The reforms we need in Budget 2024

Budget 2024 is an important one as it has to initiate some unpopular yet necessary reform measures to rebuild fiscal buffer for securing a sustainable economy._ —Bloomberg

RECENT data had pointed to moderating global economic growth in the second half-year of 2023 (2H23) and in early 2024. International institutions expect global real gross domestic product (GDP) to grow moderately between 2.4% and 3% in 2024 (estimated between 2.1% and 3% in 2023).

Three key risks stand out regarding the domestic economic outlook in 2H23 and 2024.

The first relates to the lag effects of higher interest rates and still high core inflation on the advanced economies and the downside risks to China economy, due to the property sector woes and deflation risk.

The second risk is inflation and cost of living pressure.

Food inflation and services (transportation) inflation might return, given the anticipated domestic subsidies rationalisation.

The third risk is continued high business costs due to the weakening ringgit, wages, climate change as well as environmental, social and governance (ESG) compliance costs.

Budget 2024, to be tabled on Oct 13, is an important one as it has to initiate some unpopular yet necessary reform measures to rebuild fiscal buffer for securing a sustainable economy.

Revenue limitations, rising costs and subsidies pressure had taken a heavy toll on the budget, and it is not enough to meet increasing financing (allocation) needs.

The budget will still need restrictive yet responsible spending as the government reaffirmed its commitment towards a continued fiscal reduction path, probably to between 4% and 4.5% of GDP in 2024 from estimated 5% in 2023 (negative 5.6% of GDP in 2022).

Amid the high allocation of development expenditure estimated at RM90bil in 2024 (RM97bil in 2023), the ministries and agencies must have the implementation capacity as well as good execution of the development projects and programmes to ensure the efficiency of public spending in addition to cost savings.

The budget will have measures to ease the burden of the vulnerable group and lower-income households, unleash the potential of green growth and transition, accelerate smart technology and digitalisation, job creation and income enhancement as well as care for the elderly and ageing community.

Various funds, programmes and incentives will be given to adopt technology, automation, ESG and the small and medium enterprise (SME) sector.

There will also likely to be measures on food security and tourism, such as the review of Malaysia My Second Home and higher allocation for the preparation of Visit Malaysia Year 2025. The property sector may get some sweeteners like the Home Ownership Campaign and the stamp duty exemption for properties priced from RM300,001 to RM1mil.

The budget must strike a right balance between dealing with immediate challenges and setting Malaysia up for the next leg by:

> Strengthening fiscal and spending priorities. Limited fiscal space remains a key challenge (tax revenue at 11.7% of total GDP in 2022).

The government should include a detailed plan on measures to broaden its revenue base on a sustainable basis as well as responsible spending with better outcomes.

Targeted social spending should remain a short-term priority and the phasing out blanket subsidies that are costly and unsustainable.

Attempting to address revenue shortfalls through the luxury and capital gains tax (CGT) on the disposal of non-listed private companies’ shares, which will be ready for implementation in January, could have adverse effects on the domestic luxury goods market, entrepreneurial and start-up development. There are lingering concerns that the CGT will cover other asset classes too.

The government should lay down a fiscal consolidation roadmap, outlining a timeline to broaden revenue and control expenditure.

Some painful and unpopular measures are necessary.

The burden of fiscal correction must be shared, fairly and equitably, by different classes of stakeholders.

The bottom line is that we cannot have a tax system if a small group of the people at the top pay more taxes all the time, while the rest get to benefit from their contributions.

We must come to political sense and economic sanity to avoid a fiscal cliff.

The budget offers a window of opportunity to push measured pace of reforms as it allows ample time to manage the people discontentment over unpopular measures before the 16th General Election in 2027.

Firstly, announce a 12-month timeline for the preparation to reintroduce the goods and services tax (GST) starting with a lower introductory rate (3% to 4%) in 2025.

It is a fairer and effective tax. Concerns about the GST’s regressive impact on the lower-income households can be mitigated by exempting certain essential items and GST vouchers.

The GST mitigates pyramiding tax, tax erosion, transfer pricing, and value shifting as well as cover the tax net on the “shadow economy” (estimated turnover of almost RM275bil or 18.2% of GDP in 2019).

