PETALING JAYA: Corporate Malaysia and the public are eager to uncover Budget 2025 specifically pertaining to what the government will unveil to shore up its revenue.
Putrajaya would need to be mindful of the latest inflation and consumer price index figures if it intends to tweak taxes to avoid financially distressing the people.
Yet, it is difficult to ignore the positive sentiment among netizens, on popular social media platform X, clamouring for an increase in wages since the country appeared to be doing well economically.
Requests for salary hikes only highlighted the fact that many Malaysians are still feeling hot under the collar financially.
According to economist Lee Heng Guie, the trickle-down effect of the country’s growth has been slow and it will take time for the benefits to be passed down to the people.
With the possibility of subsidy rationalisation of the widely used RON95 at next Friday’s Budget 2025, chief executive of the Centre for Market Education Carmelo Ferlito said details about the subsidy mechanism had been scant and it would be difficult to estimate the impact on the prices of goods.
Excluding the RON95 factor, however, he said prices are under control and the quantity of money is growing at a slower pace when compared with gross domestic product (GDP).
“If the government will adopt a prudent approach in Budget 2025, we should not experience sensible price increases,” said Ferlito.
He opined that it is imperative to preserve the strength of the ringgit against other major currencies in the world.
In light of the government’s focus to improve its fiscal position, the economist is hoping for the Madani administration to announce the pillars of a holistic tax reform.
“In recent years, some steps in terms of fiscal consolidation had been carried out, mostly in the form of adding new and targeted taxes, while little has been done on restructuring public spending in a radical way.
“Perhaps the moment to initiate a reform inspired by consolidation, simplification and easy enforcement has arrived,” he said.
Ferlito emphasised that the pillars of such a reform include a slight reduction in the income tax, the introduction of a multi-tier goods and services tax, as well as a special and simplified fiscal scheme for micro businesses.
More importantly, he stressed on the revision of the profitability of government-linked companies, with a plan of gradual rationalisation.
“Such a reform could consolidate the government fiscal position while at the same time limit the impact of rising inflationary tendencies due to the new monetary policy trend in the United States and China,” he said.
Meanwhile, economist and assistant research manager at IDEAS Malaysia Doris Liew concurred that Malaysia has managed to keep headline inflation in check at a relatively low level of between 1.9% and 2% year-on-year particularly during the April to August period.
On the other hand, she cautioned that several factors are poised to exert upward pressure on prices in 2025, with the two largest factors being the impending removal of blanket subsidies on RON95, and the scheduled salary increases for civil servants.
She said the government must consider expanding its revenue base through new taxes, broadening existing tax schemes, or increasing non-tax revenue.
“Currently, corporate income tax is the largest contributor to government revenue, accounting for 32.5% or RM98bil in 2023. In contrast, the sales and service tax (SST) brings in only RM34.2bil, or 11.3% of total revenue,” she said.
This indicated potential for growth in indirect taxes like the SST, as well as opportunities to introduce new taxes, pointing out that the recent increase in the sugar-sweetened beverage tax is an early example of this approach.
While rationalising diesel subsidies is expected to save RM4bil in government expenditure, she said the scheduled civil servant pay hike will add RM10bil in costs.
“Balancing these financial pressures while also working to reduce the fiscal deficit will require the government to either cut expenditure or significantly expand its revenue base.
“Expanding direct and indirect taxes and exploring new revenue sources will be crucial to managing its fiscal deficit,” added Liew.
With several banking houses and even the World Bank forecasting Malaysia’s GDP growth to hit 4.9% or more this year, economist Prof Geoffrey Williams claimed that such predictions are misattributing strong sentiment to actual growth.
He reiterated that the trade balance has been declining since August 2023 and investment announcements will not impact the economy for the next two to three years.
“The Employee Provident Fund Akaun Fleksibel withdrawals are also around half of what was expected. So the reality and the optimism do not match,” he said.
Williams said inflation would be within normal historical levels around 2% where it has already been for the last 12 months.
Malaysia’s stable economic environment and better tax collection, coupled with cutting wastage, leakages and corruption as well as subsidy rationalisation would increase revenue and lower costs, he said.
“There is less need to push for higher and broader taxes now. The deficit ratio will fall towards 3.5% simply because of GDP growth. So this is not an issue,” he said.
Williams said the priority is to raise incomes and alleviate the pressures of the cost of living issue, adding that higher taxes will damage both aims and be economically and politically unwise.
UOB Global Economics and Market Research senior economist Julia Goh expects the government to target a lower fiscal deficit of 3.8% of GDP for 2025.
To achieve the target, given the rising operating expenditure and development spending required to strengthen the country’s infrastructure, she expects the government to undertake deeper reforms including new revenue enhancements and improving efficiency of spending that includes retargeting subsidy allocation.
“Broader based taxes are always a possibility to expand the revenue base to reduce reliance on oil-related revenue and direct taxes,” she said. “It is also a matter of efficacy of implementation and which measure can yield higher savings or revenue without denting growth.”
