Budget 2025 — A missed opportunity

WHEN the unity government was formed post-2022 general election, the first window of opportunity for reforms was presented when the government tabled Budget 2024 about a year ago.

While some new taxes were announced and a move to address Malaysia’s ballooning subsidy was also made then, the traction to implement some of the changes was either delayed or went missing.

For example, the announced High-Value Goods Tax was not implemented nor was there any “life” to this new tax in Budget 2025. The promised subsidy rationalisation, especially those related to pump prices was delayed as well. Malaysia only floated diesel prices in mid-June this year, while the much-consumed RON95 is now delayed to June next year, as proposed now under Budget 2025 which was presented on Oct 18.

Complicated mechanism

We now have a new definition of the top-tier households – top 15% (T15)! In Budget 2025, the government proposed a two-tier pricing mechanism whereby 85% of households will continue to enjoy the subsidised RON95 at RM2.05, while the T15s will pay market prices.

This raised many questions on the implementation. First, the T15s in states like Kelantan or Sabah may be B40s in Klang Valley! How does one differentiate who benefits from the subsidised prices based on different regions?

Additionally, some households may hit T15 with a larger share of working adults in one household while in some households, the T15 may represented by just a sole breadwinner or even by a smaller household size.

Post-budget, many comments have been made that the T15 category will be fine-tuned to include actual expenditure patterns of households.

The income and spending patterns differ between one household and another.

Attempting to differentiate and ensure only the real B85 will enjoy the fuel subsidies is futile as it will only complicate matters and backfire on the government.

The best option, as highlighted by this column before, is to float the RON95 price to market price in a phase-in manner to allow everyone to adjust to the current market price accordingly.

At the current market price of RM2.65 per litre, this can be achieved over the next three quarters with a price increase of 20 sen per litre per quarter. Thereafter, the market price can be adjusted depending on global oil prices as well as the exchange rate.

The savings derived from removing subsidies altogether can then be channelled to those in need via the Sumbangan Asas Rahmah incentives. We don’t need to reinvent the wheel or a rocket science formula to remove fuel subsidies altogether.

Kicking the can down the road

The much talked about re-introduction of goods and services tax (GST) did not materialise.

This was indeed a lost opportunity to introduce a more efficient tax structure and boost the government’s coffers.

This also suggests that GST may not see light even in the next few budget. The 16th General Election (GE16), which must be held by February 2028, will be a critical point for the government to be populist rather than pragmatic.

As GST requires 12 to 18 months for all those involved to be ready for implementation, the absence of GST in this year’s budget means the government could potentially announce it in the next budget but unlikely in the following two budgets.

However, as the prime minister had earlier hinted, as long as minimum wages do not reach RM3,000 to RM4,000 per month, it is difficult to impose GST on the lower income group. Any re-introduction of GST is only likely post-GE16, with the next window in Budget 2029 or beyond.

Minimum wage too low

While Anwar believes that GST should only be implemented if wages are higher, the proposal to raise minimum wages by just RM200 per month to RM1,700 was very disappointing.

First, this is well below the expected increase in civil servants’ salaries and significantly lower than the 2022 Poverty Line Income of RM2,589 per month.

The slow pace of increase in minimum wages will result in the government’s ability to meet the higher labour share of the economy to rise only at a modest pace.

It should have at least announced a two-tier increase in minimum wage with the first increase to RM1,700 effective next year and RM2,000 with effect from January 2026. That would have been more compelling to address Malaysia’s low-wage structure and to be on course in achieving the income share of gross domestic product (GDP) to 45% set under the Madani Economy framework.

EPF for foreign workers

While one can applaud the government’s efforts towards treating every foreign worker equally, the idea of them contributing to the Employees Provident Fund (EPF) is not well thought out.

First, this will increase the employer’s cost of doing business as they will have to to contribute their portion for the employees as well.

Second, this will reduce the take-home pay of these workers, resulting in lower disposable income, which is now mitigated by higher minimum wages.

Third, as these workers are mostly here to earn a living and not for long-term stay, let alone for retirement, the idea of having them contribute to the EPF seems unaligned to EPF’s main purpose, which is to provide a nest egg when one retires.