Secondly, roll out the targeted subsidy rationalisation on fuel in stages and sequenced it on a measured pace based on the principle of needs and income, to be companied by giving cash assistance for the affected households. Prices of subsidised goods and services will be gradually raised to allow manageable impact on inflation and cost of living pressure.

Resource allocation of the budget must also address the fundamental issues of effective governance of spending and implementation.

The medium-term budgetary stability framework must be governed and regulated by fiscal rules.

Hence, the government has to expedite the enactment of the Fiscal Responsibility Act and Government Procurement Act in 2023-2024.

These Acts have been postponed several times since they were mooted in 2018.

A credible civil service reforms is needed to improve the quality and value of public services-based performance and productivity-linked salary system.

Accelerating digital government services and introducing defined contribution schemes for pension.

Instead of giving a temporary raise in salary, the government should only decide on the new salary structure for the civil servants until a comprehensive study of the salary and retirement scheme is completed in 2024.

> Responsible and targeted cost of living relief and cash assistance. While the people’s cash aid will continue to the targeted households and individuals, design a mechanism making cash handouts conditionally for the optimisation of financial resources.

> Funds allocation, grants and incentives for key sectors driver of sustainable growth. Initial funds, grants and incentives will be allocated for the flagship projects of the energy transition, and also the New Industrial Master Plan (NIMP) strategic co-investment fund and NIMP industrial development fund will be given allocation to support the mission projects.

Reinvestment Allowance (RA) should be extended for businesses that have exhausted their 15-year term and the additional RA will end by end-Dec 2024. The RA’s extension is necessary to encourage existing companies to plan ahead to modernise and invest in automation and machinery equipment. In addition, increase the claimable amount of the qualifying capital expenditure to 70% to 80% from 60%. The first chargeable income enjoying the preferential tax of 15% for SMEs will be raised to RM600,000 from RM150,000 currently.

> ESG and net-zero carbon emissions agenda. The budget can consider to establish an ESG Facilitation Fund (RM1.0 and RM2.0bil) to SMEs to incorporate green and sustainable processes, including a soft loan and a matching grant for the adoption of ESG and green investment.

Appoint a lead ministry to oversee national ESG agenda, together with the participation from all other ministries and agencies. For SMEs’ ESG facilitation, the government can launch ESG Assessment toolkit to guide SMEs embark on their ESG journey, by identifying gaps in their ESG level of readiness, and provide the guidance. The Budget may provide some updates on the carbon pricing framework, which is currently under study.

Low-hanging measures to encourage the installation of solar for the households and businesses. These include (a) 3,000 megawatt Net Energy Metering quota be allocated from now until 2025, with the Net Offset Virtual Agrregation or NOVA programme be given priority; and (b) Individuals’ residential houses installing solar PV systems be given a personal income tax relief of RM10,000 per year, and up to a maximum amount of RM30,00 for three years.

The government should coordinate with private players for the optimal planning of charging infrastructure such as location, timing, type, and number of charging points (CPs). The government should incentivise the construction of CPs in public places until the private sector is ready to step in, especially along highways or in more sparsely populated areas and locations that are less profitable, but essential. The government can consider to extend the road tax exemption for electric vehicles (EVs), which will expire at end-December 2025 for another three years, and introduce a different road tax structure for EVs, which will be lower than internal combustion engine vehicles.

> Increasing compensation of employees. The budget will shed reveal the structure of Progressive Wage System (PWS), which aims to uplift the wage of employees linked to productivity improvement and upskilling, which will be implemented on a voluntary basis and based incentive-based approach through a wage-support growth fund to encourage the participation of companies in PWS.

The multi-tiered levy model, which pegs the levy to the percentage of foreign workers of total employees (the higher ratio of foreign workers to total employees, the higher the levy rate paid) will likely be implemented sometime in 2024, pending the finalisation of the tiered levy structure.

The employers have raised concerns that a steep increase in the levy rate would be burdensome on the employment and operating costs of companies, especially SMEs at time of high costs environment. The levy collected must be rechannelled to an Industrial Adjustment Fund to support businesses’ automation and reskilling of employees.

Lee Heng Guie is Socio-Economic Research Centre executive director. The views expressed here are the writer’s own.

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