KEY POINTS

• Lower expectations. Official forecasts for key economic indicators could be lowered in the upcoming Economic Report. The trade forecast of 1.5% export growth could see a further cut while the 2015 GDP forecast range currently at 4.5%-5.5% could be narrowed.
• Uncertain times. Pressing need to address current economic issues that could pose a challenge to future growth and potentially derail the 2020 targets (average annual GDP growth of 5.0%-6.0%) to achieve high-income nation status and a balanced budget (fiscal deficit of 0.6%-1.0% of GDP).
• Mildly expansionary. To strike a balance between consolidation and focussing on supporting growth, the Government is expected to allow 2016 Budget to be slightly expansionary as in previous years.
• Dealing with less oil income. Removal of fuel subsidy, expected higher Goods and Services Tax (GST) collection and better enforcement along with cost cutting measures to reduce operating expenditure is expected take off some pressure on the fiscal balance sheet, which is under stress from sharply lower oil revenue.
• GST collections to overshoot. Revenue collected from GST are expected to be higher than official estimate, giving an extra boost to tax revenue that would make up for operating expenditure remaining stubbornly high.
• Fiscal consolidation path stays. The 2020 fiscal deficit target of 0.6%-1.0% of GDP is ambitious and would require a 0.4-0.5 percentage point cut annually. More realistic is a small reduction to 3.0% in 2016.
• More for development spending. More people-centric projects such as affordable housing under the PR1MA scheme and improvements to public transport, particularly rail infrastructure.
• Less for operational expenditure. Public services would likely undergo cost cutting measures to meet fiscal sustainability goals, aiming to become leaner without affecting quality of public services
• Corporate tax cut. If the increase in tax collections from GST allows it, a corporate tax cut of one percentage point to a standard rate of 23.0% could be announced for 2017.
• Disposable income boost. Measures to increase private consumption that could take the form of income tax relief or a temporary reduction in employee EPF contributions.
• Voter handouts. The ruling government will face increased pressure to continue popular social welfare schemes such as BR1M to maintain current voter share

Summary

• Striking a balance. The 2016 Budget will have three central aims as defined by its theme of “Strengthening Growth, Enhancing Inclusiveness and Ensuring Fiscal Sustainability.” It suggests that while the budget will be mildly expansionary as in previous years, the fiscal consolidation plan would not be compromised. The inclusiveness aspect of the budget is a nod to the 11th Malaysia Plan which is broader than the previous five-year plans in including social wellbeing targets. Major sections of the budget will address concerns over the cost of living and housing affordability. All in all, the budget’s main focus will be regaining investor and consumer confidence while striking a balance between the need to consolidate and, if need be, to raise development spending to ensure the economy does not falter amidst growing instability in the global economy.
• Priority on development spending. On the expenditure side, indications are that operating expenditure will be adjusted down in favour of a higher allocation for development expenditure. Based on the allocation of RM260.0b for development spending over the course of the next five-years, development expenditure could increase to over RM50.0b in 2016. The likelihood of a stimulus package included in the budget is slim as the economy remains in reasonably good health. Based on analysis of past national budgets during periods of economic stress (Asian Financial Crisis and Global Financial Crisis), there is a pattern of stimulus measures announced off-budget. 

Source: Kenanga Research - 19 Oct 2015