- The Prime Minister will unveil the 2016 Budget on 23 October 2015. The upcoming budget is likely to emphasise sustainable and inclusive growth in the forthcoming year. The government is expected to stress on:- (i) fiscal prudence while reducing the budget shortfall; (ii) reduce dependence on public spending; (iii) heighten social safety net to ease the financial burden of middle and low income households; (iv) promote investment to spearhead economic growth; (v) boost exports to improve overall trade balance; and (vi) ensure sustainable growth in a stable price environment.

- Development expenditure to be broadly unchanged in 2016. We expect the allocation for development expenditure to be broadly unchanged at RM50.3bil in 2016 (vs. RM50.5bil in 2015) assuming that the government allocates RM2.0bil per annum for contingencies during the 11MP period and apportions the development spending allocation given the expectations of a slight decline of 0.4% per annum for the next four years. Other than that, we envisage total operating expenditure to be about RM226bil in 2016, assuming an average annual growth rate of 6.4% for operating expenditure during 11MP period (2015e: RM212.4bil).

- Government revenue to rise by 7.9% per annum during the 11MP period. Government revenue is likely to advance to RM240.3bil in 2016, on the back of the targeted revenue boost of 7.9% per annum. Based on earlier guidance for the 11MP period, federal government revenue is envisaged to be RM1.4tril for five years from 2016-2020, which is a cumulative growth of 34% compared to RM1.05tril in 10MP. The government has been gradually diverting from its high dependence on petro-dollar income towards a more sustainable and broader revenue base. Going forward, GST will generate an average of RM31.4bil revenue per year over the next five years (vs. the estimate of RM21.7bil in 2015).

- Floating petrol pump price mechanism results in lower subsidies in 2015. Petrol subsidies were scrapped effective 1 December 2014 and petrol pump prices have been based on a floating price mechanism ever since. As such, spending on subsidies had amounted to RM12.2bil during 1H15 (or -41.5% YoY). During the corresponding period in 2014, total spending for subsidies stood at RM20.9bil. The overall savings from scrapping subsidies for petrol pump prices has significantly reduced the government expenditure on subsidies in 2015. In tandem with the rationalisation of subsidies, the introduction of GST since April 2015 has enabled the boost in total revenue.

- Lower-than-expected public spending in 2015. For 2015, development spending is retained at RM48.5bil plus RM2.0bil for contingencies. Nonetheless, the allocation for operating expenditure has been lowered by RM11.0bil to RM212.4bil (vs. the earlier projection of RM223.4bil). Also, total government revenue is revised lower by RM12.5bil to RM222.7bil (vs. the initial guidance of RM235.2bil as per the Budget 2015 announcement last year).

- More handouts via BR1M in 2016. The government is expected to strengthen its social safety net and increase the cash handouts to households and individuals next year. For 2016, households with monthly income below RM3,000 could receive RM1,050 (up from RM950 in 2015), household income of between RM3,000 and RM4,000 will likely get RM850 (vs. RM750 in 2015) and individuals earning less than RM2,000 could receive RM450 (vs. RM350 in 2015). All in, allocation for the cash assistance programme through BR1M will likely cost the government RM5.6bil in 2016, compared to the allocation of RM4.9bil for 2015.

- Commitment to further reduce budget deficit. Overall, the government’s financial position is likely to improve on the back of the implementation of GST and efficient tax collection going forward. That said, the government is committed to reduce budget deficit to 3.2% of GDP in 2015, driven mainly by the boost in revenue (2014: -3.4% of GDP). As at YTD 1H15, GDP had advanced by a healthy 5.3% while budget deficit stood at 2.8% of GDP. Also, the government seeks to reduce the fiscal shortfall further during the 11MP period to 0.6% by 2020. Given that, we foresee a reduction in fiscal deficit to 2.7% in 2016, assuming that GDP grows by between 4.5%-5.0% while the government remains prudent in terms of spending.

Source: AmeSecurities Research - 6 Oct 2015