Overall, pulled many of the right levers and rightly so, it will be an unpopular budget. But one that is necessary. Could have done more but political will and political suicide are also factors which we commentators do not always put into our equation.

GRADE:  B-

Comments are coloured highlighted and suggestions at the end.

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Following are highlights from Najib's ongoing speech to
parliament: 
    
CIVIL SERVICE
*  Pensioners will receive a special financial assistance of 250
ringgit to assist them meet the rising cost of living. 
*  Government to give a half-month bonus for 2013 with a minimum
payment of RM500 to be paid in early January 2014. 
   
CASH HANDOUTS
* Cash handouts to households with a monthly income of below
3,000 ringgit will be increased to 650 ringgit from 500 ringgit.
* For individuals aged 21 and above and with a monthly income
not exceeding 2,000 ringgit, cash handouts will be increased to
300 ringgit from 250 ringgit.
* For the first time, cash assistance of 450 ringgit will be
extended to households with a monthly income of between
3,000-4,000 ringgit. rising cost of living borne by the lower
middle-income group. 
* To implement all cash schemes, government will allocate 4.6
billion ringgit which is expected to benefit 7.9 million
recipients. 

Comments: Obviously some may wonder why go through such "additional logistics", why not just increase tax free threshold by RM2,000 or even RM4,000. The answer lies in covering those whose monthly income are not recurring and/or less than RM1,000. These people will not benefit even if you raise the threshold of tax free income, and would be hardest hit by the GST.

     
REAL PROPERTY GAINS TAX
* For gains on properties disposed within the holding period of
up to 3 years, RPGT rate is increased to 30 percent.
* For disposals within the holding period up to 4 and 5 years,
the rates are increased to 20 percent and 15 percent,
respectively. Malaysian property firms with exposure to this tax
change include UEM Sunrise,  Mah Sing Group 
and Tropicana Corp . 
* Raise the minimum price of property that can be purchased by
foreigners to 1 million ringgit from 500,000 ringgit. 
* Prohibit developers from implementing projects that have
features of Developer Interest Bearing Scheme (DIBS), to prevent
developers from incorporating interest rates on loans in house
prices during the construction period.
* Financial institutions are prohibited from providing final
funding for projects involved in the DIBS scheme. Malaysia's top
three banks are Maybank, CIMB and Public
Bank.

Comments: The most contentious part of the budget. You may not read the full "vociferous protests" in mainstream media. However, you will also find the protestations came MAINLY from the inner circle, i.e. the developers, land owners, agents, property company owners, etc... 

a) Like it or not, we need to take the "speculative element" out of the market. The new RPGT will go a long way to address that.

b) Like it or not, the problems lies in developers ONLY building houses for big guys and girls, i.e. RM1.5m and above as they attract foreign buyers. Nobody was really keen to build the RM300,000 to RM700,000. So you get the gap between affordability for first home buyers being priced out. The developers brought this on themselves. 

c) Government should make it really easy for first home buyers by lowering deposit, increasing deposit from EPF. That way, the developers will always go where the money is and build the RM300,000 to RM700,000 accommodation.

d) People in property will always claim that their markets need a bit of speculation, fine .... but they also blame the cost of materials for building prices going, fine as well .... What the RPGT tries to address is to allow the genuine players to buy, and wait a little longer to make money, they will still make money but a little longer. The market for the past 8 years have seen flippers only, many buying 3-5 units and flipping them within a year or so. This raises cost for genuine buyers, its a game for the well heeled and in many ways creates a inner circle game much like the high rollers room in casino. 

So if you ask me, cost of materials go up, yes ... but most of the increase in property prices have been because of a deluge of money going into property investments and speculation. 

e) Should not punish the sector because this is the effects of global quantitative easing. YES it is precisely the effects of global QE. It is PRECISELY because of that that the government and Bank Negara MUST and HAD taken the steps necessary to CONTAIN THE ILL EFFECTS of QE, kapiche!!!???

You know the sector is heated up when listed companies NOT in the usual business of having anything to do with property developments, are suddenly starting divisions within their companies to do property development. Truth hurts when they are real.
    
