Analysts say fulfilling election pledges may raise fiscal deficit


THE unprecedented electoral victory of the new “government-of-the-day” has put Malaysia in uncharted territory.

With the Pakatan Harapan administration now in power, concerns are now rising on whether the new ruling coalition will be able to continue the momentum set by its predecessor and deliver its election promises without hurting federal coffers.

In the next 100 days after taking office, Pakatan has pledged to fulfil 10 promises, which have been labelled as “populist” by critics.

Among the 10 promises made by Pakatan are the removal of the goods and services tax (GST), the introduction of targeted fuel subsidies, the abolition of Felda settlers’ loans, and a mandatory increase in the minimum wage.

The proposed measures are intended to reduce the cost of living and increase the purchasing power of Malaysians.

Wait-and-see: Ong says the cost to implement the promises within the first 100 days is unknown.
Wait-and-see: Ong says the cost to implement the promises within the first 100 days is unknown. 

Now, how will Pakatan’s electoral promises affect the country’s financials? Can the country’s current fiscal position support the implementation of Pakatan’s manifesto?

Speaking with StarBizWeek, Bangi MP Ong Kian Ming says the exact cost to implement the 10 promises within the first 100 days is “unknown at the moment”.

“The new Cabinet, together with the finance minister and the ministry officials, will need to look in detail at the cost of implementing the 10 immediate promises. We have to wait for the new Cabinet to be formed,” says Ong, who was part of the Pakatan manifesto drafting committee.

Analysts have raised concerns on the possible impact from the government’s manifesto, particularly on the national fiscal reform initiatives.

In a recent note, Citi Research says that Pakatan’s election pledges may raise the country’s fiscal deficit.

The research firm foresees difficulties in covering revenue shortfalls from the GST’s abolition by replacing the tax regime with the sales and services tax (SST).

“Revenue contribution from the GST is around 3% of gross domestic product (GDP) and for the SST it is around 1.5%-1.6% of GDP. The deficit could widen by 1.4% of GDP on a full-year basis, or around 0.4% of GDP if implemented in mid-August (100 days after the general election).

“There could be a possible knock-on impact on sovereign ratings in the context of Malaysia’s relatively high debt for an A- rated economy. Still, the extent of the implementation remains to be seen,” says Citi Research.

Similarly, HSBC in its report, says that Pakatan’s policies could create a higher fiscal deficit in the short-term, if implemented.

In 2017, the Government collected about RM44bil in GST. By replacing the current system with the SST, the Government will likely record a lower indirect tax revenue.

Acknowledging this in its 2018 alternative budget, Pakatan, however, says that the removal of the GST would lead to a boom in consumer consumption and business activities.

As a result, the coalition is projecting stronger Federal Government revenue, driven by higher proceeds from corporate income tax as well as import and excise duties. Together with the reduction in fiscal wastage and corruption, these are expected to cover the revenue shortage from the abolition of the GST.

As for Pakatan’s targeted fuel subsidy, Fitch Ratings says it could offset some potential budgetary gains from rising oil and commodity prices.

To note, fuel subsidies accounted for around 1.7% of GDP in 2014 before they were rationalised, declining to 0.3% in 2015.

The quest to realise a comprehensive fiscal discipline lies not only in enlarging the revenue base, but also in managing the expenditures. This is crucial to continue reducing the national fiscal deficit, which had fallen substantially from 6.7% in 2009 to 3% last year.

In the period of 2014 to 2016, the Federal Government’s overall expenditure has gradually reduced from RM258.1bil to RM250.8bil, in line with the drop in revenue as the crude oil price tumbled. However, the expenditure rose again last year to RM260.7bil, as per preliminary figures from the Economic Planning Unit.

If the new Government revises the current fiscal-year budget in line with its previously-announced alternative budget, significantly lower overall expenditure can be expected.

In the 2018 Pakatan alternative budget, the coalition projected a lower expenditure of RM258.52bil, with an operating expenditure of 77% and about 23% in development expenditure.

In comparison, in Budget 2018 tabled by the previous Barisan Nasional government, the Federal Government’s expenditure was estimated at RM282.25bil, of which 83% represents operating expenditure with the balance allocated for development expenditure.

Pakatan’s alternative budget expects a 2.04% fiscal deficit, as compared with the 2.8% deficit target in Budget 2018.

Cash flow-aside, the new ruling Government will also have to keep the Federal Government debt in control.

In nominal terms, Malaysia’s total Federal Government debt had surged from RM456.1bil in 2011 to RM685.1bil as at end-June 2017.

However, relative to the GDP, the debt amount has declined significantly in the past three years, from 54.5% at end-2015 to 50.9% as at end-June 2017.

It is worth noting that the debt-to-GDP ratio is currently below the government’s self-imposed threshold of 55%.

In its earlier report this year, credit rating agency Moody’s estimated the country’s debt burden to decline further to 48.7% of GDP in 2018, down from a projected 49.6% for full-year 2017.

Despite the declining debt-to-GDP ratio, the Federal Government’s debt has elevated.

Moody’s sovereign risk group assistant vice-president Anushka Shah has described the high debt amount as a “credit constraint” for the country, going forward.

“The Government’s debt burden is relatively higher than other A-rated sovereign states and this will likely remain a challenge for the country’s credit profile,” she says.

The new Government must now focus on reducing the debt, both in relative and nominal terms.

In this aspect, the coalition’s manifesto has indicated its aim to bring down the debt levels.

“Among Pakatan’s first steps will be to review, list and publish all the Barisan government’s debts so that the public can access the information,” it says in the pre-election manifesto.

Pakatan also plans to reduce the country’s contingent liabilities, moving forward.

Contingent liability refers to off-budget debt and explicit or implicit guarantees by the Government.

“Mega projects such as the mass rapid transit, light rail transit (LRT) extension, LRT line 3, East Coast Rail Link, the KL-Singapore high-speed rail project, and the Pan Borneo Highway, are a few examples of hidden expenses using the name of special-purpose vehicles.

“When the companies borrow money, their loans are guaranteed by the Government. As a result, the contingent liabilities almost tripled, from RM84bil in 2009 to more than RM200bil at the beginning of 2018.

“Pakatan will improve the transparency of Malaysia’s financial administration and we will implement a more responsible budget,” it says.

While it is too early to determine the new Government’s effectiveness in reducing national debt levels, Prime Minister Tun Dr Mahathir Mohamad’s earlier statement to revise and renegotiate several mega-projects in Malaysia may point towards a lower contingent liability level, moving forward.

Economy , PH