DESPITE continuous economic headwinds, the 2017 Budget, which will be tabled in Parliament next week, is expected to latch on the country’s economic progress, especially in activities that spur domestic demand.
While the challenges due to weak ringgit and low prices of commodities like crude oil and rubber continue to be seen in the near term, the highly-awaited budget is expected to mirror key developments over the past year.
To achieve a pragmatic “people’s budget”, some analysts say the government will undertake a delicate balancing act between maintaining fiscal prudence, managing growth as well as the people’s well-being.
Economists have different views on what is in store for the public, but they all agreed it would be filled with goodies to spur domestic demand.
They anticipated the 2017 Budget will have to strike a balance between the need to curb spending to reduce fiscal deficit and the need to spend to ensure continued growth.
They also believed next year’s spending will be slightly higher compared to this year.
Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the budget is deemed to be expansionary given that expenditure is still higher than revenue and hence, the term deficit.
In this regard, he said, development expenditure is critical in driving growth, given its association with infrastructure projects and the spillover effects it has on other sectors such as construction, manufacturing and services.
“Continuous reduction in deficit is good for confidence-building as Malaysia’s sovereign rating will remain unchanged at ‘A3/A-’. This will ensure a steady flow of funds from abroad, thereby providing sustainability and stability in our yield curve,” said Afzanizam in his budget preview report.
RHB Research Institute Sdn Bhd economists are of the opinion that despite subdued global macro environment, the budget is still expected to support the growth of domestic economy, while focusing on people and managing the rising cost of living.
They said this could also be a pre-election budget, given the speculation of a possibility of the government calling for an early general election next year.
“Under the 2017 Budget, we believe priority would be given to people-centric projects such as affordable housing, rural electrification, water supply and public transports.
“Despite the mounting challenges, we expect the government to remain on track to consolidate its fiscal position although the pace will likely be slower than earlier expectations,” said the team.
While the continued people-
centric spending on affordable housing and infrastructure would likely be maintained off balance sheet, they said.
Universiti Kebangsaan Malaysia (UKM) Graduate School of Business principal fellow and head of Strategic Centre for Public Policy professor Datuk Dr John Anthony Xavier said the budget will be a people-centric in line with the government’s slogan “1 Malaysia, People First, Performance Now”.
He said it will be people-friendly, given the rising cost of living and the smarting effects of the Goods and Services Tax (GST).
“The GST has caused a one-off spike in inflation. Admittedly, the GST is a regressive tax. It hurts the poor more than the rich,” Xavier told Business Times.
On the brighter side, he said, the various exemptions — as much as 50 per cent — of products from the
GST have somewhat cushioned
the impact on the lower-income groups.
“And over the long term, the inflation rate will be that much lower than that without the GST. Notwithstanding, the GST has hurt, especially the poor.”
Xavier believes the government would be seeking to further ease the GST burden through increases in 1Malaysia People’s Aid (BR1M) payouts.
He said the additional amount could be secured from the rising oil revenue from higher prices of oil (at US$50 per barrel) compared with estimates of up to US$30-US$35 (RM125.73-RM146.82) per barrel when the 2016 Budget was revised in January this year.
“We can now expect the government to earn about RM7 billion to RM9 billion from the increased oil price. This increased revenue could be shunted to alleviating the cost of living for the lower-income groups,” said Xavier.
The government remains committed to ensuring that its fiscal position remains strong and will continue lowering its budget deficit further, albeit only slightly to 3.0 per cent of gross domestic product (GDP) next year.
Afzanizam said reducing fiscal deficit from an estimated 3.1 per cent this year to 3.0 per cent next year can be an uphill task, particularly when the economy is likely to grow below its potential level.
Therefore, he said, effective communication is important, especially when there could be a sudden turn of events that may compromise revenue collection.
“This is to ensure all stakeholders, such as the rating agencies, businesses, investors and households, are all on the same page,”said Afzanizam, adding that focus should be given on non-fiscal measures that would help reduce operating expenditure.
“Accelerating the implementation of infrastructure is also para-mount as this will allow the economy to grow at a respectable speed.”
Maybank Investment Bank Bhd chief economist Suhaimi Ilias said there was doubt if this year’s budget deficit target of 3.1 per cent of GDP, or RM38.6 billion, can be met in view of budget deficit of 5.6 per cent of GDP, or RM32.8 billion, in the first half of this year.
However, the company believes the 2016 Budget deficit target is on track as monthly data showed improvements in budget balance in early second half after the deficit surge in the first half.
Xavier, on the other hand, said given the moderate growth forecast, it is not the time for the government to cut its budget.
“This is more so given that private investment barely grew in the first half of this year due to weak business sentiment amid global economic weakness. With household debt at 89 per cent of GDP — an Asian high — private consumption does not inspire confidence in inflating the economy either,” he said.
In anticipation of a possible downturn in the economy, Bank Negara Malaysia too rather unexpectedly cut its benchmark interest rate to 3.0 per cent recently.
Given the woes affecting the economy, Xavier said, public expenditure is ever more crucial to keep the economy on its growth trajectory.
However, he said, greater expenditure may compromise efforts to reduce fiscal deficit.
“As such, the government needs to optimise its expenditure through prudent spending, especially on supplies and services and grants. Greater prudence in public expenditure can fortify the revenue base that the GST has expanded,” he added.
In conclusion, Xavier said budgeting is a delicate balancing act across priorities.
“In all this the government will have to have one eye on its budget deficit and public debt targets.
“It has committed to eliminating the budget deficit and cutting the public debt to 45 per cent of GDP by 2020,” he said.
The 2017 Budget themed “Accelerating Growth, Fiscal Prudence, Enhancing Wellbeing of People” will be presented on Friday.