Even in Singapore, contribution to the Central Provident Fund is only applicable to Singapore citizens and permanent residents who are working under a contract of service or employed on a permanent, part-time, or casual basis. Hence, the government should rethink this proposal thoroughly.

A lowball dividend tax

The 2% tax on dividend income in excess of RM100,000 is perhaps a “testing water” incentive by the government.

While this opens up potential higher rates, wider scope and lower threshold levels in the future, the move, seen in isolation, is not significant.

After all, the government did not announce the widely rumoured inheritance tax. Hence, this lowball tax is not material. Even if an individual earns RM10mil in divided income, the tax is less than RM200,000, while those who have a portfolio of RM2.5mil in investments and earning some RM125,000 in dividends (assuming a dividend rate), will only pay some RM500 in tax, which is clearly not material as it is only 0.4% of total dividend income.

This is clearly targeted towards individuals with a valuable portfolio and likely enjoyed by households in the T15 category.

Instead of a tax on dividend income in excess of RM100,000, the government should introduce a 2% withholding tax (or higher) for dividends paid out above the threshold level. This is administratively easier to implement instead of relying on a formula to calculate the tax on dividends.

Fiscal forecast within expectations

Two weeks before Budget 2025 was presented, this column highlighted some key barometers that were expected for the economy next year.

On the economy, the raised GDP forecast to 4.8% to 5.3% this year was not utterly surprising, given the strength of the economy in the first half of of this year. The forecast of 4.5%-.5.5% is within our expectations as we had estimated GDP growth of between 5.0% and 5.5%.

The RM421bil budget for next year too was within our estimate of RM416bil but the composition of expenditure is higher for operating purposes at RM335bil against our estimate of RM324bil, while net development expenditure of RM84.7bil is lower than our forecast of RM92bil.

The gross development expenditure for 2025 is relatively unchanged from this year’s budget of RM86bil. However, if one were to analyse the breakdown of the development expenditure, it is worrying to see that public-private partnership/private finance incentives (PPP/PFI) will increase to RM8.67bil in 2025 from RM5.08bil this year.

The significant increase is seen from the Housing and Local Government Ministry and Works Ministry where the PPP/PFI component will jump to RM1.61bil and RM2.28bil in 2025 from RM49.0mil and RM260.9mil this year respectively.

The government’s inflation forecast of between 2% and 3.5% for next year is slightly outside our estimate of 2% to 3%, while the budget deficit target for next year at 3.8% came in below our optimistic estimate of 3.5% as seen in the accompanying table.

It was disappointing to see that the government is not aiming to achieve the 3.5% budget deficit target as clearly outlined in the 12th Malaysia Plan Mid-Term Review tabled last year.

The higher deficit is on the back of emoluments, debt service charges and retirement charges, which are expected to increase by 6.2%, 17.7% and 7.7%, respectively in 2025.

Debt service charges are seen rising to 15.8% this year, higher than the 14.9% jump last year.

This will increase to 16.3% of the total operating expenditure (opex) in 2025, while emoluments and retirement charges are expected to jump to 41.7% this year (2023: 40.4%) and to 43.7% next year.

The rise in these three items is indeed worrying. The government ought to find ways to tackle future increases holistically.

The three big opex items, which accounted for 55.3% in 2023, are expected to increase to 57.5% and hit the 60% threshold next year! From RM172.3bil in 2023, the total expenditure will increase to RM185bil this year and to RM201.2bil in 2025.

Even the projected direct tax revenue of RM171.3bil, RM177.1bil and RM188.8bil for the three years will be insufficient to meet the opex for the three big items.

Stagnant tax to GDP ratio

After falling to just 10.9% in 2020, tax revenue to GDP ratio rose to 12.6% in 2023 and is expected to fall to 12.4% this year.

For next year, the government projects the ratio to remain stagnant at 12.4% as the increase in tax revenue will be mostly driven by higher sales and service tax collection, and higher company and individual income tax collection but lower petroleum income tax collection.

In conclusion, Budget 2025 was a missed opportunity to address Malaysia’s many lingering and structural issues.

While addressing some of them, the proposals fell short of expectations and other critical issues for the long-term sustainability of the government’s finances were lacking, especially re-introduction of GST, minimum wages and the complicated mechanism for subsidy rationalisation.