What to expect from Budget 2015

Budget 2015 will continue to be friendly to businesses and investors, without forgetting the rakyat, according to Manokaran.

IN the run-up to the Budget 2015 announcement next month, expectations are rising that the Government would introduce mitigating measures to alleviate the rising cost of living faced by the people and provide new incentives to companies amid the impending implementation of the goods and services tax (GST).

Thousands of wish lists had already been submitted to Prime Minister Datuk Seri Najib Tun Razak during the two-week campaign last month to gather feedback. The question once again is how will the Government balance the need to reform the country’s economy and meeting the expectations of the people.

Najib is scheduled to table Budget 2015 in parliament on Oct 10.

He had clearly indicated last month that the upcoming budget would focus on stimulating growth, improving Malaysia’s fiscal position and raising the people’s standard of living.

In general, economists believe there would be no let-up in fiscal consolidation under Budget 2015, as the Government strives to lower its deficit and debt level. Nevertheless, they say, policies are expected to remain expansionary, with the people’s welfare and private-sector growth in mind.

“Taking a leaf from the Government’s pre-Budget 2015 consultation, we expect the budget to be pro-growth, with an emphasis on domestic economic and price stability,” Alliance Research chief economist Manokaran Mottain says in his report.

“Overall, Budget 2015 will continue to be friendly to businesses and investors, without forgetting the rakyat, especially the lower-income group,” he explains.

According to Manokaran, the Government is expected to face a handful of macroeconomic challenges next year. These challenges include the rising cost of living and declining housing affordability among low-income group and first-time homebuyers. And with inflation expected to spike on the back of the GST implementation in April 2015, consumer spending will likely come under pressure and weigh on the economy.

Hence, Manokaran expects policies under Budget 2015 to strengthen economic fundamentals in the short to medium term, as that will benefit low and middle-income groups, small and medium-sized enterprise (SME) and key industries.

“We can expect the budget to address rising cost of living and issues pertaining to affordable housing and urban living,” he adds.

Fiscal consolidation on track

According to Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid, while the rising cost of living and higher interest rate environment will be key considerations in formulating Budget 2015, measures to address some of the predicaments faced by the rakyat will be limited due to the Government’s resolve to stick to its fiscal consolidation programme to cut its budget deficit and debt.

The Government’s commitment is to reduce the ratio of fiscal deficit to gross domestic product (GDP) to 3% in 2015, before achieving a balanced budget by 2020.

As it stands, the Government seems on track to reduce the country’s budget deficit from 3.9% of GDP last year to the target level of 3.5% of GDP in 2014.

“Thus far, the fiscal deficit reduction has been well on track, with the numbers for the first six months of 2014 showing deficits-to-GDP ratio down at 3.7% from 4.7% in the corresponding period last year,” Afzanizam says.

In addition, he notes, the government debt-to-GDP ratio has stabilised at 53.0%, which is well below than the self-imposed limit of 55%.

“We also noticed that the MGS (Malaysian Government Securities) and GII (Government Investment Issue) issuance has been on the declining trend this year, suggesting that the government is very mindful of its debt level,” Afzanizam adds.

In addressing its fiscal weaknesses, economists say, the Government is expected to tighten its operating expenditure, a move that will involve further subsidy rationalisation, while the implementation of GST by April 2015 as announced in the previous budget will serve to enhance the Government’s revenue base and reduce its dependence on petroleum sources.

As part of the Government’s subsidy rationalisation programme, Manokaran says he expects a revamp in fuel subsidy mechanism to be announced. The aim of the new fuel subsidy mechanism, he points out, is to plug the leakages and change the current blanket scheme, which benefits all consumers regardless of their income, to a more targeted scheme to benefit the more deserving lower-income group.

Economists note that the subsidy rationalisation programme will be firmed up in the fourth quarter of the year, citing Second Finance minister Datuk Seri Ahmad Husni Hanadzlah.

Meanwhile, the consensus view is that under Budget 2015, the Government will likely increase the Bantuan Rakyat 1Malaysia (BR1M) cash handouts to eligible households.

“Aside from the targeted based subsidy programme, we expect the Government to strengthen its social safety net and increase the cash handouts to households and individuals next year,” AmResearch senior economist Patricia Oh says in her report.

“Owing to higher cost of living and implementation of GST, BR1M for 2015 is likely to increase by RM300 for households with monthly income below RM4,000 and individuals earning less than RM2,000 per month,” she says.

Her estimation means households with monthly income below RM3,000, will receive higher cash handouts of RM950 (from RM650 previously), while households with monthly income of between RM3,000 and RM4,000 will receive RM750 (up from RM450 previously) and individuals earning less than RM2,000 per month will likely receive RM600 (up from RM300 previously).

According to Oh, the higher cash handouts under BR1M will likely cost the Government RM7.5bil next year, compared with RM4.6bil in 2014.

As part of its measure to mitigate the impact of GST implementation, economists believe the Government would introduce more tax reliefs, aside from the reduction in corporate and income taxes announced in the previous budget. They also expect the Government to introduce new incentives for SMEs to promote the private sector to drive growth.

Goodies for the rakyat

And as part of its effort to address the housing affordability gap in Malaysia, the Government is expected to continue with schemes such as the 1Malaysia People’s Housing Programme (PR1MA), which is targeted at first-time homebuyers, and extend the incentive of 50% stamp duty exemption for first-time homebuyers of residential property up to RM400,000, which is due to expire at the end of this year.

On the other hand, economists say the Government will also likely to implement measures to cool down the property market in the country.

With Budget 2015 being the last budget in the 10th Malaysia Plan period (2011-2015), economists say the Government will likely announce measures to enhance development and infrastructure projects and investment schemes to drive the nation towards a high-income economy in the next five years.

“This year’s budget will be the final budget under the 10th Malaysia Plan (10MP). As such, the coming budget will see allocations for the remaining programmes and projects under the plan prior to the introduction/implementation of the 11th Malaysia Plan (2016-2020), which would cover the crucial final leg of Malaysia’s transformation into a high income and developed nation. Given that the bulk of the measures were announced last year, we do not expect any major surprises in the coming budget,” CIMB Research economist Julia Goh argues.

“In view of the uneven global economic recovery, closure of the US Federal Reserve’s quantitative easing, looming interest rate hikes in the US and the geopolitical uncertainties that could lead to another emerging markets sell-off, the Government will have to push forward with the much-delayed fiscal reforms to address the country’s fiscal vulnerabilities, strengthen public finances and build counter-cyclical buffers,” she adds.

In her research note, Goh also stresses that it is imperative that the government reassures the populace that there will be better management of collected revenue and spending to shore up public confidence.

“Revenue enhancements from GST and savings from subsidy cuts should be accompanied by optimal and cost-efficient spending,” she says.

Goh has projected a GDP growth of 6% for this year and 5% for 2015 for Malaysia, mainly supported by the strong private investment momentum, ramp-up in Economic Transformation Programme-related spending, positive (albeit slower) consumer spending and continued export recovery.

All in, the hope is that the measures to be unveiled in the upcoming Budget 2015 will keep in line with its theme of accelerating growth, sustaining fiscal sustainability and prospering the rakyat.

BY CECILIA KOK