Prudent budget with many goodies

  • Business
  • Wednesday, 10 Sep 2003

IT'S the time of year when most of us turn our attention to the budget. 

Prime Minister Datuk Seri Dr Mahathir Mohamad, in his capacity as Finance Minister, will table the government's 2004 budget in Parliament on Friday. 

As usual, there is plenty of speculation what the budget will contain. 

I am told the Prime Minister is in a good mood and expectations that the budget will contain a bag of goodies for the rakyat are not misplaced. After all, this will be his last budget as he will be retiring at the end of October to be succeeded by his deputy, Datuk Seri Abdullah Ahmad Badawi. A general election is also looming on the horizon. 

I'd like to make four points on the budget. 

ONE: The budget is being framed against the backdrop of a rebounding economy. A few months ago, many thought the government's projection of a 4.5% growth rate for the economy this year was unachievable. Now few would want to question this projection. The expectation is that the 4.5% target may be exceeded. 

Therefore, the primary objective of the budget will be to sustain the economic growth momentum. 

TWO: There is a fair amount of concern among economists and analysts about the size of the 2004 budget deficit, with some speculating that it could be as high as 6% of gross domestic product (GDP). A deficit exceeding 5% of GDP is considered to be high. 

This concern is understandable, given the fact that the budget deficit has been growing in recent years from 1.8% of GDP in 1998 to 3.2% in 1999, 5.8% in 2000, 5.5% in 2001 and 5.6% in 2002. 

The finances of a government are like that of a family. If a government continues to overspend (meaning expenditure exceeds revenue), then a time will come when it will have to take the unenviable decision to cut spending or jack up taxes to raise revenue, or both. These measures will be painful for the rakyat and could create social and political tensions. 

A sound economy is not sustainable if the government runs a persistent budget deficit, just as a family will be in trouble if it persistently overspends. 

The federal government has always been prudent when it comes to managing its finances. 

It's the government's policy to achieve a balanced budget as soon as possible. Unfortunately, because of the Iraq war, SARS and the world economic downturn, it has found it necessary to put more money into the local economy (pump-priming), thereby increasing its budget deficit. 

I understand the government has a relatively short time frame to achieve a balanced budget, and this was conveyed to the chief of the International Monetary Fund (IMF), Horst Kohler, recently when he visited Malaysia. The IMF chief was reported to be comfortable with this time frame. 

I believe the government will be applying the same prudence in the coming budget as it had done in the past. 

My Putrajaya contacts tell me the 2004 budget deficit is not expected to exceed 4% of GDP, which will be manageable. This will show the government's determination to return to a balanced budget. 

THREE: There has been widespread anticipation among corporations and accounting firms of a reduction in the corporate tax rate – some expect a 3-percentage point cut. The last time corporate tax was cut, from 30% to the current 28%, was five years ago. 

Supporters of a corporate tax cut argue that this would stimulate business and bring in more foreign investments. 

I very much doubt the government will go for a corporate tax cut, although I would be happy to see one. 

Sure, the government is interested in encouraging businesses to grow. But it feels that a corporate tax cut simply means that companies will retain a greater percentage of their profits for no effort; there is no guarantee they will plough back the extra profits into expanding their businesses. 

Also, most foreign companies are already enjoying many tax incentives and the government does not collect much from them by way of income tax.  

On an international scale, Malaysian corporate taxes are not among the highest; neither are they among the lowest.  

Corporate income tax (paid mainly by local companies) form a substantial portion of government revenue and the government needs the money. 

The government feels that if companies want to enjoy more profits, then they must create those profits through expansion, innovation and greater productivity.  

There are a range of incentives such as accelerated depreciation allowances, export allowances, etc, to encourage companies to grow and earn more profits. Such incentives would be broadened in the coming budget.  

FOUR: I mentioned that Dr Mahathir is in a good mood and expectations of a bag of goodies are not misplaced. 

This is what I expect: a big cut in personal income tax to put more money in the pockets of consumers for a consumption-led economic recovery. 

Currently the rate on taxable personal income (after personal reliefs) rises from 1% on taxable income of RM2,500 to 29% on income from RM150,000 and above. 

I believe the government is looking at reducing the tax rate so that a person with a taxable income in the range of RM100,000 to RM150,000 will pay tax of 20% instead of 28%. 

Why, if Dr Mahathir is in a generous mood, he may even extend the 20% tax rate to taxable incomes up to RM200,000. 

Now, wouldn't that be wonderful? But as they say, get it from the horse's mouth. 

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