When good is not good enough

Strong pillars: According to the re-tabled Budget 2023, growth will be underpinned by the services and construction sectors, which are projected to grow by 5.3% and 6.1% against 5% and 4.7% predicted in the original budget, respectively.

BY now, most readers would have read everything that is to be said about the retabled Budget 2023 that was presented last Friday, Feb 24, 2023.

The budget has several tweaks here and there to accommodate changes that the unity government sees under the leadership of Prime Minister Datuk Seri Anwar Ibrahim.

This week’s article will scrutinise some of the critical elements of the budget and provide readers with an in-depth assessment of the numbers and thoughts behind the retabled budget.

First, of course, is the headline 4.5% gross domestic product (GDP) growth for 2023, which is the middle path of the last year’s estimate of between 4% and 5%.

The 4.5% headline GDP growth is not only above the World Bank and the International Monetary Fund’s estimate of 4% and 4.4%, respectively, but also ahead of the current consensus median estimate of 4.2% growth.

According to the retabled Budget 2023, growth will be underpinned by the services and construction sectors, which are projected to grow by 5.3% and 6.1% against 5% and 4.7% predicted in the original budget, respectively.

On the demand side, the government estimates economic activity will be driven by robust investment, which is expected to expand by 6%, based on the retabled budget, against the 3.3% forecast before.

This must be driven by not only public investment, which is expected to register a growth of 7% against the 2.1% estimated before but also private investment, which is expected to grow by 5.8% compared with the 3.7% forecast in the original budget.

These growth numbers are indeed bullish, considering the investment climate in Malaysia is at best lukewarm.

Yes, we have been seeing a surge in both application and net foreign direct investments (FDIs), which rose to a new record high of RM73.3bil last year. The forecast growth in private investment is still rather optimistic.

In addition, if one were to look at the budget allocation, the government raised the net development expenditure (DE) by approximately only RM2bil from the original figure of RM94.3bil.

In addition, similar to the original budget, the gross DE figure of RM97bil includes principal payments due for 1MDB debt amounting to US$3bil (RM13.43bil) as well as other private-public partnership/public finance incentives amounting to approximately RM8.3bil.

Hence, on a net basis, the actual DE for 2023 is at RM74.5bil, which is just RM4.3bil or 6.1% above the net DE of RM70.2bil in 2022.

A huge budget

Hitting a new record, year after year, is not extraordinary when it comes to the tabling of the annual budget.

Hence, despite being tabled less than five months from the original budget, the revised Budget 2023 saw a record-high total of RM386.1bil, which was higher than the RM372.3bil presented in October last year.

The key difference is not the additional RM2bil in DE as explained earlier, but also higher operating expenditure (OE), led by a quantum leap in the amount allocated for subsidies and social assistance.

Based on the Economic and Fiscal Outlook and Federal Government Revenue Estimates 2023 report, the allocation for subsidy and social assistance has now been raised by 39.5%, or RM16.6bil, to RM58.6bil from the original budget allocation of RM42bil.

The higher allocation must surely be due to the increase in social assistance programmes, as the government is not only committed to absolutely eradicating poverty but also maintaining the current subsidy scheme, until such time that it is able to introduce a holistic approach towards introducing a targeted subsidy scheme, especially with respect to fuel subsidy.

Surely, the government must address the current imbalance with respect to who is enjoying the fuel subsidy, as some RM17bil is purely wasted on consumers who can very well afford them.

In addition, with the pending six state elections, the higher allocation in the retabled budget does not come as a surprise as the government is perhaps buying some time before introducing targeted subsidies.

Higher PETRONAS dividend

On the revenue side, the total revenue projection under the retabled budget is at RM291.5bil, up by RM18.9bil or 6.9% from the original target of RM272.6bil.

The increase is mainly from corporate income tax, which is now expected to increase by RM7.5bil to RM96.4bil, as a result of higher compliance as well as payment for prosperity tax for the 2022 year of assessment.

Petroliam Nasional Bhd (PETRONAS) too is expected to bump up its dividend by another RM5bil to RM40bil this year, while another RM3.7bil will be from higher individual income tax collection and petroleum income tax.

