Whatever label is ascribed to the 2017 Budget, tabled in the Dewan Rakyat on Friday by Finance Minister Datuk Seri Najib Razak, also the prime minister, the clear message is that despite the ongoing sluggish global economic recovery and low commodity prices, which have spared no nation, the Malaysian economy continues to hold its own, although there may be some headwinds ahead.
It may not be an “election budget” as opposed to a “commitment budget”, as Najib alluded to in his pre-budget statement, but it is a politically shrewd one which neatly fits into his 2017 Budget theme: “Ensuring unity and economic growth, inclusive prudent spending, wellbeing of the rakyat”.
An election is due before May 2018, but if the economy continues on its steady growth trajectory, especially if commodity prices start to rebound in a more sustainable way and the government can sort out governance issues, then the prime minister may well be tempted to call a snap election in 2017 in the wake of a weak and divided opposition.
The social constituency that stands to gain the most from the budget is the so-called B40, the category of income pyramid referring to the bottom 40 per cent of households with a monthly income of RM3,900 and below, which is prevalent in any economy in the world. This is followed by the M40, the group which includes singles, most working married couples, the educated and skilled, whose monthly income ranges from RM3,900 to RM8,300.
As such, the 2017 Budget resembles more a “People’s Budget” aimed at a cornucopia of diverse groups ranging from civil servants, women, entrepreneurs, the rural and urban poor to small- and-medium-sized enterprises (SMEs) and students.
According to Khazanah Research Institute, the income of the B40 households recorded a faster growth rate last year compared with that of the M40 and T20 (top 20 per cent income) groups.
It is a far cry from the first post-independence budget tabled in 1959 by the Alliance Party, the precursor to the Barisan Nasional coalition, which amounted to a princely sum of RM888 million.
In contrast, the 2017 Budget estimates government revenues at RM260.8 billion, 3.4 per cent higher than the recalibrated 2016 Budget.
What is remarkable is that for the past six decades, Malaysia has managed to sustain gross domestic product (GDP) growth at a 6 per cent per annum average.
Nobody should be under any illusion that the road ahead could be bumpy, especially if conditions in the global or regional economy beyond the control of Putrajaya materialise.
Next year’s budget deficit, for instance, is estimated at RM41.1 billion, based on government revenue projections of RM219.7 billion. While the expansion rate of the deficit has slightly slowed down from 3.1 per cent this year to a projected 3 per cent next year, the differential is so small that any whiff of unpredictability could push up the upside risk.
Putrajaya should not be tempted to expand the Goods and Services Tax (GST) to boost revenue. Najib, to his credit, has strongly dismissed rumours that he plans to extend GST rates. The GST collection netted nearly RM30 billion to Treasury coffers as at Oct 19.
The impact of falling commodity prices on national revenues must not be underestimated.
The recent fall in oil prices alone resulted in revenue loss of an estimated RM30 billion from income and corporation tax, royalties, Petronas dividend and petroleum income tax.
But, the government has also been successful in diversifying sources of revenue through its policy to reduce dependency on oil and gas sector-related revenue from 41.3 per cent in 2009 to 14.6 per cent this year.
“As a result of further diversification of our economy, growth had been resilient and sustained despite the recent decline in oil prices by almost 50 per cent. The government’s bold measure to implement GST further diversified sources of revenue. We should realise that there are only 2.1 million income taxpayers out of 14.6 million of the country’s total workforce,” explained Najib in his budget address.
Similarly, the prime minister stressed that he is “confident of achieving a (GDP) growth of between four per cent and 4.5 per cent in 2016 and between four per cent and five per cent in 2017”.
This is against an expected global growth background of 3.1 per cent this year from 3.2 per cent last year.
The World Bank, in its latest Regional Economic Outlook for Asia Pacific at the World Bank Group Annual Meetings in Washington in October, had already downsized its Real GDP projection for Malaysia for next year to 4.6 per cent from the 4.8 per cent projection in its Article IV Consultation Report on Malaysia published in May.
Similarly, the current account balance was revised downwards to 1.2 per cent from 2.3 per cent for this year and to 1.5 per cent from 1.9 per cent next year. The good news is that the Consumer Price Index, inflation, is projected at three to 3.1 per cent, albeit up from 2.1 per cent projection for this year. This is due to the current account balance, vagaries of the commodities markets, cost of imports and volatility of the ringgit exchange rate.
On a positive note, Malaysia’s Purchasing Power Parity per capita increased from US$23,100 in 2012 to US$26,891 last year, making it an upper middle-income country; approved foreign investment totalled RM28 billion during the first half of this year, an increase of 32 per cent compared with the same period last year; and, the provision of vacant lands to government-linked companies and the 1Malysia People’s Housing Project is slated to build more than 30,000 affordable houses with several tax incentives.
The challenge for Najib and his successors is to leverage Malaysia’s A- rating in pursuit of the national ideology, Rukunegara, under the universal Islamic principle of wasatiyyah — moderation, balance, social justice, fairness and excellence — to effect National Transformation by 2050!
Mushtak Parker is an independent London-based economist and writer.