Commendable Tax and Expenditure Programme in Jan-May 2019

According to a media release by Ministry of Finance (MOF), the Government remains firmly on track to meet its fiscal deficit target of 3.4% of GDP for 2019, an improvement from 3.8% of GDP in 2018. Most significant, the Federal Government's revenue rose strongly to RM105.4bn in January to May 2019, RM12.7bn higher than RM92.7bn in the same period last year. Government’s operating expenditure declined by RM3.3bn to RM106.5bn in Jan-May 2019 (RM109.9bn in Jan-May 2018), but development expenditure rose by RM2.4bn to RM20.3bn in Jan-May 2019 (RM17.9bn in Jan-May 2018), reflecting the Government efforts to strike the appropriate balance between fiscal discipline and supporting the domestic economy. MOF highlighted in the note that “fiscal discipline has been instituted through a combination of tighter controls over operating expenditure in the form of wider application of open competitive tender and implementation of zerobased budgeting (i.e. a budget system that assumes a zero base at the start of the budget cycle).

As a result, with Government demonstrating its commitment in fiscal reform by slowing down its operating expenditure, and as revenue remained at healthy level, the government managed to cut its fiscal deficit by RM13.6bn to RM21.4bn in Jan-May 2019 (from a fiscal deficit of RM35bn in Jan-May 2018), its lowest fiscal deficit level in the first five months of the year since 2015, see Fig 3.

Based on the current fiscal performance to the full year 2019 Budget allocation, the government has collected RM105.4bn, around 40.3% to its target of RM261.8bn. As for operating expenditure, 41% or RM106.5bn of the total allocation out of RM259.9bn budgeted in Budget 2019 has been spent and the remaining will be spent by the Government this year.

As for net development expenditure, in the first five months of 2019, a total of RM20.3bn has been disbursed out of the RM33bn allocated in Budget 2019.

As highlighted, around 54.1% of the development expenditure was allocated for economic services followed by social services (25.7%), defence and security (15.4%) and general administration (4.7%). The allocation of spending on transport, which attributed 32.5% over total economic services category, amounted to RM2.0bn. We believe that this may be reflected in some of the transport related mega projects, including LRT3, MRT2 and ECRL as well as other infrastructure projects.

The country’s budgetary position remains stable and healthy as receipts from direct and indirect taxation, is well supported by domestic demand on the back of still favourable external environment. Going forward, we believe the Government will increase development expenditure in the quarters ahead, as historically as illustrated in Fig 5, spending on development expenditure rises more in second half of the year. In the 1Q19, the government has spent RM11.5bn or about 21.0% for development expenditure of the total budget allocated in 2019.

The Finance Minister also noted that even though the government has managed to narrow the country’s fiscal deficit, it will continue to be “mindful of its subsidy bill and will continue to manage its expenses prudently”. The Government will be able to achieve the fiscal deficit target of 3.4% of GDP for 2019 as well as maintaining the current account surplus.

MOF also guided that the government is confident that the Malaysian economy will expand steadily in 2019 and 2020, as economic indicators continued to show resilience. In May, growth in IPI was steady at 4% yoy, for the second consecutive month, while export growth remained in the positive territory of 2.5% yoy in May from 1.1% in April, reflecting that Malaysia benefitted from some trade substitution and diversion from trade war. Our real GDP growth projection is maintain at 4.5% in 2019 (4.7% in 2018), with private consumption remaining as a key driver of g

Source: Affin Hwang Research - 25 Jul 2019