Budget 2019 to Focus on Strategies Set Out in Mid-term Review of 11MP

The 2019 Malaysian Budget will be presented on 2nd November 2018, where the proposals may be seen as a follow up to the directions and strategies set out in the mid-term review of the Eleventh Malaysia Plan (11MP). This will also reaffirm and establish Government’s commitment towards new policies and reforms, such as enhancing the wellbeing of the people, especially the bottom 40% of the household income group (B40), as well as achieving inclusive growth through promoting and accelerating innovation (such as Industry 4.0, among others), boosting productivity, and moving up the value chain of manufacturing industries.

Sustaining economic growth over fiscal deficit target in the short term

In view of the uncertain external environment, Malaysia will have to rely more on internally generated growth. We believe that a responsible Budget will address structural problems, such as the country’s budget deficits, but other strategies are required to sustain economic growth to generate revenue, where the budget proposals should also aim at stimulating private consumption and domestic demand, as well as incentives for businesses to support corporate profitability. This is particularly significant after the abolishment of goods and services tax (GST), with lower indirect taxation revenue as a major source of Government revenue.

Unpaid Tax Refunds of RM35bn Complicates Fiscal Policy

Recall that the current Government had announced the RM35bn in unpaid tax refunds that were not disclosed by the previous government. MOF noted that the previous government had not refunded a total of RM16bn in income tax and real property gains tax. The government also noted the unpaid Goods and Services Tax (GST) claims to businesses of about RM19.4bn in refunds. MOF assured the tax refunds would be repaid to the companies and individuals, either next year or in the following years.

Government fiscal deficit target may likely be ‘reset’ to higher level

As such, following the likely reset after taking into consideration the unpaid tax refund, based on our own estimate, the Federal Government will possibly show a larger revised budget deficit of 3.6% of GDP estimated for 2018, and a deficit of 3.3% of GDP projected for 2019. The government revenue still outpaces that of operating expenditure to register an operating surplus of RM0.7bn projected for 2019 (RM0.8bn in 2018), based on our estimate.

Sovereign Rating Agencies to Monitor Progress

In the mid-term review of 11MP, Government already noted that the fiscal targets will be flexible to shore up growth, where the fiscal deficit is expected to be beyond the initial fiscal target set by the previous Government before reverting to the fiscal consolidation path. We believe that if the current Government could lay out a detailed plans and strategies to consolidate the deficits going forward, the country's sovereign rating outlook by international rating agencies will remain stable.

Government to Conduct Study on New Taxes as Revenue Sources

Finance Minister Lim Guan Eng already acknowledged recently that some new tax measures will be announced in the upcoming Budget 2019 to support Government finances. There are market speculation of a number of possible taxes including i) inheritance tax; ii) capital gain tax; iii) health and environment tax (i.e. soda and carbon taxes) as well as iv) digital tax. However, in our opinion, as the Tax Reform Committee (TRC) has just been established, it is unlikely for the Government to announce the inheritance tax and capital gain tax in the upcoming Budget 2019, as study will be ongoing and implementation may not be so soon.

Source: Affin Hwang Research - 22 Oct 2018