• Continued fiscal consolidation

• Further enhancement of revenue

• Expect the development expenditure (DE) allocation to trend around RM90bn- 100bn

• Budget 2024 to focus on structural reforms and driving investments

• Measures will be undertaken to ensure prudent fiscal spending

Budget 2024, to be tabled in parliament on October 13, will be the second budget announced by the unity government. Taking our cue from the mid-term review of the 12th Malaysia Plan (12MP), Budget 2024 is likely to be an expansionary one. Hence, Budget 2024 is likely to feature a delicate balancing act by the Government between continued economic support while ensuring debt sustainability.

The Budget is likely to remain mildly expansionary in nature, with substantial support towards selected priority sectors and continued assistance to ease the financial burdens of the targeted groups. We expect some form of fiscal consolidation measures to be announced.

Continued fiscal consolidation. The fiscal consolidation efforts would be continued where the fiscal deficit target is maintained at a range of 3.0% and 3.5% of GDP by end-2025 versus 5.0% of GDP projected for 2023. In order to achieve that rate, we estimate that 2024 deficit would be in the range of 4.0% to 4.5%. The deficit has been reduced from -6.2% in 2020 to -5.6% in 2022. The fiscal deficit consolidation will be supported by a pickup in GDP and absence of 1MDB bond repayment (2023: USD3bn). Although the discontinuation of Special Covid-19 Fund should help to reduce government spending, a sustained large fiscal development spending of around RM90bn annually for the remaining 12MP period would not translate into a quicker fiscal consolidation. The government is expected to advance its targeted subsidy rationalisation plans. In this regard, the government will leverage on its PADU database which will be used as a central reference for assistance targeting.

The federal government’s revenue is seen at RM904.83bn for the remainder of the 12th Malaysia Plan (12MP) from 2023 to 2025, resulting in a deficit of RM257.93bn. That would be an average of more than RM300bn in the next three years. For the whole of 2021-2025 period, revenue has been revised upwards to RM1.43tn, compared with RM1.23tn estimated earlier. During the first two years of the 12MP, federal government revenue was RM528.11bn.

Although no major changes in consumer tax to be expected, there will be expansion of tax bases and government revenue streams, targeted subsidies and prudent fiscal management to better manage the country's finances. While new taxes are on the cards, the government reassured that it will be taken care of and those in need will be taken care of and aid given continuously.

As part of its efforts to widen the revenue base, the government does not rule out introducing new progressive taxes (direct and indirect taxes) including a consumptionbased tax albeit we think such revenue policy enhancements will require careful planning, timing and communication. There is likely to be clarification of the luxury tax and capital gains tax on unlisted entities proposed in the revised budget 2023 in February this year.

Capital gains tax (CGT) is among the new taxes that will be implemented next year. This has been already hinted during the re-tabling of Budget 2023 with the CGT proposal on the disposal of unlisted shares. Malaysia does not have a CGT regime except for gains arising from the disposal of real property, which may be subject to Real Property Gains Tax or RPGT. Media reports quoting Finance Minister and Prime Minister emphasised that CGT would not be introduced on listed shares and that the disposal of unlisted shares for an approved IPO would not be subject to any new CGT. Should it be materialized, we expect the CGT impact to be minimal and manageable. The luxury tax goods, which was announced during Budget 2023 but was halt few months after that could be announced again in the upcoming budget. Measures to improve the tax collection efficiency and tax compliance are anticipated as well.

On expenditure side, we expect the development expenditure (DE) allocation to trend around RM90bn-100bn, in line with the revised spending ceiling for the 12th Malaysia Plan (12MP) programmes projects. The government has increased the ceiling RM15bn for the 12MP allocation, totalling the allocation to RM415bn. As mentioned, the increase was dedicated to enhancing the standard of management and refocusing subsidies to suit the needs of the people.

In 2021, the total development expenditure was reported at RM64.3bn, while in 2022 the amount was RM71.6bn. This was only about 34% of total development expenditure allocated under the five-year plan - RM135.9bn out of RM400bn. Hence, there is another RM279bn remaining for 2023-2025. Under Budget 2023, the sum earmarked for DE was larger at RM97bn excluding RM2bn in contingency savings. Thus, that leaves about RM182bn or an average of RM91bn per year for the years 2024 – 2025. When tabling the 12MP's MTR, Prime Minister said the government is committed to spending at least RM90bn in development expenditure annually from 2023 to 2025. Henceforth, we could expect the DE for Budget 2024 to be c.RM90bn.

We view that he comprehensive review of the 12MP needs to prioritize the reinvigoration of mega projects, especially those related to infrastructure.
 

Source: BIMB Securities Research - 4 Oct 2023