PETALING JAYA: The government may only have limited options in its pursuit of slashing national expenditure in its upcoming first-ever federal budget, which is likely to be neutral to mildly expansionary.
Despite the ongoing measures to trim public expenditure, Affin Hwang Capital Research expects the government’s total expenditure to still increase in 2019, albeit marginally by 0.3% to RM280bil.
In its Budget 2019 preview report, the research firm said that most of the government’s operating expenditure (opex) was fixed by nature and would continue on an annual basis, citing examples of emoluments, pensions and debt service charges.
“When combined with other ‘rakyat-centric’ expenditures, the total ‘fixed’ expenditure is currently as high as 91.3% of the government’s opex.
“This reflects that the room for further cuts in government expenditure may be limited, making it a challenging situation for the government to maintain the fiscal deficit in a range of between 2.8% and 3% of gross domestic product (GDP) in the near term,” it said, describing Budget 2019 as “a balancing act between fiscal deficit and economic growth”.
Affin Hwang Capital Research’s report came on the heels of Prime Minister Tun Dr Mahathir Mohamad’s statement that Budget 2019 would see a cut in the development budget, as the government cannot afford to reduce operational expenditures.
On Oct 18, The Star quoted Dr Mahathir as saying that a lot of government revenue must be used to pay off the mounting national debt, which has reached more than RM1 trillion.
However, CIMB Research believes that the government has enough room to make spending cuts without hurting growth prospects, if wastages and leakages are curbed.
“We think operating and development expenditures can by trimmed by RM7bil in Budget 2019 due to tighter procurement procedures, zero-based budgeting, reviews or deferment of infrastructure projects, more targeted subsidies and cash transfers, and revisions in supply and services contracts, which could limit the need for aggressive revenue-raising measures and steeper cuts to productive areas of spending,” it said in an earlier note.
Affin Hwang Capital Research pointed out that the government’s belt-tightening measures would likely emphasise on improving spending efficiency, with its finances focused on the reprioritisation of programmes and projects.
On a positive note, the government’s revenue is still projected to outpace the opex to register an operating surplus of RM700mil in 2019. In comparison, the projected operating surplus for 2018 is slightly higher at RM800mil.
However, upon taking into account the development expenditure, Affin Hwang Capital Research estimates the government to record a fiscal deficit of 3.3% of GDP in 2019. As for this year, a 3.6% fiscal deficit is expected, higher than the government’s target of 2.8%.
Meanwhile, CIMB Research said that the country sees a short-term deviation away from its fiscal deficit target.
However, it said that missing the fiscal deficit target does not mean the country’s fiscal consolidation plan is aborted.
Under its base-case scenario, CIMB Research forecasts Malaysia’s budget deficit to widen to 3.7% of GDP in 2018 and 3.5% of GDP in 2019, due to the recognition of large, one-off goods and services tax and income tax refunds totalling RM34bil.
By 2020, the deficit level is expected to moderate to 3%, as per the target of the mid-term review of the 11th Malaysia Plan.
“In our view, the temporary deviation is necessary to repair government finances and should not be mistaken as a sign of profligacy.
“In fact, if the tax refunds were excluded, our estimates suggest that the government would have run a marginal current surplus in 2019 and a budget deficit of 3.2% of GDP in 2018 and 2.5% of GDP in 2019,” stated the research house.
Affin Hwang Capital Research said that a responsible budget should aim at stimulating private consumption and domestic demand as well as incentives for businesses to support corporate profitability.
“In view of the uncertain external environment, Malaysia will have to rely more on internally generated growth.
“As a result, despite no reduction in the corporate tax rate expected in 2019, given the budget constraint, we believe the government will promote private investment by introducing fiscal incentives such as the extension and expansion of the reinvestment allowance, as well as measures to encourage investment in machinery and equipment, especially in automation, and enhancing capacity and productivity of enterprises,” it said.
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