Fiscal deficit projected at 3.7% this year and 3.4% in 2019

AGAINST market expectations of an austerity budget and despite a trillion-ringgit debt, Budget 2019 is one that is expansionary, with the fiscal deficit projected at 3.7% in 2018 and 3.4% in 2019.

The gross development expenditure in 2019 is to be maintained at RM54.7bil, almost similar to the RM54.9bil the government spent in 2018.

This revision is to accommodate the new policy direction while addressing short-term adjustments. The government will resume its fiscal consolidation plan in 2019 and onwards.

Under Section 1 of the new government’s inaugaural publication of the Fiscal Outlook and Government Revenue Estimates, the government’s fiscal stance will continue to be expansionary, where the amount spent on the economy is higher than the revenue collected.

This stance is appropriate considering the nation’s high level of domestic savings.

Furthermore, domestic investors will benefit from the government’s debt issuance by earning a stable return.

For 2019, the government has decided to settle all the outstanding tax refunds estimated at RM37bil, of which RM18bil is dues from income taxes while RM19bil is from the goods and services tax (GST). To fulfil tax refund obligations, the government is expected to receive a one-off special dividend from Petronas amounting to RM30bil, with the balance to be set-off by expenditure savings.

Total revenue excluding Petronas’ special dividend is expected to decline by RM4.6bil to RM231.8bil mainly due to lower interest and investment income, despite a higher tax collection.

In contrast, operating expenditure (OE) excluding tax refunds is estimated to decrease RM12.6bil to RM222.9bil.

The government has also undertaken a reclassification exercise from OE to development expenditure (DE) for more accurate reporting. DE is forecast to remain around RM55bil. Taking into account all the measures, the net savings is estimated at RM8.2bil. With RM7bil to partially finance the refunds, the fiscal deficit is expected to reduce to RM52.1bil or 3.4% of GDP.

Meanwhile, the Medium Term Fiscal Framework (MTFF) is a fiscal guidance and outlines the three-year fiscal projections along with required key policy initiatives. It sets out a three-year optimal spending level taking into account the revenue generating capacity and the government’s commitments.

The medium-term period of 2019 to 2021 is the transition period for fiscal adjustments.

Non-petroleum revenue is expected to remain the largest revenue source representing 76% of total revenue while petroleum-related revenue contributes the remaining 24%. Total revenue under the MTTF period is prudently estimated at RM767.9bil.

The total indicative ceiling for OE will stand at RM754.9bil for 2019 to 2021 while the allocation for DE is projected at RM164.7bil.