- The Prime Minister will unveil the 2015 Budget on 10 October. The upcoming budget will place further emphasis on fiscal  reformation in the forthcoming year. The government is expected to stress on:- (i) ensuring fiscal prudence and lowering budget  shortfall; (ii) enhancing private investment and reducing dependence on public investment spending; (iii) heightening the social  safety net to ease the financial burden of households; and (iv) subsidies rationalisation and introduction of GST in 2015.

- Subsidy rationalisation programme will be firmed up in 4Q14. According to the second finance minister Datuk Seri Ahmad Husni Hanadzlah in July, the subsidy rationalisation programme for next year will be firmed up by the government in 4Q14.  Note that spending on subsidies during 1H14 had amounted to RM18.18bil (or +2.1% YoY). In part, higher spending on subsidies was attributable to the elevated crude oil price which average at USD100.9 per barrel in 1H14 vs. USD94.9 per barrel in 1H13, and higher disbursement for cash assistance under BR1M to the low and middle income group. For the full year of 2014, the government has allocated a staggering RM40.4bil (or 18.0% of total revenue) for overall subsidies.

- Further assistance by the government to ease financial burden of households. The government will provide further assistance, especially to the low and middle income group, when GST is implemented. The assistance and support for assessment year 2015 are as follows:- (i) one-off cash assistance of RM300 to households who are BR1M recipients; (ii) individual income tax rates to be reduced by 1-3ppt; and (iii) revision to individual income tax structure. Due to the income tax review, families with monthly income of RM4,000 or about 300,000 persons who currently pay income tax will no longer have tax liability.

- The government to increase allocation for BR1M in 2015. On the back of higher cost pressure in 2015, we expect the government to strengthen its social safety net and increase the cash handouts to households and individuals next year. BR1M for 2015 is likely to increase by RM300 for households with monthly income below RM4,000 and individuals earning less than RM2,000 per month. Allocation for the cash assistance programme through BR1M will likely cost the government approximately RM7.5bil in 2015 (vs. RM4.6bil in 2014).

- Sin taxes account for 2.5% of total government revenue. In 2013, overall excise duties accounted for 5.7% (or RM12.19bil) of total government revenue. Collectively, tobacco and brewery contributed to about 2.5% of total revenue. Assuming a 10% increase in the excise duties for brewery (or +74 sen per litre), government coffers may grow by RM150mil per annum. As for tobacco, a 10% increase in the excise duties (or +50 sen per pack of 20s) generates about RM320mil in terms of government revenue. That said, the price increase of alcoholic beverages and tobacco by 10% will not have a significant impact on inflation as this segment contributes a mere 2.2% to the basket of CPI.

- Budget deficit stood at 3.7% of GDP in 1H14. As at YTD 1H14, GDP had advanced by a healthy 6.3% while budget deficit stood at 3.7% of GDP. In 1H14, the Federal Government’s operating expenditure surged by 7.9% YoY to RM106.9bil due to higher spending on emoluments, pension and gratuities, debt service charges, subsidies, asset acquisition, grants and transfers, and other expenditure. Nonetheless, development expenditure contracted by 12.6% YoY to RM14.3bil in 1H14. The decline in the development expenditure was mainly attributable to lower spending for defence and security, economic services, and social services.

- The government is expected to lower budget deficit to 3% in 2015. No changes to our full-year GDP projection at this moment. Our GDP growth assumption is 5.7% for 2014. Owing to the strong GDP growth, budget shortfall for 2014 could come in lower than expected at 3.3% of GDP in 2014 vs. the government’s initial estimate of 3.5% of GDP (2013: -3.9% of GDP). The government is expected to lower budget deficit to 3% in 2015 and achieving a balanced budget by 2020.

Source: AmeSecurities