AFFORDABLE HOMES
*  To further increase access to home ownership at affordable
prices, an estimated 223,000 units of new houses will be built
by the government and the private sector in 2014. 
    - Companies that specialise in affordable housing
development include Hua Yang Bhd.  
* Government to allocate 578 million ringgit to the National
Housing Department (JPN) for low cost flats consisting of 16,473
housing units. 
* Malaysian's government to provide 80,000 housing units with an
allocation of 1 billion ringgit under affordable housing scheme.
The sales price of the houses will be 20 percent lower than
market prices.
* Introduce the Private Affordable Ownership Housing Scheme
(MyHome) to encourage the private sector to build more low and
medium-cost houses. The scheme provides a subsidy of 30,000
ringgit to the private developers for each unit built.
*  Preference will be given to developers who build low and
medium-cost houses in areas with high demand and limited to
10,000 units in 2014. 
* The scheme is for housing projects approved effective from 1
January 2014 with an allocation of 300 million ringgit. 
    
TAX RELIEF
* Government proposes a special tax relief of 2,000 ringgit be
given to tax payers with a monthly income up to 8,000 ringgit
received in 2013. 

Comments: The new poor. This Budget would have marginalised the new poor, i.e. those earning between RM3,000 to RM8,000 as they will feel the full effects of GST, subsidies removal WITHOUT this proposal. The proposal to reduce taxation rates may or may not benefit them fully as the details are not clear and seem to favour those on higher tax brackets. However this proposal should not be just a special one year proposal, it should be as permanent as the GST is permanent, as permanent as the removal of subsidies.
       
GOODS AND SALES TAX
* To implement goods and services tax (GST) on April 1, 2015 -
17 months from now. 
* GST rate fixed at six percent, the lowest among ASEAN
countries. 
* GST replaces current sales tax. 
* Basic food items, transportation services, highway tolls,
water and first 200 units of electricity for domestic users per
month to be exempt from GST. 
* Sale, purchase and rental of residential properties as well as
selected financial services are exempted from GST. 
* PM Najib: "The reality is that inflation now is low at around
2 percent. The government is confident this will be the best
time to impose GST as inflation is minimal and under control."
* Training grant of 100 million ringgit will be provided to
businesses that send their employees for GST training in 2013
and 2014. 
* Financial assistance amounting to 150 million ringgit will be
provided to small and medium enterprises for the purchase of
accounting software in 2014 and 2015. 

Comments:  Yes, 6%, somebody is listening. It would have been useless to do 4%. Five percent would not have changed the status quo.
    
CORPORATE TAX
*  corporate income tax rate be reduced by 1 percentage from 25
percent to 24 percent. 
* income tax rate for small and medium companies will be reduced
by 1 percentage point from 20 percent to 19 percent from the
year of assessment 2016.
          
INCOME TAX
* government to give one-off cash assistance of 300 ringgit to
low income households 
* personal income tax rates be reduced by 1 to 3 percentage
points for all tax payers.   
* individual income tax structure will be reviewed  
* chargeable income subject to the maximum rate will be
increased from exceeding 100,000 ringgit to exceeding 400,000
ringgit. 
* Current maximum tax rate at 26 percent to be reduced to 24
percent
* measures to be effective in 2015        
    
SUBSIDIES
* Subsidy programme to be "gradually restructured"
* A portion of savings from restructuring to be distributed in
the form of direct cash assistance with the other half to
finance development projects.
* To abolish the sugar subsidy of 34 sen effective October 26
2013.
    
IMPROVING BUDGET MANAGEMENT
* committed to reducing the fiscal deficit gradually, with the
aim of achieving a balanced budget by 2020. 
* to ensure federal debt level will remain low and not exceed 55
percent of GDP.
* government to conduct audits on projects valued at more than
100 million ringgit during its implementation. 

ISLAMIC FINANCE
-  Securities Commission to introduce the a framework for Social
Responsible Investment (SRI) Sukuk, or Islamic bonds, to finance
"sustainable and responsible" investment initiatives.
    
AGRICULTURE
-  Government to allocate six billion ringgit allocated for
agriculture programmes.          
 * Says to 243 million ringgit allocated for rubber, palm oil
and cocoa replanting as well as forest plantation programmes.
Main plantation companies in Malaysia include Sime Darby
, IOI Corp  and KL Kepong.

