechanisms and their benefits for the economy.
Since a comprehensive study of the salary and retirement schemes for civil servants will be completed in 2014, credible civil service reforms are needed to improve the quality and value of public service-based performance and productivity-linked salary systems.
These include rightsizing civil servants and accelerating digital government. A path to public pension reform entails the transition to a defined contribution plan for new hires and also applies to existing public sector employees according to the number of years for which they have already contributed to the system.
A key advantage of defined contribution plans is that they eliminate the potential risk of underfunding long-term pension liabilities.
Moreover, what is evident is that the creation of a sustainable revenue system is still not part of the fiscal consolidation plan.
How can Malaysia ensure the long-term viability of its tax system without a proactive effort from now on? We cannot have a tax system if a small group of people at the top end pay more taxes all the time, while the rest get to piggyback on their contributions to enjoy more benefits.
MOF is not ready to implement the goods and service tax (GST), an efficient and transparent consumption tax.
We are concerned that the High Value Goods Tax and Capital Gains Tax on non-listed shares could have adverse effects on the domestic luxury goods market, entrepreneurial and start-up development. There are lingering investors’ concerns that the CGT will cover other asset classes down the road.
The introduction of e-invoicing in stages supports the increase in tax revenue by potentially reducing the tax leakages from the shadow economy.
Subsidy rationalisation, followed by an upward adjustment of ceiling prices must be introduced gradually to cause less disruption to the economy. It allows households and businesses to adjust their consumption and cost structure in response to price changes and market conditions in an orderly manner.
Furthermore, the increase in the service tax rate would mean higher living expenses for paying electricity bills, motor vehicle repairs and insurance coverage.
Consumers will bear higher prices though additional cash handouts for the targeted group will ease the price impact. Businesses will bear higher cost pressures, and there could be some cost pass-through to consumers. MOF expects headline inflation to increase by between 2.1% and 3.6% in 2024 (estimated at 2.5%–3.0% in 2023). – Oct 14, 2023
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.
