IN Business Times’ post-2017 Budget roundtable moderated by New Straits Times Press Bhd group managing director Datuk A Jalil Hamid, the panellists — Isis Malaysia deputy chief executive Datuk Steven Wong, MIDF Amanah Investment Bank Bhd chief economist Dr Kamaruddin Mohd Nor, Malaysian Institute of Certified Public Accountants (MICPA) council member and tax partner at Deloitte Theresa Goh, UKM Vice Chancellor & professor of economics Datuk Dr Noor Azlan Ghazali and Universiti Utara Malaysia director of Asean Research Institute of Banking and Finance (ARIBF) Dr Irwan Shah Zainal Abidin share their views on what the budget means to the people, companies, small and medium enterprises (SMEs), corporate sectors, investors and financial markets.
Q: Maybe we can start off with what surprised you the most in the 2017 Budget?
Steven: I don’t think there were big surprises. One of the things that I took a note of, and it’s something that Malaysia has been good at doing in the past, and has helped us get out of “hot water” ... If you notice in the budget theme, there’s the word “prudent”. In the run-up to the budget, there were commentators, economists, including myself, saying that the government needed to be prudent because things around the world are not going the way we think is helpful or positive or constructive. So we need to be on the watch.
Within the context of over RM260 billion allocated in the budget — of which RM220 billion the government raises and another RM40-41 billion the government borrows — the government has to make use and prioritise.
What I think I wanted to see, and it was in the budget, was that the government allocation of key ministries were cut back. This will help to produce results at the end, but it also puts us in better shape in terms of being prudent, given the global risks. I didn’t think that it would have been cut back as much.
Overall, the budget from a macro point of view is not an expansionary budget. I think it’s a prudent budget, and it’s what we need going into this current headwinds and the challenges that we see next year.
Q: Dr Kamaruddin, do you think the GDP and fiscal numbers are on the high side or the low side, given the headwinds that we see in the world?
Kamaruddin: Looking at this GDP (gross domestic product) forecast for next year the range is higher. This year we have four to 4.5 per cent. Next year, they are forecasting growth of 4-5 per cent. So, from that perspective, we are seeing optimism going forward, but like Datuk Steven mentioned, there’s going to be external headwinds. We have seen our external trade moderating, China is stabilising, and there are a lot of so-called external shocks going forward. But from our analysis, this year will be a bottoming out (phase). There would be some positive pick-up at least in the second quarter of next year. I think from the GDP point of view in terms of looking at the growth, yes. We are still highly dependent on the domestic economy, but there’s going to be (some) positive coming from the external sector compared to this year. I think the 4-5 per cent GDP forecast for next year is within an achievable scenario.
Q: What do you think of fiscal deficit target? Do you think we are too conservative at 3.0 per cent for 2017?
Kamaruddin: I think this year we (target to reduce it) to 3.1 per cent and to 3.0 per cent next year. Even though to have a balanced budget by 2020 looks very challenging, but if you look at the past, in the 2009 or 2010 budgets (our fiscal deficit was) at 6.4 per cent and now it’s about 3.2 per cent. That is about half. If we expect the rebound to be from next year onwards, it’s not impossible. But is something that is very challenging.
Steven: The government this year is taking a very conservative oil price per barrel (assumption) of US$45, and that gives you the projected 3.0 per cent deficit. There are already commentators, economists and some bankers saying that if the oil price comes in around US$50 per barrel, there is actually scope for the deficit to drop to something like 2.5-2.6 per cent. Now, given that nominal GDP is always a very volatile number, if we experience some heavy headwinds next year, of course the base will also shrink, and as a result the deficit will increase. To the extent that we know today, the US$45 per barrel is something that not many will say it would go much below that. So, there is actually scope within what we know at the moment for that number to be achieved.
Kamaruddin: Just to add on that. In our revised 2016 Budget, the oil price (was forecast to be) US$30-35 and our year-to-date average for oil price this year is nearly US$44 per barrel. Our house call for next year is an average about US$50 per barrel.
Q: Theresa, from a tax point of view, where do you see the challenge in terms of ensuring the revenue stream for the government next year?
Theresa: As you know, GST (Goods and Services Tax) revenue is stable already for this year, so you can’t expect more from that. Most people would have registered for GST by now. So, you look at income tax, and of course petroleum income tax, or petrol tax, petrol dividends from Petronas et cetera depend very much on how the oil price is doing.
But on corporate tax and income tax, there is so much going in the world about increased transparency. There’s this BEPS or Base Erosion and Profit Shifting that’s going on and the OECD (Organisation for Economic Co-operation and Development) has come out with 15 action points to prevent companies from making a lot of profits and not paying tax anywhere in the world. As a result of that a lot of initiatives have already been laid out by OECD, and Malaysia is on board. We already signed the multilateral agreement early this year.
We can expect a lot more transparency with regard to two things. One is the individual. We have this thing announced in the budget called the CIA (Collection Intelligence Arrangement). We are talking about the collaboration between Inland Revenue Board, Customs and Companies Commission of Malaysia. With sharing of information and data base it’s a lot easier. For example, someone who is registered for GST, the revenue is supposed to be RM500,000, but in the income tax file, if they only declared RM300,000 then it’s very easy for this difference to be flagged down and for IRB to go after them.
