WE hope that Budget 2023, to be presented on Oct 7, is fiscally responsible with a reform thrust focusing on development and structural changes instead of being election-centric.
The renewed commitment on fiscal consolidation (deficit reduction) to rebuild fiscal buffer against future shocks is welcome news given that high borrowings and debt are unsustainable.
It has been a tough two years for Malaysians as we have overcome the Covid-19 pandemic.
Amid uneven recovery amongst the economic sectors, the domestic economy has been recovering steadily to register a strong annual growth of 6.9% in the first half (1H) 2022, and will likely to end the full-year at between 6% and 6.5%.
Despite the prevalence of external and domestic risks, we are in a better shape to meet the next set of challenges to provide all Malaysians with economic security in the good times and bad. We need to ensure that we invest what is needed now without adding to fiscal and debt risk.
As the economy is on a recovery path, it is no longer required extraordinary deficit fiscal spending packages as provided during the pandemic.
Hence, we estimate a deficit budget of 4.5% to 5.5% of gross domestic product (GDP) in 2023 compared with an estimated average deficit of 6.2% in 2020-2022.Budget 2023 is being formulated during difficult times for the global economy and Malaysia.
The impacts of rising inflation, cost challenges, prolonged conflict in Ukraine, weakening ringgit as well as higher US interest rate-have triggered economic risk and financial volatility.
The budget should focus on implementing credible economic policies, undertaking structural reforms geared towards sustainable subsidy management to ensure a better investment climate as well as the welfare of individuals and families.
The budget must seek to reprioritise public spending towards expenditures in infrastructure (5G, communication, transportation, and highway), climate change-related projects and environmental, social and governance (ESG), health, skills development, education and supporting the vulnerable segment of the population.
Priority one: Rebuilding fiscal sustainability for future shocks
We have to rebuild adequate fiscal buffers for future counter cyclical fiscal support.
But, enhancing the fiscal anchor requires the need to address revenue volatility and instability (dependence on oil revenue and a narrowed tax base tax revenue at 11.2% of total GDP in 2021); the allocation of spending prioritisation as well as plugging irresponsible and leakages in spending.Putting the country’s fiscal position on a sustainable path will require higher tax revenue.
These include making bold tax reforms, improving compliance, and closing tax loopholes.
> The demands of fiscal responsibility have increased to prevent twin deficits if the bulging operating and development expenditures outpace revenues.
The Fiscal Responsibility Act must be enacted to deliver better fiscal outcomes, enhance governance, accountability and transparency.
The Parliament will debate on the revision of statutory debt ceiling and a full disclosure of contingent liabilities. The Government Procurement Act is equally important.
> The establishment of a Fiscal Council could provide an added layer of objective impartial public oversight that government is indeed planning and spending resources in an accountable manner.
> Implement a multi-pronged reforms to check on ever rising recurrent operating expenditure. This is to ensure that current revenue can cover current expenditure.
The budget has to embark on subsidy rationalisation based on the principle of needs and income.
Switching subsidies from products to households will benefit the needy who would receive cash handouts.
Design a mechanism to make cash handouts conditionality and review the eligibility of cash assistance.
> Announcements should be made on any proposal to reintroduce the goods and services tax (GST) starting with a 4% rate. This will allow a lead time of at least 12 months for businesses in their planning and preparatory work.
Priority two: Protecting Malaysians against higher inflation and rising cost of living
Focus on the immediate challenges of alleviating the impact of inflation and cost of living pressures.
While Malaysia’s Consumer Price Index growth of 4.4% in July was low on international comparisons thanks to the subsidies buffer, this does not diminish the impact on the low and middle-income earners, who are struggling to deal with rising costs.
Soaring operating and production cost pressures have forced businesses to pass the increased cost onto consumers.
Price increases cover basic necessities, food served in restaurants, street food, services delivery, and consumer durables.
We expect the budget to deliver a cost-of-living package targeted at the low and middle-income households:
> One-off cost of living tax offset or continued cash payment for poor households.
> Reduce the personal income tax rate for the low and middle-income wage earners.
> Reduce out-of-pocket expenses for the elderly care through higher tax allowance.
> Extend the tax rebate of RM400 to the individual taxpayers with chargeable income not exceeding RM70,000.
> Increase the personal relief for contribution to Employees Provident Fund to RM6,000 from RM4,000; and to RM6,000 from RM3,000 for life insurance premiums.
> Increase child relief to RM3,000 from RM2,000.
Pillar three: Revitalise private investment and support the small and medium enterprises (SMEs)
Measures are needed to revitalise private investment.
While private investment growth increased by 6.3% year-on-year (y-o-y) in 2Q and 0.4% y-o-y in 1Q22 (up 2.9% in 2021; down 11.9% in 2020), the headwinds hampering its sustained momentum remain.
These include the shortage of workers, increased business costs, weakening ringgit, concerns about slowing global growth, and recession risk in the US economy and Europe.
Budget 2023 can consider the following measures:
> Reinvestment Allowance, which is due to expire in 15 years, to be extended for up to 20 years.
> Reduce the preferential tax rate for SMEs to 15% from 17% and increase the first threshold of the chargeable income of SMEs subject to the preferential tax rate to RM1mil from RM600,000 currently.> Standardise and increase the qualifying expenditure for Accelerated Capital Allowance for both category one (high labour-intensive industries) and category two industries to RM10mil from RM4mil and RM2mil, respectively.
> Increase the digitalisation matching grant to RM20,000 for SMEs to take up greater digitalisation scheme or RM4,000 for five years.
> For SMEs in need of working capital amid rising business costs and borrowing cost, SME loan programmes and enterprise financing schemes can be made more attractive with low interest rates; less collateral required and no repayment penalty as well as giving ample time for business recovery.> Design a debt-based crowdfunding platform for SMEs financing, which matches SMEs with retail investors, who can back SMEs.
> Dedicated productivity solutions grant for SMEs to improve both labour productivity and capital utilisation efficiency. Expenses cover include the purchase of technological equipment, digital marketing tools/solutions, consultancy and technical services.
Pillar four: Facilitate ESG and green investing
The budget’s strategies should enable Malaysian corporates and SMEs to meet the country’s commitments on climate change to achieve the desired net-zero impact through stimulation of the flow of capital/financing for the transformational investment needs. The government is in a position to influence the demand of environmentally friendly products and encouraging businesses to include environmentally friendly activities.
> Effective implementation of Green Government Procurement best practices framework in ministries, government agencies, local authorities, statutory bodies and government-linked companies.
> Loans and grants for green investments in sustainable agriculture, renewable or low-carbon energy sources, energy-efficient buildings, public walkways and cycleways and electric vehicle (EV) infrastructure.
> Subsidies and tax rebates to boost demand for green products and services like EV, solar panels or renewable energy.
> Provide 100% tax exemption for the companies’ budget on ESG and green investment.
> Provide corporate tax credits to encourage investment in renewable energy production and also facilitate the solar industry through incentives for homeowners and companies to install solar panels.
> Extend the Green Technology Financing Scheme until Dec 31, 2024 (from end-2022).
> Consultation fees incurred for the adoption of ESG practices to be given double tax deduction.
> Allow companies to undertake ESG investment to claim investment allowance on the value of investments made in new ESG assets or in “environment protection”of up to 35% of the cost of investment.
Lee Heng Guie is executive director of the Socio Economic Research Centre. The views expressed here are the writer’s own.