PUBLIC INVESTMENTS            
* Public investments to reach 106 billion ringgit. Projects to
be implemented include:
- A 316-kilometre West Coast Expressway. Locally listed Kumpulan
Europlus Bhd owns 80 percent of the project, while IJM
Corp owns the balance 20 percent.
- Double-tracking rail project along west coast Malaysia. The
project is carried out by  as a joint venture between MMC Corp
 and Gamuda.
- Various projects from state oil firm Petronas under
its 300 billion ringgit capex programme, including a
petrochemicals plant in southern Johor state.

* INTERNET ACCESS
-  To carry out second phase of high-speed broadband project
with the private sector involving 1.8 billion ringgit
investment. State-linked telco Telekom Malaysia Bhd 
is involved in the project. 
-  To increase Internet coverage in rural areas, 1,000
telecommunication transmission towers will be built in the next
three years, with an investment of 1.5 billion ringgit.
-  To increase Internet access in Sabah and Sarawak, new
underwater cables will be laid within three years at a cost of
850 million ringgit. 


SUGGESTIONS

POLITICAL WILL LACKING - I am not saying anything new here. I am not naive to think that I know better. I am sure most of those in EPU, MOF ...etc... advising the government know it too. There was no political will to DELAY, POSTPONE or ABANDON many of the mega yet unnecessary buildings. 

There was also no political will in reducing the defence budget. I a, just pulling out figures here out of a hat. Stop all purchases of defence weaponry, armoured vehicles .... plus other incidentals, that may whack 20% off the defence budgeting already. I would increase the budgeting for police force by 10% as crime prevention needs more attention.

I would also freeze hiring and budget increases for CIVIL SERVICE save for education. Natural attrition of work force will take their effects. To lay off the civil service is not just lacking in political will but may also be political suicide, so natural attrition may be the best option. For the rest of the civil service, just improve on productivity to cover the gap, we know you can EASILY do that.

NO GOOD NEWS, THINK OUTSIDE THE BOX - It seems that when you restrict your budgets, no decisions will be friendly or welcomed. However there are MANY things the government can do which does not inflate our deficits but in effect will cause a boost to the local economy.

This has to do with the VELOCITY OF MONEY. Money that is spent investing say in foreign properties may take years to yield a reasonable return. The velocity of money there is very low, especially to the local economy I am not saying we should not do it. There are plenty of ways to do things which are thoughtful, smart and increases the velocity of money.

RM1 if you spend it is thought to be worth between RM6-RM8 for the economy. Hence you move certain things from low velocity to high velocity. For example, EPF has such a huge investable amount that they have problems investing locally. However, EPF has shunned companies with market cap of less than RM500m as well. Why is that?

Is it because of monitoring? You tell me it is soooo difficult to set up a new department charged with RM3bn funds to look at listed companies locally below RM500m??? All you need is about 20 pax, assume you pay RM100,000 in all related compensation per person a year (pay, rental, EPF, insurance, bonus) = RM2m a year. On RM3bn, assuming you invests with an average global fund, paying 0.5%-0.75% fees a year = RM15m-RM22.5m alone in fees.

Such a simple move will cause untold benefits:
a) small companies will look seriously to their bottom line to grow their companies knowing there is a strong likelihood of having more institutional investors
b) no institutional investors will mean a relatively large free float even if results may be good, thus causing some to rely on doing share rampings to make some money on the side
c) I chose just RM3bn and assume there are 100 decent small companies out of the 300-400 small companies = RM10m investment per company on average
d) investors will start "valuing good small companies" and cause a chained reaction

Another suggestion in creating velocity of money without affecting the deficit is the restructure the bankruptcy laws. Please read my more detail postings on local archaic bankruptcy laws. Its currently in perpetuity and favours the banks no end. Keep up to date with global best practices, HK 4 years, Singapore 5 years max. When the laws are in perpetuity, you take that person out of the real economy. Not just one person but also the family members and even extended family. 

When you allow for better participation back into the economy, there are many benefits. As the number of bankrupts is very sizable as a proportion of the working population (maybe as high as 5% of the workforce), this is imperative.

It will also encourage more entrepreneurs to recover faster and NOT SO BADLY PUNISHED - we all know entrepreneurs make the economy and most will take a few hits before striking it.