A tough balancing act

Lee expects a cut in development expenditure in the upcoming Budget 2023.

PETALING JAYA: With a national debt of almost RM1.2 trillion and a towering subsidy bill, Budget 2023 is a tough balancing act for Prime Minister Datuk Seri Anwar Ibrahim and his Cabinet.

Unlike the pre-election Budget 2023, which was heavy with election goodies, economists said the revised budget must incorporate some “adjustments” for a more sustainable fiscal spending.

This includes tax reforms to address the country’s narrow income base.

Socio-Economic Research Centre executive director Lee Heng Guie expects a cut in development expenditure in the upcoming Budget 2023.

Malaysia University of Science and Technology (MUST) economics professor Geoffrey Williams, on the other hand, urged all ministries to achieve efficiency savings of around 5% through rebalancing spending, prioritising policies on growth, incomes, jobs and investment.

Speaking with StarBiz, Lee said the government has a limited spending capacity.

“This compels the continued rationalisation of expenditure, including targeted subsidy reform and the enhancement of revenue net through the reintroduction of the goods and services tax starting Jan 1, 2024.

“Budget 2023 and fiscal strategy must take a balanced approach to reinforce the economic recovery, grow the economy sustainably through strengthening economic and financial resilience as well as undertake radical structural reforms.

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

“It must be responsible to support current and future generations by reducing persistent deficits and managing debt prudently,” he said.

Lee expects the revised Budget 2023 to have a smaller fiscal deficit at 4.5% to 5% of gross domestic product (GDP) as compared to 5.8% of GDP in the pre-election budget.

Budget 2023 is scheduled to be tabled on Feb 24.

Commenting on the budget’s spending programmes, Lee said the focus must be on mitigating inflation and rising cost of living pressures, facilitating business investment and small and medium enterprises (SMEs) as well as investing in critical public services.

He also suggested the new administration to introduce a cut in personal income tax rate for the RM50,000 to RM100,000 income bracket.

In addition, a 2% cut is suggested in SME preferential tax rate to 15% to ease financial burden.

Economist Aimi Zulhazmi Abdul Rashid opined that the new Budget 2023 may not be as big as the pre-election budget due to measures to reduce the sovereign debt.

“The government needs to balance the fiscal spending without committing to increased debt.

“The ministries that are able to build the economy on the right structure are those that must be allocated most budgets, long-term growth must be sought rather than only short-term results.

“The government should also look at measures to increase the revenue through a better tax collection measures, notwithstanding the need to overcome the grey economy that has escaped from paying taxes,” he said.

Despite the expectation of a smaller budget, the associate professor at Universiti Kuala Lumpur’s Business School said there continues to be a need for mega infrastructure projects in Malaysia.

This is necessary, he said, considering that mega projects act as catalysts for the economy.

The compounded effect from such projects would help to spur the domestic economy that is expected to be the engine of growth this year, amid a slowdown in export performance due to the expected global recession.

“Nonetheless these mega projects should not be financed solely by government funds but must come from foreign and local investors.

“This will help to reduce the government’s debt that is rising attributable to the policy of assisting the people in subsidies and cash handouts,” according to Aimi Zulhazmi.

Meanwhile, MUST’s Williams said the allocation for Budget 2023 should be increased by 4% – in line with core inflation – to RM345bil.

If the government’s revenue is achieved at RM285bil as targeted last year, this will reduce the government’s fiscal deficit to RM60bil in 2023.

“Then, within the new budget, efficiencies and adjustments can be made to meet core spending more economically and provide scope for extra spending if necessary.

“In particular, procurement irregularities must be addressed to find savings and cut leakages. There will also be savings from subsidy reforms, which can be reallocated to core activities, especially on welfare reforms.

“We do not need austerity, just fiscal prudence,” he said, adding that Malaysia requires a more efficient tax system with lower overall taxes.

The economist further highlighted that the government must push for supply-side reforms under Budget 2023 to improve competition and investment.

Williams also suggested that the Health Ministry’s budget be maintained, without any increase in allocation, until the severe structural problems in procurement, contracts and above all governance and working conditions have been addressed.

“Patient care must be the priority and this requires full reform of the public and private healthcare system,” he said

On mega infrastructure projects, Williams pointed out that any project should be based on economic needs and the likely economic impact on jobs, incomes and investment.

“Projects that are underway can be reviewed to be more efficient such as flood mitigation while others can be renegotiated and some can be rescheduled.

“Opportunities for more private investment must be opened up. If the mega projects are indeed economically viable, then private companies would be willing to invest,” he added.