Budget sets new direction for economy


BY PROF MOHAMED ARIFF

TO be sure, the 2005 Budget, tabled recently in the Parliament by Prime Minister Datuk Seri Abdullah Ahmad Badawi, was by no means a “tough” Budget. 

Indeed, there is absolutely no need for one, as the economy is no danger of overheating. Nor was it overly ‘soft’ by any measure, as care has been taken to ensure that it is truly prudent, strapped with fiscal discipline.  

There is no necessity to pump-prime the economy this time around, as the economy is growing nicely on its own, with the private sector moving into the driver’s seat. The revised growth targets of 7% for this year and 6% next year are within striking distance, with the mildly expansionary Budget serving as a tonic. 

The Budget is clearly in sync with the Prime Minister’s “mild” approach, as it does not impose undue additional burden, with the notable exception of increased “sin” taxes. Yet, the Budget is able to reduce fiscal deficits, largely by adjusting the expenditure side of the equation. Total expenditure planned for next year stands at RM117.4bil, a decline of 4.2% from this year’s allocation of RM122.7bil. 

Accordingly, the budget deficit for 2005 is targeted at 3.8% of gross domestic product (GDP), considerably lower than the 4.5% estimated for the current year. The deficit could have been smaller, if subsidies on sensitive items like fuel had been reduced. Unsurprisingly, painful adjustments have been shunned in a caring fashion. 

The slash in total expenditure notwithstanding, the Budget makes a big difference in terms of sectoral allocations. Unquestionably, the Budget has got its priorities right. It is indeed refreshing to note that the largest allocation of RM21.5bil, which represents nearly a quarter of total operating expenditure, is set aside for education, the importance of which cannot be exaggerated. 

It is also noteworthy that RM13.9bil or 49.1% of development expenditure is earmarked for infrastructure, agriculture and industry. As expected, small- and medium-sized enterprises have received special attention.  

Understandably, there has been no change in the income tax structure, except for some increased tax allowances. For it is impossible to reduce the existing tax rates and the budget deficit at the same time, in the absence of new taxes.  

This is not to overlook the merit of lower corporate and individual income tax rates, as high rates tend to erode away the incentive to work and earn, not to mention the need to stay closer to the relatively low rates of competitors. 

Direct tax rates can be reduced without revenue loss, if indirect taxes can fill the void. It is such considerations that have led the Government to toy with the idea of a Goods and Services Tax (GST), a consumption levy, better known generically as Value Added Tax (VAT). 

The new tax, to be implemented on January 1, 2007, would be accompanied by a reduction in income tax rates. Hopefully, GST will enable Malaysia to balance its books by 2007 or 2008. The introduction of GST has long been overdue.  

Singapore, Thailand, Indonesia and the Philippines all have a similar tax, with rates ranging from 5% to 10%. The rates are much higher in New Zealand (12.5 %) and Britain (17.5%).  

The proposal to establish a panel on taxation, to look into such issues as broadening and deepening the tax base, is timely. It is advisable to keep the GST rates low initially until businesses and individuals get used to the new tax. It is instructive to note that Singapore began with a GST of 2%, raising it gradually to 5% over a number of years.  

It is important to ensure that the width and depth of GST would make it both efficient and equitable. For all this will ironically mean that those who have not been paying taxes before will be paying taxes once GST is implemented, reducing the burden of the direct-tax payers.  

Another highlight of the new Budget is the bold move to further liberalise the country’s capital market. The measures include the opening of the capital market wider to more overseas stockbrokers and global money managers.  

This will not only improve fund management expertise and quality of services in the country but also promote Malaysia’s investment instruments internationally. What is more, 100% ownership is allowed in futures broking and venture capital companies, while the Employees’ Provident Fund is permitted to increase funds placed with local fund management companies.  

The accent the Budget places on agriculture would make considerable sense, especially if it is seen as an effort to bring development to the rural folks. But, it is difficult to see how agriculture could become an engine of growth in the absence of a major technological revolution that would make agricultural activities less intensive in land and labour, in which neighbouring countries have comparative advantage.  

However, food processing and manufacturing seems more promising, with raw materials coming from neighbouring countries at competitive prices under the Asean Free Trade Area. 

The 2005 Budget is a watershed Budget, as it marks the transition from the Eighth to the Ninth Malaysia Plan. It addresses several key issues facing the Malaysian economy that has arrived at crossroads.  

It sets new directions with increased emphasis on human capital, research and development, productivity and competitiveness. Evidently, the Malaysian economy has no difficulty in coming to terms with globalisation, as the Budget takes the economy further in that direction, by not only liberalising the capital market but also reducing import duties on 118 items and abolishing import duties on 27 items. 

Needless to say, it is impossible for any Budget to meet everyone’s expectations, given the resource constraints. In this sense, the Budget may not be exciting to all. Be that as it may, the fact remains that the Prime Minister has presented a ‘thinking’ Budget with a breath of fresh air. 

  • Professor Emeritus Dr Mohd Ariff Abd Kareem is the executive director of Malaysian Institute of Economic Research  

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