Recap of the Previous Budget Announced in October 2022

Key public finance statistics from the Budget 2023 that was announced in 2023 are as follows:

▪ RM372.3 billion was allocated, a significant increase from the RM332 billion budgeted for 2022.

▪ Government revenue was projected lower at RM272.6 billion (-4.4%) on declines in expected investment income and petroleum income tax.

▪ Operating and development expenditures stood at RM272.6 billion and RM95 billion respectively.

▪ On development expenditure (DE), around RM95.0 billon was allocated in which RM54.0 billion goes into the economic activities.

▪ To reduce the operating expenditure (OE), subsidies and social assistance was cut down by RM16.9 billion to RM42.0 billion.

▪ Supplies and services saw RM1.3 billion reduction to RM32.0 billion.

▪ Fiscal deficit-to-GDP ratio target of 5.5%. The narrower fiscal deficit is line with the Medium-Term Fiscal Framework (MTFF) where the fiscal deficit/GDP is projected to average at -4.4% of GDP between 2023 - 2025.

The Upcoming Re-tabling of Budget 2023: The Need to Reform Government Finance

In our point of view, the new budget will be recalibrated to reflect the aspiration of the new unity government which came into power on 24 November 2022. For the sustainability of the government finance, we view that there must be an urgency in reforming the government finance, especially on government’s revenue stream which eventually relates to two key fiscal metrics namely fiscal balance and public debt. This is also in line with the Prime Minister ‘s remark that fiscal deficit and the public debt will be reduced in stages. Based on our observation in the last two months, the Prime Minister had announced several measures including:

1) 20% Salary Cut for All Ministers.

2) RM100 Million on Flood Mitigation in Kelantan and Terengganu

3) Household Electricity Tariff Rebate Are Maintained at Two Cents Per KWH

4) Property Tax for Land Below RM300 Thousand in Putrajaya

5) ECRL Cost Cut of RM11 Billion to RM75 Billion (Original Cost Back in 2016 Was RM86 Billion)

6) Reduction of development allocation for Member of Parliament, from RM3.8 million to RM1.3 million.

In addition to above, the government had recently announced tax collection of 10% on transaction via E-commerce below RM500. There is no official estimate given, but our estimate shows that the government could collect roughly around RM1-3 billion from this tax. This estimate is derived based on RM301.5 billion of online purchase in 2019, of which 10.6% of this involved purchases from overseas.

For the Upcoming Budget Announcement, Below Is How We Look at the Situation:

1) The Budget is expected to remain skewed towards “somewhat” expansionary considering that the global economy is entering a soft patch period with “mild” global recession looking likely. In addition, continuous recovery of domestic economy shall be maintained as Small and Medium Enterprises (SMEs) segment have not fully returned to pre-pandemic level.

2) We do not think the allocation to be significantly higher from RM372.3 billion that was announced earlier considering tight fiscal constraint.

3) All people-friendly measures are expected to be maintained to ensure sustainable domestic demand in view of slower external trades.

4) Reallocation from development expenditure allocated in the original budget towards providing support to SMEs may be possible.

5) There is a possibility for tax rate adjustments to the top income brackets for individuals but if any, the quantum is expected to be small and will not be significant enough to dampen private consumption levels since the high-income individuals have lower marginal propensity to consume.

6) The Prime Minister had also ruled out reinstating the goods and services tax (GST) though acknowledging the GST remains the most transparent and efficient taxation system. (Bloomberg Interview, 30 January 2023).

7) We expect some of the subsidies related to food production and cash transfer programme will be maintained or improved.

8) The likelihood of targeted subsidies for fuel being rolled out also exists, but if it comes to that, we expect any subsidy rationalisation to be cautiously implemented to avoid the situation of ballooning inflation. Should there be no outright targeted subsidies announced, then maybe its mechanism could be announced in the upcoming Budget. On that note, the country’s inflation which stood at 3.9% in December 2022 was still high by historical standard.

9) We see the government championing the Environmental Social & Governance (ESG) agenda as the country aims towards zero carbon emission by 2050. In the earlier Budget that was announced in October 2022, this agenda was clearly expressed via measures such as the High Technology and Green Facility Fund, Dana Impak and Green Technology financing scheme.

Source: AmInvest Research - 13 Feb 2023