The litmus test for Budget 2023

BUDGET 2023 could possibly be the toughest bill faced by the current government, which has just turned a year old.

With budget day brought forward to Oct 7, the Finance Ministry has three weeks less to decide on how the monies will be spent.

But, the biggest challenge would be in balancing the already-stretched fiscal position and the “goodies” ahead of the 15th General Election (GE15) that could be just around the corner.

Against a federal government debt of RM1.05 trillion and debt-service charges of RM43.1bil in 2022, the government led by Prime Minister Datuk Seri Ismail Sabri Yaakob appear not to have the luxury to be generous in Budget 2023.

At the same time, with the budget being Ismail’s indirect manifesto for GE15, the premier needs Budget 2023 to be as attractive as possible to the voters.

As such, introduction of new taxes to boost revenue collection or a sharp reduction in subsidies to cut expenses could be detrimental to Ismail and his coalition in GE15.

Socio-Economic Research Centre (SERC) executive director Lee Heng Guie says the imposition of new taxes or increasing existing tax rates would dampen business and consumer sentiments.

“However, we do not discount the possibility of widening the scope of goods and services covered by the sales and service tax (under Budget 2023),” he tells StarBizWeek.

Meanwhile, some ministers have openly asked for higher allocations for their ministries. These include Health Minister Khairy Jamaluddin and Tourism, Arts and Culture Minister Datuk Seri Nancy Shukri.

Former Sabah Deputy Chief Minister and incumbent Tawau MP, Datuk Christina Liew, has also demanded a bigger allocation for Sabah under Budget 2023 to lift the state out of poverty.

Khairy, who said “some ministries are more important than other ministries”, asked for public health expenditure to be increased to 5% of the gross domestic product (GDP) to ensure Malaysia has a world-standard public health system in the future.

For an upper middle-income country, the benchmark for public health expenditure is between 4% and 5% of the GDP. But currently, Malaysia has only allocated 2.59% of its GDP for public health expenditure.

The request for a higher allocation is understandable, considering that the federal government may collect more revenue in 2023.

In a report back in June, MIDF Research forecast Brent crude oil price to average US$120.30 (RM539.43) per barrel for 2023, as compared to US$112.49 (RM504.41) per barrel for 2022.

Budget 2022 was based on a crude oil price forecast of US$67 (RM300.43).

It is noteworthy that every US$1 (RM4.48) per barrel rise in oil price would give an increase of RM300mil in oil revenue.

Economist Geoffrey Williams, however, thinks that the government should not allocate more under Budget 2023.

Instead, the economics professor at the Malaysia University of Science and Technology (MUST) says the government should take advantage of an improving economy this year to reduce its expenditure and build a buffer, in case economic conditions worsen in 2023.

“We should aim for a lower overall budget, efficiency gains alone would reduce the budget to RM315.5bil from RM332.1bil (Budget 2022) and savings from lower Covid-19 costs, subsidy rationalisation and reform of welfare could either cut the budget more.

“The money can be returned to the rakyat or can allow savings for extra spending in priority areas,” he says.

Williams does not believe that the country’s fiscal position is stretched.

He says the debt and deficit targets are manageable, adding that current elevated levels are cyclical in nature and will adjust accordingly over time.

“The key issue is not to continue with the posturing that higher spending means better government,” he says.

Meanwhile, SERC’s Lee says Malaysia no longer requires a massive deficit fiscal spending as during the Covid-19 pandemic years in 2020-2022.

“While the government is expected to table a deficit budget estimated at 5.5% of GDP for 2023 with spending priorities in critical sectors, it must not be as large as the last three years’ deficit of averaging 6.2% of GDP in 2020-2022.

“It is time to resume a set of fiscal rules to carefully manage the deficit, debt and costs while planning for the future,” he says.

Better management needed

In crafting Budget 2023, the Ismail Sabri administration needs to ensure that the country gets the most value out of every ringgit spent.

Fiscal consolidation does not always mean slashing expenses. It is also about spending efficiently.

Institute for Democracy and Economic Affairs CEO Tricia Yeoh points out the recent examples of gross mismanagement of procured projects, including the RM9bil littoral combat ship scandal and the conviction of Datin Seri Rosmah Mansor related to a solar hybrid project for 369 rural schools in Sarawak.

Yeoh says both cases have to do with massive procurement leakages.

She urges the government to immediately enact the Government Procurement Act (GPA), which she says should include harsher punitive measures against public servants and politicians engaging in bribery and corrupt practices.

“We need to stem the prevalence of operational mismanagement, uncontrolled project variations, the lack of timeliness of payment schedules and general lack of enforced oversight in our procurement system.

“The current direct negotiation rules, as our policy paper suggests, have some weaknesses.

“The GPA, especially if it is modelled after the international procurement legislation such as the UNCITRAL Model Law on Public Procurement, will provide better accountability mechanisms for direct negotiation and public procurement in general,” according to Yeoh.

Echoing a similar stance, SERC’s Lee says the enactment of GPA is necessary.

Lee acknowledges that the government’s procurement practices currently are governed by circulars and directives from the Finance Ministry, and have to comply with rules laid out by the Federal Constitution, Financial Procedures Act 1957 and the Government Contract Act.

“But, these circulars and directives lack clear rules for any breaches to procurement procedures that carry legal implications and obligations for ensuring accountability.

“Hence, the legislation of GPA must have stricter enforcement mechanisms to regulate public procurement projects through concession, direct negotiations, closed tender or public-private partnership methods, outline clearly the type of violations in procurement process and penalties for committing them,” he says.