The surge in nominal GDP

As we are aware, Malaysia’s GDP expanded by 8.7% in real terms in 2022. However, the growth in nominal terms was phenomenal, rising by 15.7% year-on-year to RM1,788.2bil.

With the higher nominal GDP, the government was able to record a lower statutory debt and total federal government debt-to-GDP ratio of 58.2% and 60.4% against the previous estimate in the original budget at 60.2% and 63.0%, a two and 2.6 percentage points improvement, respectively.

Of course, this is before taking into consideration government guarantees, the remaining 1MDB debt that is due as well as other liabilities. Taken together, these three items add approximately RM366.3bil to the nation’s debt to RM1,445.9bil, translating to 80.9% of nominal GDP.

The higher total operating expenditure against the previously tabled budget also means that the government’s debt service charge, which was previously estimated at 16.9%, is now lower by one percentage point to 15.9%. This remains above the 15% self-imposed threshold that Malaysia adheres to.

What’s next?

Given the dynamics of revenue, expenditure and growth in nominal GDP, Malaysia is on the right track in fiscal discipline with a lower budget deficit of 5% in 2023 than the 5.6% achieved last year. The government is also committed to reducing the deficit further to 4.1% in 2024 and reaching 3.2% by 2025.

In addition, the government is surely looking at tax reforms with the introduction of luxury goods tax (LGT), excise duties on vape and e-cigarettes as well as capital gains tax (CGT) for the disposal of shares in unlisted companies, which will be introduced next year.

Although details are still sketchy at this stage, the introduction of these taxes is seen as a step in the right direction to boost the government’s coffers.

Interestingly, with this, it is unlikely that goods and services tax (GST) 2.0 is anywhere near being reintroduced, although it is a more transparent and efficient tax structure.

With the government setting the stage for the introduction of a LGT, the definition of what is “luxury” must be clear as the critical threshold is not only on high-valued items like handbags and watches but also luxury brand names.

For a start, the government should introduce a low tax rate for LGT so as not to burden domestic consumers while for inbound tourists, a refund mechanism must be in place to allow retailers to continue to enjoy brisk sales from tourists, which is rather similar to any other country that has a GST or value-added tax (VAT) system in place.

CGT for the sale of unlisted shares too will need to be fine-tuned to avoid any misinterpretation of the disposal of companies, not just in the form of shares but also to incorporate the disposal of a business.

The rules governing subsidiary companies of a listed company too must be spelled out and whether an internal restructuring of a listed company too will be subjected to CGT.

As for the imposition of excise duties on vape and e-cigarettes, while it is also welcomed, must be uniformly applied to ensure both nicotine-based and non-nicotine-based are subjected to the excise duties.

While there may be a different excise duty rate for nicotine and non-nicotine-based e-cigarettes, the rate to be applied must also be reasonable to ensure that it is not detrimental to the industry as a whole.

Finally, with the recognising of the vaping industry as part of the legitimate business, it is also time for the government to introduce legislation and regulation with respect to vape and e-cigarettes under the Control of Tobacco Products and Smoking Bill to ensure enforcement can be carried out.

At the same time, it is crucial for the government to carefully review the generation end game as it may impact the economy negatively, resulting in job losses, business closures and foreign investments.

Higher tax revenue to GDP

Overall, while the new Budget 2023 seems to be on the right track as far as budgetary measures are concerned, the introduction of potential new taxes and target subsidies will allow the government to boost revenue and reduce debts and towards a healthier deficit ratio.

With tax revenue to GDP now estimated at 11.6% this year (2021: 11.2%, 2022: 11.7%), more needs to be done to raise our taxes and closer to at least 15%, which according to the World Bank, ensures economic growth and eradication of poverty in the longer term.

In fact, Malaysia’s tax revenue-to-GDP ratio is also well below the Asia-Pacific average. Taking the 2019 data, at a time when Malaysia’s ratio was at 11.9%, the Asia-Pacific average was at 19.1%. The difference of about seven percentage points is equivalent to RM135bil based on this year’s nominal GDP.

Given time, Malaysia should aspire to reach at least this target to ensure we will be able to run a surplus budget or at least a balanced budget.

Hence, while the new Budget 2023 is seen as reasonably good, but not good enough to address Malaysia’s low tax collection and debt overhang.

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