The importance of fiscal discipline

Last week, this column looked at various tax measures that the government should be embarking upon to ensure sustainable growth in the government’s coffers via various tax measures.

Critically, these measures are crucial to be implemented to ensure Malaysia is on the right path in achieving its fiscal targets, which in turn can boost not only international rating agencies’ assessment of Malaysia but more importantly boost Malaysia’s competitiveness.

A better debt-to-gross domestic product (GDP) profile and improvement in debt-service ratios are important milestones for any developing country to catch the attention of institutional investors.

This will help to boost the local capital market further and enhance the nation’s international reserves as well as the ringgit.

This week, the focus is on Malaysia’s fiscal position and what to expect for the rest of 2024 and going into 2025, which may be tabled in less than two weeks under Budget 2025.

As explained last week, the introduction of e-invoicing, which will come into full force next year, is expected to improve the government’s revenue while the implementation of the global minimum tax (GMT) will boost tax revenue from companies that fall under the ambit of the new tax regime.

Malaysia is also expected to see a wider tax net if a proposal to remove some of the personal tax reliefs is implemented while the restructuring of tax rates for different chargeable income levels should see the rich paying more.

One of the key highlights of the mid-term review of the 12th Malaysia Plan (12MP) that was tabled last year was the increase in development expenditure (DE) for 2021-2025 to RM415bil.

Up to mid-2024, the government has spent some RM265.9bil, leaving the balance of RM149.1bil to be spent in the last 18 months of the 12MP.

Under Budget 2024, the government had proposed to spend some RM90bil, which would likely leave some RM56.1bil to be spent for the second half of 2024 (2H24), as some RM33.9bil was spent in the 1H24.

Hence, for Budget 2025, leaving everything else unchanged, the government should be tabling a gross DE of approximately RM92bil.

Government revenue is projected to be much higher than the revised projection of RM312.1bil that was presented in March this year.

The government’s revenue is expected to jump to RM321.5bil this year, an increase of 2.1% year-on-year (y-o-y).

The increase is expected as economic growth this year is poised to hit the upper end, or higher, of the 4% to 5% GDP growth that was pencilled in earlier.

At the same token, as expenditure too will likely be higher at about RM317.5bil, Malaysia will likely show an operating surplus of RM4bil this year.

This will lead to a budget deficit of RM85bil, translating to a marginally smaller budget deficit of 4.4%.

The lower deficit is also due to accelerated expansion in the nation’s nominal GDP, which is expected to increase to RM1.95 trillion this year, up 7% y-o-y (1H24 increase was 6.3% y-o-y)

GDP growth in 2025

With the Malaysian economy poised to surpass the 4% to 5% GDP growth target set for this year, Budget 2025 will likely forecast higher economic growth, with the potential range of between 5% and 5.5%.

The growth will be underpinned by public and private investment, on the back of higher DE as well as firm foreign direct investment commitments, while higher private consumption will likely be driven by the higher minimum wages as well as the increase in civil service pay packages.

On the flip side, there will be an added burden to consumers in the form of higher consumer prices as the expected gradual increment in the price of RON95 fuel will have some knock-on effect.

Inflation for next year is likely to hover between 2% and 3% given the price pressure from the removal of fuel subsidies as well as the likely reduction or abolishment of sugar subsidies.

A RM416bil budget?

For 2025, the government’s revenue is expected to surge to RM342.5bil, up 6.5% y-o-y, on the back of higher tax collections, especially with the implementation of e-invoicing and the GMT.

Expenditures are expected to rise at a slower pace of 2% to reach RM324bil, giving a surplus of RM18.1bil.

As the government’s finances are expected to be better next year, despite a marginally higher gross DE of RM92bil, the budget deficit will drop to the targeted 3.5% in 2025 as per the 12MP.

Based on these figures, Budget 2025 will increase by approximately RM21.2bil or 5.4% y-o-y to RM415bil as the total allocation for this year was at RM393.8bil.

Given that Malaysia is expected to continue to run a budget deficit for an unscheduled period, this deficit can only be funded via borrowings.

Statutory government debt and total debt, which stood at RM1.13 trillion and RM1.17 trillion, respectively, is expected to increase to RM1.22 trillion and RM1.26 trillion by the end of this year, respectively.

This will translate to a statutory debt-to-GDP ratio of 62.4% and a federal government debt-to-GDP ratio of 64.5%, which is marginally higher than the 62.1% and 64.3%, respectively, achieved in 2023.

For 2025, as nominal GDP growth is expected to outweigh growth in nominal debt, the ratios are expected to fall to 61.9% and 63.8%, respectively, as seen in the accompanying table.

What next for markets?

A budget is a short-term reform agenda that the government should and must undertake to achieve the long-term objective under the Madani Economy Framework.

If the suggestions and recommendations that have been made by this column are carried out, we will be able to improve the lives of ordinary Malaysians with higher wages while those who are in the upper-income group should be subjected to greater taxation and lesser personal reliefs.

The implementation of e-invoicing and GMT are steps in the right direction, while the re-introduction of the goods and services tax will be seen as timely and ready to be rolled out by the end of the second quarter (2Q) or 3Q of 2026.

For markets, this will be a clear signal of intent and purpose and with the right fiscal strategy, Malaysia is on the right path, to being loved by international rating agencies, which will be ready to upgrade Malaysia.

S&P Global Ratings, Moody’s Investors Services, and Fitch Ratings have presently placed Malaysia at A-, A3 and BBB+, respectively, and may upgrade Malaysia in terms of outlook to “positive”, followed by a likelihood of an upgrade in rating by a notch to A, A2 and A-, respectively.

This will be positive for the capital markets, as investors will be more willing to add positions in both the fixed-income and equity markets, allowing the ringgit to improve against major currencies even further and on its strength.

The bottomline is that Malaysia must show fiscal discipline to win over institutional investors and the accolades of international rating agencies and this can be done via pragmatic and bold measures under Budget 2025.