Development ceiling cut by RM40bil

PETALING JAYA: The economy is expected to grow by 4.5% to 5.5% between 2018 and 2020, with the fiscal deficit expected to rise to 3% for the remaining years of the 11th Malaysia Plan (11MP) instead of achieving a balanced budget by the end of this decade.

Development expenditure ceiling would be rationalised from the original allocation of RM260bil to RM220bil for the overall Plan period, 2016-2020, to consolidate the fiscal position.

The government will cut back on its investment expenditure for the remaining period of plan period and see lower growth in its expenditure. Trade balance is expected to double, with exports projected to rise by 7.5% from an earlier estimate of 4.6%.

“The fiscal and governance reforms undertaken beginning mid-2018 will have an impact on economic growth but is anticipated to be short-lived and manageable.

“The short-term growth trade-off is necessary to further strengthen the economy in ensuring more meaningful economic growth for the rakyat,” said the mid-term review of the 11th Malaysia Plan.

With growth for the remaining years of the plan to be lower than earlier estimated, private consumption is seen as a major source of growth and is projected to grow by 7% a year with the share to GDP reaching 56.9% in 2020.

This target is based on the expected favourable labour market conditions and continued growth of income levels, said the report.

Public consumption is expected to grow moderately by 0.3% per annum with the government emphasising on optimising public expenditure without affecting the quality of public service delivery.

The report said the government would further strengthen the private investment to continue as the growth catalyst, with a targeted growth of 5.7% per annum and the contribution to GDP increase from 12.3% in 2010 to 17.8% in 2020.

“The efforts will be continued to ensure quality private investment that creates more high-paying skilled jobs, particularly in the manufacturing and services sectors.

“Thus, measures to encourage investment in machinery and equipment, especially in automation, will be implemented to enhance capacity and productivity of enterprises.

“Furthermore, efforts will be undertaken to attract quality foreign direct investment in high value-added products and services, which utilise frontier technologies and promote technology transfer to local companies,” said the report.

Public investment is projected to contract at 0.8% per annum due to the revision of major infrastructure projects such as the East Coast Rail Link and High Speed Rail. The government, however, remained committed to meet the socioeconomic needs of the rakyat by undertaking high-impact projects, the report said.

With the private sector in focus, the services sector is targeted to sustain growth momentum at an annual average rate of 6.3%, spurred by various initiatives through the Services Sector Blueprint as well as efforts in promoting Digital Free Trade Zone and productivity improvements.

The manufacturing sector is targeted to grow at 4.5% per annum, largely driven by the shift towards high value-added, diverse and complex products.

The construction sector is targeted to moderate at an annual average rate of 4.3% due to slower growth of residential and non-residential subsectors.

Nevertheless, the overall growth momentum of the government civil engineering sub-sector is expected to dampen due to reprioritisation of major infrastructure projects to rationalise the fiscal position of the government, the report said.

The agriculture sector is targeted to register higher growth at 2% per annum, stemming from the increased production of palm oil, rubber and food crops.

In addition, the contribution of the agro-food sub-sector is targeted to increase, with emphasis on productivity improvements and modernisation as well as the introduction of new sources of wealth, such as premium-grade fruits, high-yielding coconut varieties and large-scale grain corn production.

The mining sector is targeted to grow marginally at 0.1% due to the extended commitment to cut production by the Organisation of the Petroleum Exporting Countries (Opec) and non-Opec countries as well as the disruption of natural gas supply in the Sabah-Sarawak Gas Pipeline in 2018.

What the government intends to do is to increase the share of compensation of employees (CE) to GDP in order to reduce income disparity between capital owners and employees. Gross operating surplus, which is made up of the income of capital owners and mixed income, is expected to drop to 58.2% of GDP in 2020.

Meanwhile, CE is targeted to achieve at least 38% share of GDP, supported by continuous growth in salary of employees. Nevertheless, this CE target has yet to reach that of high-income countries, such as Australia at 47.3%, South Korea at 44.4% and Singapore at 42.4%, the report said.

The report said the federal government would, over the next two years, undertake measures to strengthen its medium-term fiscal position, among others by strengthening the management of public debt and accelerating institutional reforms.

“These measures will be balanced with the need to sustain growth and deliver quality public services in ensuring the wellbeing of the rakyat.

“However, fiscal targets will be flexible during the transition period of the new administration to shore up growth.

“The economy may react to these immediate fiscal reforms in the short term but these reforms are necessary in order to lay down a firmer foundation for a more sustainable and inclusive growth,” it said.

The fiscal deficit was expected to temporarily be beyond the target set during the last Budget at 3% in 2020. The higher deficit was just a transition period before reverting to the fiscal consolidation path.

“The consolidation will be achieved through a multi-pronged approach towards strengthening fiscal management,” it said.

The report added that revenue would continue to be diversified by increasing the contribution of indirect taxes and non-tax revenue such as licenses, permits, fees and rentals.

“The improved version of the sales and service tax has replaced the goods and services tax in September 2018.

“As e-commerce and activities related to sharing economy are on the rise, the government will explore imposing tax on these online transactions.

“More initiatives to improve tax compliance will also be undertaken to ensure collection is maximised from both direct and indirect taxes,” it said.