Budget 2023: Strategising for the future

BUDGET 2023 – which was initially planned to be tabled on Oct 28, has now been brought forward to Oct 7, a full three weeks in advance of its original date. The market is abuzz that the reason for Budget 2023 to be brought forward is to make way for the 15th General Election (GE15).

Whether this is the reason or not, events over the past week certainly show that there is some form of urgency to call for snap polls soon.

Should Parliament be dissolved post tabling of Budget 2023, when will GE15 be held? Going by past conventions over the last three general election, GE15 will likely be held anywhere between 25 and 33 days from the date of dissolution.

The question for most people now is, of course, first of all, when will Parliament be dissolved?

Dissolving Parliament after the supply bill is presented is not unprecedented. In 1999, Budget 2000 was tabled on Oct 29, 1999, but the budget could not be approved as Parliament was dissolved on Nov 11 of the same year.

Budget 2000 was re-tabled on Feb 25, 2000, by the then Finance Minister, Tun Daim Zainuddin. In effect, Budget 2000 only had approximately eight days of debate before Parliament was dissolved.

Parliament to dissolve by Oct 14?

With the Budget now expected to be tabled on Oct 7, the government would likely want the “feel-good-people-friendly” budget to have the right trickling effect on the voting public before calling for the dissolution of Parliament.

As the budget itself is tabled on a Friday, the feel-good factor of the budget can have a lasting impression on voters for the next few days and it may not come as a surprise if the government calls for dissolution as early as Tuesday, Oct 11, and latest by Friday, Oct 14.

The government needs to call for the dissolution early as once the budget is presented, it is subject to a lengthy debate at the policy stage for two weeks, followed by replies by ministers for another one week.

This will bring the voting on Budget 2023 to Nov 2.

Thereafter, the debate at the committee stage will commence and this will take an additional three weeks.

In essence, once the budget is tabled, it needs another 24 parliamentary sitting days for it to go through all the respective stages and to be finally approved on Nov 23.

Hence, the likelihood of Parliament being dissolved latest by Oct 14 is high, leaving the debate on the budget itself hanging mid-way as it was in 1999.

Polling on Nov 12?

With no school holidays or festive season and right before the monsoon season starts, Saturday, Nov 12, is an ideal date for GE15 to be held.

Working backward, this suggests that nomination may be held as early as Oct 29 and approximately 15 days after the dissolution of Parliament, assuming that is done by Oct 14.

Budget 2023 – goodies galore?

As we have seen in the past and during an election year, the tendency for the budget to be people and business-friendly is highly likely and hence one can expect the absence of any new taxes while a hike in tax rates too will likely be pre-mature as the government needs to win the hearts and minds of the people to win the elections.

However, as with anything else in life, it comes with a price.

A further deterioration in public finance for another year would set Malaysia back again from achieving its long-term objective of meeting its fiscal targets, while Federal Government debts will be under further pain due to short-term gains.

Be ready for post-GE15 tax reforms

Malaysia has deferred many initiatives to tackle its tight financial position due to political expediency as any measure seen hurting the man on the street has always been pushed back.

Kicking the can down the road was Malaysia’s way of addressing issues plaguing the nation as decision-makers do not have the political will to do the right thing.

The recent issue related to subsidy is one example as even introducing targeted subsidy was deferred as the government felt that the time is not right, despite the economy projected to grow 6.5% this year, going by consensus estimate.

Hence, any political coalition that wins GE15 will have its hands full in addressing the nation’s number one financial issue – debts and deficits.

This requires not only political will but must be addressed in a holistic long-term manner to ensure it is sustainable.

This includes the re-introduction of the goods and services tax (GST), which is an efficient tax system, but was subjected to abuse due to the complicated and delayed refund mechanism.

The new government might even opt to call it value-added tax (VAT) to remove the stigma associated with GST.

As time is running out, although the much talked about Fiscal Responsibility Act (FRA) is expected to be tabled in the coming parliamentary session, it will now likely be tabled after GE15, assuming that elections are held by mid-November.

It is hoped that the FRA will introduce tax reforms that will enable the government to lift its revenue to gross domestic product (GDP) threshold to more than 15% as clearly anything below the 11% to 12% threshold is not sustainable in the long term.

Every 1% increase in the ratio of tax revenue to GDP translates to RM16bil in the government’s coffers.

Clearly, a 3% to 4% increase will give the government enough room to achieve a much lower budget deficit and even potentially turn into a surplus.

GST or VAT is not a magic formula to lift the government’s revenue but simply a more efficient taxation system, although, on a net basis, it hurts the lower income group more than the middle to higher income households.

From Capital Gains Tax to Inheritance Tax, the government needs to widen the tax net to raise the nation’s coffers.

Remember, we have a fiscal target to achieve, which is to reach a 3.5% fiscal deficit by 2025 and this can only be attained if we can raise other sources of revenues as our fixed operating expenditures are already taking away most of the tax collections in the form of emoluments and retirement charges (close to 50%) while debt service charges alone is another 18-19%.

Tax reforms in the form of individual and corporate tax reliefs too ought to be looked into while expanding the tax net too is a crucial step towards achieving revenue objectives.

Remove subsidies, introduce cash transfers

The other key measures post-GE15 is of course addressing the issue related to subsidies.

Targeted subsidies are not an easy thing to implement due to the nature of the potential loopholes that may be created by those who are not supposed to be receiving the subsidies.

A more palatable approach is the cash transfer mechanism and this can even be done not only for the B40s but to a certain extent to the M40s group too.

The government should not only remove subsidies but also impose taxes on some of these items, especially RON97 and RON95. Even starting with a gradual 50 sen tax on every liter of fuel sold can generate RM10bil in tax collection for the government.

A more appropriate tax is actually at least RM1 per liter, if not higher. After all, fuel prices are much higher within our Asean neighbours, a fact that the government itself recognises.

Next to fuel subsidies, we shall also remove subsidies for utility supplies as well as other necessities as subsidies distort economic reality and have a high tendency to benefit those who don’t need them at all, especially the T20s.

In essence, Budget 2023, in all likelihood, will be an election budget. But a greater challenge awaits the nation post-GE15 if our finances are not fixed to strategise for the future. Let’s take the route towards fiscal responsibility instead of pacifying the voters just as GE15 is around the corner.

Pankaj C Kumar is a long-time investment analyst. The views expressed here are the writer’s own.