Key Points

• Commitment to consolidation. Even with the improvement in the economy and steadier crude oil prices, the Government would continue its effort to reduce the stress on its balance sheet, suggesting that while there is room for the budget to be slightly expansionary ahead of the upcoming General Election the commitment to fiscal prudence remains intact.
• Striking a balance. Such balance would require fiscal discipline while reallocating funds towards targeted social and infrastructure development. Hence, the Government is expected to project a fiscal deficit of 2.9% of GDP in 2018 slightly better than its target of 3.0% in 2017.
• Rationalise spending. The key to narrow the deficit and eventually balance the budget is to lower the total gross expenditure (operating + development) to below 20% of GDP via expenditure rationalisation. Apart from targeted spending, more efforts could still be done to minimise leakages and wastage arising from poor management and negligence/corruption.
• On supporting economic growth. Along with the expectation of a General Election next year the Government is expected to design the 2018 Budget to be slightly expansionary to support the economy and mitigate any sharp slowdown in the economy. On the back of rising global economic uncertainty, we forecast GDP growth to moderate to 4.9% for 2018 from a projected 5.4% growth in 2017. We expect the MoF would similarly forecast GDP growth to moderate to 4.5%-5.0% for 2018.
• A better option to a tax cut? Though income tax cut is a probable option, raising personal income tax relief to between RM10k to RM15k from the current RM9k would be a better alternative for improving voter sentiments.
• Affordable housing. The government is expected to step up efforts to further increase the supply of affordable houses, especially in major urban areas and introduce measures to bridge the affordable housing gap
• Rewarding civil servants. Public employees are expected to get at least a one month and possible adjustment to their pay and allowances.
• Taxing the digital economy. Though still at a preliminary stage, the Government may announce ways and methods to tax the digital economy as part of its strategy to broaden the tax base.
• More incentives for SMEs. The government may also introduce measures to encourage companies particularly SMEs to internationalise by participating in global value chain and international trade to boost the nation’s resource surplus
• Broadening the BR1M cash handout. We expect another year of a big cash handout to the B40 income group

Source: Kenanga Research - 20 Oct 2017