BUDGET 2005 involves an intricate task. In his maiden budget presentation, Prime Minister Datuk Seri Abdullah Ahmad Badawi, who is also Finance Minister, will seek to balance pressure from two opposing directions: to reduce the budget deficit and increase incentives to spur other economic activities. The latter is needed in the wake of a manufacturing sector that is facing intense competition from China.
It was heartening to hear from the Inland Revenue Board chief executive Tan Sri Zainol Abidin Abd Rashid that the tax revenue target of RM50bil is likely to be achieved. Direct taxes form the biggest source of Government revenue. Other sources include indirect taxes.
Earlier, economists were sceptical that the targeted revenue from direct taxes could be achieved. One factor not anticipated was that Petronas, the national oil corporation, would be paying a larger sum in taxes.
Petronas paid RM21.3bil in taxes and royalties to the Federal and state Governments in its latest financial year ended March 31.
It contributed significantly to the Federal Government's estimated total revenue of RM95.6bil this year. Its contribution will undoubtedly increase next year in view of the high oil prices, and can conceivably increase even further if it raises its dividends.
That could, however, be almost totally offset by the correspondingly higher fuel subsidies that the Government has to extend. Last year, the Government paid RM6.8bil to close the gap between the cost of fuel and pump prices.
This year, the subsidy is expected to reach RM9bil. Considering the figure, it is not surprising the Government is reportedly planning to raise pump prices, and reduce fuel subsidies by RM4bil. It looks like motorists will have to bear much higher petrol prices in the year ahead. That, however, is because of the current high oil prices.
“It makes sense for the Government to cut this subsidy and funnel the funds into other areas of social economic development,” said an economist. These areas could include a higher investment in education, which would help the country become more competitive.
A motorist, not surprisingly, said he hoped the Government would continue to subsidise petrol since it was collecting higher revenue from Petronas.
In terms of the impact on inflation, the economist believes the Government will expect businesses to increase revenue from other sources to offset the high prices of petrol and diesel.
Public transport companies could, for instance, raise revenue from advertising to reduce the impact of the higher fuel price. “This will hopefully prevent fare increases,” he said.
Some businesses, however, may not have other sources of revenue or pricing power due to competition. “For instance, a pizza company will not increase its price, even when having to make delivery, if it may cause fewer people to buy pizza,” he added.
Alternatively, some businesses may separate the delivery cost from the cost of goods to allow customers to choose to pick up the goods themselves or pay for it to be delivered.
Meanwhile, even as the Government strains to reduce the budget deficit further from an estimated 4.5% of the gross domestic product this year, it has to provide funds and incentives to stimulate growth in promising new sectors of the economy.
This is to offset a probable slowdown in the manufacturing sector in the years ahead. Even though this sector recorded double-digit growth in the second quarter, this was believed to have arisen from slack capacity in existing factories. Fewer new factories are being planted up, with most of the foreign – and some of the domestic – manufacturers moving to China and Vietnam.
One of the sectors widely expected to get some attention in the budget is agriculture. The Government has made it known it wants a high output in agriculture. There is consensus among economists that this is the right direction as farmland is not an asset that can migrate. There is, therefore, a likelihood of incentives for food production. In particular, the Government may try to steer corporates to invest in this sector.
In a related field, the Government also wants Malaysia to get on the fast lane towards biotechnology, a new sector of growth for the economy. Hence, there may be more tax breaks or grants for this industry.
Tourism is a sector where growth is already tangible. This sector has been a runaway success so far this year and continues to be a major source of revenue for the country. Some 9.1 million visitors came to Malaysia in the first seven months this year versus 5.3 million in the same period a year ago.
The Government is also expected to unveil its road map for the motor vehicle industry. A clear plan will enable foreign car players to decide if they will pick Malaysia as a regional production base.
At the same time, the Government does not want to cause a “breakdown” in the domestic industry. This is one sector that will be closely watched by consumers.
It will be an interesting budget as the Government lays the groundwork for the 9th Malaysia Plan, which begins next year.
Related Story:Some tax goodies on the cards?