Meanwhile, MUST’s Williams highlights the need to tighten standards for anonymous competitive tenders and reduce direct negotiations for contracts.

For example, a targeted subsidies scheme which focuses on specific products or brands from specific companies sold through specific outlets using specific e-wallets introduces multiple opportunities for corruption and leakages by design.

“Allowing consumers to choose products themselves through direct cash transfers removes the middlemen and cuts procurement costs,” he says.

He also points out that the design of many policies or projects such as PenjanaKerjaya or even MySejahtera lead to financial losses or concerns about data security, governance and ownership.

“An independent fiscal institution could be established to vet policy design and create guidelines for best practice to stop possible procurement leakages from the outset,” he adds.

People’s interest: Fishermen putting up the Jalur Gemilang on their boats in Sungai Gelugor, Penang, in conjunction with the Merdeka celebration. Regardless of the high subsidy burden, the government needs to be balanced in calibrating its expenditure and in providing sufficient assistance to vulnerable groups and households in the immediate to long term. — Bernama

Generating greater revenue

With the reopening of the economy, the government has seen a normalisation in its revenue generation.

In the second quarter of 2022, the federal government revenue increased by 8.2% to RM61.6bil, primarily attributed to higher tax revenue collection.

Direct tax improved by 10.6% to RM32.5bil, mainly thanks to higher crude oil prices that led to an increase in petroleum income tax.

Similarly, indirect tax surged by 33.1% to RM14.1bil, due to higher collection from service tax, excise duties and windfall profit levy on crude palm oil.

However, as the economy is expected to hit a soft patch in the second half of 2022 and followed by an even softer growth next year, there are concerns on whether the federal government can generate enough cash to reduce its deficit and at the same time, pay for a large expansionary budget.

SERC’s Lee does not expect the Finance Ministry to introduce new taxes under Budget 2023, given the uneven state of recovery for some economic sectors and also the attendant risk of a sharp global slowdown in 2023.

Regardless, he believes there are many options for the government to raise its revenue.

These include increasing tax rates, reducing tax breaks, expanding the tax revenue base and also the levying of new taxes.

Lee also does not discount the possibility of the government widening the scope of goods and services covered by the sales and service tax (SST).

Meanwhile, IDEAS’ Yeoh says it is possible for the government to consider increasing the SST rate for now.

In the long run, however, the government must consider other measures to expand the tax base, including the possibility of reinstating the goods and services tax (GST).

“The government can also be creative in its application of the GST, if it is to return, by ensuring that the burden of the tax does not fall disproportionately on the lower or middle class.

“One way of doing it is to introduce different GST rates for different types of purchases, including a higher ‘luxury’ rate for purchases associated with higher income households.

“IDEAS has also previously suggested a possible progressive capital gains tax on profits made from the disposal of assets, including company shares.

“To counter some of the effects from additional taxation, we have also previously proposed a Living Wage Tax Credit to be introduced simultaneously alongside these measures, as well as an Employee Equity Scheme,” according to her.

MUST’s Williams concurs that SST should be reformed, but added that this should cover all aspects of taxation, including income tax and corporate tax as well as other levies and duties.

Williams also says that the country can lower its taxes, yet improve tax revenues.

This could be achieved via effective supply-side and tax reforms, as experienced in other countries.

“The reforms include higher and easier compliance and removal of loopholes and tax avoidance and tax evasion,” he says.

Spend where necessary

While Budget 2023 will likely be an “election budget” with goodies for voters, it cannot avoid cutting back on subsidies.

In fact, the government has already started to rationalise some subsidies such as on poultry products and cooking oil.

The rationalisation is undertaken as Malaysia’s subsidy bill is set to hit a historic amount of RM80bil this year.

SERC has reported earlier that in 2022, Malaysia’s bloated subsidies are estimated to make up 31.2% of the total revenue and 4.6% of GDP.

The share of subsidies to total revenue has been increasing from an average 14.3% per annum in 2012 to 2019 to 16.6% per annum in 2020 to 2022, according to the think-tank.

Regardless of the high subsidy burden, IDEAS’ Yeoh says the government needs to be balanced in calibrating its expenditure and in providing sufficient assistance to vulnerable groups and households in the immediate to long term.

Amid the rationalisation of subsidies on certain goods, she adds that subsidies on other essential products need to be implemented in a targeted manner in the short term, as long as planning for a more comprehensive and monitored social protection program is underway.

“As Malaysia is on the path to become an ageing society in the next decade or so, this is worrying as we have not reached the developed country status, that is backed with high income and a formalised social protection system.

“Looking at our path, the government really needs to look into how a permanent social protection system can be introduced and financed, to protect our ageing society that is growing within the next decade or so,” she says.

MUST’s Williams suggests the introduction of a universal tax credit scheme to raise the incomes of low-paid Malaysians to a universal basic income.

This can replace the hundreds of wasteful schemes and provide a much more efficient social protection system for everyone.

“The current Bantuan Keluarga Malaysia system can be enhanced to do this, along with the Inland Revenue Board to provide regular monthly payments rather than irregular lump-sum amounts as we have now.

“The data on incomes and eligibility are all in place already. It can be done quickly in Budget 2023,” according to him.

On top of subsidy programmes, SERC’s Lee says Budget 2023 must continue the efforts to invest in critical public services.

These include digital infrastructure, healthcare, education as well as environmental, social and governance (ESG) and climate change.

“The Finance Ministry must commit towards the Medium-Term Fiscal Framework, which is a guide in formulating strategies towards medium-term fiscal consolidation for a period of three to five years, in line with the 12th Malaysia Plan,” he says.