While some reckon that the local economy will find it difficult to absorb new taxes such as new capital gains tax, others opine that the government has to consider various moves to expand its tax base.
Aside from that, economists and captains of industry are recommending the government place some emphasis on affordable housing and that the Home Ownership Campaign (HOC) and automotive sales tax exemptions should be extended. Some also say that the government ought to kickstart mega infrastructure projects.
Budget 2022, to be unveiled on Oct 29, is likely to see the largest development expenditure allocation to date as the country is undergoing a recovery period from the aftermath of the Covid-19 pandemic that hit almost all businesses and forced many to permanently shut down.
Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz has hinted that the Budget 2022 would highlight recovery strategies for various economic sectors.
“Budget 2022 will mirror the government’s determination to revive the country’s economy, hence restoring foreign investor confidence in making Malaysia as the main investment destination,” he told the media this week.
At last week’s Invest Malaysia 2021, Minister in the Prime Minister’s Department (Economy) Datuk Seri Mustapa Mohamed suggested that a “balanced budget is not part of the government’s plan” at the moment.
Notably, he added “this is not an opportune time to discuss higher taxes as we are still in repressive mode.”
Under the 11th Malaysian Plan (2016-2020), the government had envisaged a balanced budget or near-zero fiscal deficit by 2020.
But the Covid-19 pandemic has beset the economic growth momentum and the government had to introduce various stimulus packages to bolster the economy over the last 20 months.
The government has now changed its target to achieve a fiscal deficit of 3% to 3.5% of gross domestic product (GDP) by 2025.
Tengku Zafrul now says that Malaysia’s fiscal deficit could reach between 6.5% and 7% of GDP in 2021, which is higher than the 5.4% initially targeted.
This would be almost the same level during the global financial crisis in 2008-2009 when the country’s fiscal deficit reached 6.7%.
Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid expects the government to maintain its current tax regime but would share its plan on how to improve collection.
“Judging from the government’s deficit target of 3% to 3.5% of GDP by 2025, it could be quite likely that the government will shed more light on how to improve its revenue stream so that the budget gap can be reduced.
“In the Pre-Budget Statement (PBS) that was issued in August, the government talked about improving tax compliance and the administration of the tax system,” he tells StarBizWeek.
Afzanizam reckons that introducing new taxes can be an ideal solution to increase the government’s revenue.
“The state of economic recovery is fragile. The government is mindful of this. It is going to be a delicate balance,” he adds.
It has been speculated that there could be a re-introduction of the goods and services tax (GST) as well as some forms of capital gains, carbon and windfall taxes.
However, RHB Research opines that if there were to be new taxes introduced, it would only happen in 2023 at the earliest..
“Broadening the tax base will be a major consideration for the government, given its need for fiscal consolidation.
“Speculation is rife over the implementation of the capital gains tax on traded shares as well as windfall tax on companies’ excess profits, and the government has been toying with the idea of reintroducing the GST.
“Nevertheless, we believe the implementation of new taxes is untimely as the economic recovery is rather fragile.
“Even if there is an announcement, the implementation of such measures are likely to take place in 2023 or later,” the research house says.
Private sector should lead the way
A crucial part of the Budget 2022 would be the government’s development expenditure, as it needs to strike a balance between the recovery from the Covid-19 pandemic and spurring mid-to-long term economic growth.
“It is about managing the economic recovery. It is a delicate balancing act. Ideally, the private sector should lead the way in terms of growth,” says Afzanizam
“However, given the lingering uncertainties, the private sector will be very guarded in their spending plans.
“The government’s role will be to provide the right catalysts for the economy to grow more sustainably”.
RHB Research expects Budget 2022’s development expenditure to reach another record high in line with the 12th Malaysian Plan.
“We could likely see allocations for development expenditure in Budget 2022 on the upwards of RM70bil compared to RM68.2bil in 2021,” it says.
The research house suggests that the development expenditure for 2022 would go beyond the usual mega transportation projects and address the socio-economic gaps in society.
The research house says that the coming budget would include allocations for mega infrastructure projects such as the East Coast Rail Link (ECRL), Johor Bahru-Singapore Rapid Transit System, and the Pan Borneo Highway.
RHB highlights that the government would also place emphasis on spending for digital and communications infrastructure such as 5G, the Jendela programme, and increasing digital adoption by SMEs.
Jendela, which stands for Jalinan Digital Negara, is a RM21bil national digital infrastructure plan towards greater digital connectivity by boosting the efficiency of the national infrastructure and optimising spectrum usage.
RHB points out that the government would also put a higher allocation to reduce the income gaps between less developed states such as Kedah, Kelantan, Perlis, Sabah, Sarawak and Terengganu.
“This includes construction of schools, hospitals, roads, industrial areas and poverty eradication programmes.
“The government has also stated that some part of the development expenditure will be allocated towards rehabilitation of government agencies such as Lembaga Tabung Haji and the Federal Land Development Authority (Felda),” it says.
KLCI to end the year higher
To support the ambitious plan for Budget 2022, the government has raised its debt ceiling to GDP ratio.
Earlier this month, the government revised the debt ceiling from 60% of GDP to 65%.
Tengku Zafrul said the increase in the statutory debt limit will be in effect until Dec 31, 2022, after which the debt ceiling will return to its original limit of 60%. The debt ceiling was 58% of GDP at end 2020, higher than 48.7% at end-2019.
This came after Bank Negara revised its full-year gross domestic product growth forecast for Malaysia to between 3% and 4% for 2021, from its previous forecast of between 6% and 7.5%.
The recent spike in global crude oil prices could also provide some headroom for the government to manage its finances.
As an oil exporting country, Malaysia is set to benefit from higher crude oil prices which are expected to average at US$70 (RM290) per barrel. This would be 60% higher than the oil price assumption of US$42 (RM174) per barrel that was stated in last year’s budget.
At US$42 (RM174) per barrel, the Ministry of Finance had estimated petroleum-related revenue to come in at RM37.8bil.
MIDF Research vice-president and head of research Imran Yassin Md Yusof has maintained his FBM KLCI forecast for this year at 1,700 points on the anticipation of a rise in commodities prices.
“We believe that Budget 2022 may provide some impetus to some sectors such as construction given that we expect the government to provide support to the economic recovery following the easing of restrictions,” he says.
He points out that foreign investors have made a comeback to buy some local stocks. From Aug 11 to Oct 21, foreign funds recorded a total net inflow of RM3.74bil, he points out.
“We opine that this could be due to the fact that we have reopened our economy and economic activities are expected to increase.
“We believe that measures to support the recovery of the economy may provide some impetus,” he adds.
Imran expects that for Budget 2022, there will be incentives provided to some sectors which have been struggling to recover after being hit by the pandemic. He says this should include industries such as tourism, hospitality and aviation.
“Budget 2022 is expected to promote greater domestic tourism activities, and there could be additional allocation to assist companies to cope with the lingering effect of the pandemic-induced slowdown.
“Like in the previous budget, we also foresee allocations such as grants and financial assistance to support small and medium enterprises (SMEs) as well as micro enterprises,” he says.
Imran also reckons that the technology sector would benefit as the government aspires to become a regional hub in technology.
“This requires spending to improve the technology infrastructure in Malaysia. We expect spending to promote digital adoption and improving internet connectivity will be included in Budget 2022.
“Overall, the development expenditure is expected to create more job opportunities and have positive spillover effects to other businesses and sectors in the economy,” he says.