Budget Proposals Will Also Focus on Government’s Fiscal Discipline

The 2018 Malaysian Budget will be presented on 27th October 2017, with the theme “Shaping the Future”, preparing the country’s strategies on advancements in technology, business processes and innovation. However, with the General Election (GE14) needed to be held on or before 24th August 2018, many market observers also believe that Budget 2018 measures to be people-friendly, filled with various goodies for the people, especially the lower income households. Despite the generous budget proposals to stimulate domestic demand, the Federal Government will still focus on fiscal discipline and likely incur a smaller budget deficit of 2.8% of GDP in 2018, compared with a deficit of 3.0% of GDP in 2017, the lowest level since 1999.

Budget Strategies Are Planned on a Favourable Economic Outlook

The improvement to the budget deficit position in 2018 is premised on the following factors: 1) a synchronized improvement across both advanced and emerging market economies 2) manageable capital flows 3) steady commodity prices, especially global crude oil prices 4) steadier economic growth in Asia, and 5) strong domestic demand with a stable Ringgit. We believe government will likely revise higher the macroeconomic forecasts for 2017 and 2018. The official annual GDP growth forecast for 2018 will likely to be increased to 4.5-5.5% (5.0-5.5% estimated for 2017), in tandem with the assessment made by International Monetary Fund (IMF), which projected the global economy to grow at a faster pace of 3.6% in 2018, from 3.5% in 2017.

Major Measures to Support Private Consumption

This will likely include measures such as the extension of 1Malaysia People’s Aid (BR1M), where cash assistance of RM1,200 to households with a monthly income of below RM3,000, remaining the same from the 2017’s allocation of equal amount. We believe the cash assistance under BR1M will not be increased from RM1,200 as the Government has announced various financial assistance over the last few months to other targeted group in the agriculture/plantation sectors, low-income urban and rural households as well as civil service and veterans of the armed forces.

Government Likely to Cut Personal Income Tax With Other Tax Reliefs

For the medium income group earners, we believe there is a possibility for the government to cut personal income tax rate in Budget 2018, bringing the maximum tax rate of above RM1m bracket from the current 28% to 27% for individuals. Based on our estimate, a 1%-point reduction in the personal income tax for all income brackets will involve the Government foregoing an estimated RM1.3bn in revenue collection. A proposed reduction in personal income tax rate will narrow the tax rates gap between corporate income tax and personal income tax.

We Are Not Factoring a Cut in Corporate Tax Rate in 2018 Budget

Corporate income tax accounts for 53% of direct tax and 27% of total government revenue. In Budget 2017, the Government announced that the corporate tax rate (CIT) will be reduced for companies on a tiered basis, resulting in tax savings, ranging from between 1% and 4% for YA 2017 and 2018. Going forward, we believe the Government will review the effectiveness of the proposed CIT tiered system implemented, which will be effective for YA 2017 and YA 2018. Despite suggestions for a straight forward an across the board cut in CIT by some manufacturing associations, we believe any cut in corporate tax rate will only be implemented from 2019 onwards.

Source: Affin Hwang Research - 9 Oct 2017