In addition, there’s automatic exchange of information. So if you’ve got a bank account in Switzerland, for example, the Swiss bank will have to disclose who the beneficial owners of the funds are, and the bank will have to report to the tax authority of Switzerland and there will be automatic exchange of that information with the various tax authorities.
Q: This is basically to strengthen the collection and compliance?
Theresa: Yes, that’s right. So if the taxpayer knows that there is freedom of sharing information, then you have to ensure that whatever you declare to Customs and income tax purposes is the same. For companies, for example, there is transfer pricing. So, when you buy and sell goods to other parties, what is the price? When you import particular goods and you have to pay import duty, at the end of the year because of your accounting and transfer pricing, you need to make adjustments. Then the question is, have you made adjustments for the import duty as well? If you were to make adjustment to lower or increase the price, then you have to take into account Customs. So, there is greater transparency between the two authorities. This is an area that is difficult to comply with, but now with the increased transparency, I think businesses have no choice, but to ensure that they take the pains to see how they going to do it right.
Q: Prof, you spoke yesterday (Monday) at UKM about how the government has been quite restrained in terms of fiscal management. Do you think this budget is keeping that on track?
Azlan: Interestingly, I think the way people look at budget in Malaysia depends on which perspective you are looking at. For the ordinary people, in most cases, what they look for is where they are mentioned. If they are fishermen (and) you don’t mention anything about fisherman, they will say this is a poor budget. It depends on your profession. It ends up like that, which is not so right in the perspective of what the budget actually means for the whole nation.
For Malaysia, it is so obvious that all eyes are looking at the fiscal deficit. That basically sums up the budget — how much you earn and how much you spend. It is interesting to see that for a number of years, the approach taken is more like setting the end and then coming back. For example, we want to rein in fiscal deficit to 3.0 per cent ...(we) lock in that first and then go back and see how do we basically distribute, who should get what, and so on.
I always look at the budget in two ways. It is an annual budget anyway, about next year, about how a country is manoeuvring its operations, taking into account the global economic environment, the structure of the economy and the most immediate needs of the public at large.
But it must also be in line with a longer term plan, which not many people talk about. This is actually a budget for the second year of the 11th Malaysia Plan. Whatever you do must be in line with that. In this budget, the focus is very much on the rakyat. That’s why even in the theme of the budget, you see this word appear three times: about putting people together — unity, inclusivity and well-being.
Q: Dr Irwan Shah, what do you like most and what do you dislike most about this budget?
Irwan: What I like about this budget is that it is a forward-looking budget. I think for the first time, since independence in 1959, we see a yearly budget that sets the course for the future. I am referring to TN50, the 2050 national transformation programme. I think this is something that I like most. TN50 is about how the government wants to engage with the young generation for them to have national discourse and for them to look into what type of vision they want to see in the future.
The other thing is about the fiscal consolidation exercise. I agree that this is not an expansionary budget — of course because we are still in deficit — but the fact that the government is still on course with fiscal consolidation is something that we need to highlight. This budget, to me, is pro-growth. In economics, when we have pro-growth, we usually will compromise in the context of fiscal at that level. This budget, although it’s pro-growth, it still managed to maintain the fiscal consolidation path to 3.1 per cent this year and three per cent next year.
Q: It is a tough balancing act?
Irwan: To me, credit must be given where it is due. It is not easy. Issues that I see ... One, maybe housing. Although I see some new measures, but we need to find a long lasting solution, something that is more holistic. Overall, I see the budget is something that is pro-growth, people-centric and something that is forward looking.
Azlan: When Irwan mentioned about housing, yes there are measures about building more houses and selling them at subsidised prices. That is something that can sooth the pressure for the targeted growth. Will that solve the problems? The problem is out there, whether the price of houses we are seeing is a genuine price. That is something probably hard to pin-point in the budget, but I believe there are elements still left untouched. Government should not be continuously building houses. I have some reservations about that.
Q: This is a very hot topic, affordable housing. From what I understand, the budget tries to address the supply as well as demand side. One budget alone cannot solve it. Datuk Steve, maybe you want to share your thoughts on this?
Steven: Housing is not something that any one budget will fix, and not even something ten budgets can fix. It depends on your demographics, because there are new people who join the workforce all the time. You want a sustainable position. You want to ensure that people have a roof over their heads. Under no circumstances should they be homeless. Those things have to be provided.
There is a portion of social housing, and we see some part of it in the units that the government wants to build under this budget. There is, however, besides the social, we have the affordable. This is an area that all countries are struggling with, not just us. We are bit more fortunate than other countries because we are basically talking about Klang Valley, extending down south and to the north. It is a position we can live with. Holistic is correct, but it has to be sustainable. To push very much higher, people into houses at the expense of taking on additional debt — debt which by the way they are not getting at the moment — is not a sustainable position. Government needs to work on this area. There are no quick fixes to the question, because having an over-extended household, especially since almost a quarter of the loans and advances in the financial system are taken by households with less than RM3,000 a month in terms of income. That’s very sizeable. So, we don’t want to push that. We want to provide a solution and this solution will have to grow over time.
Theresa: I like what was mentioned in a research by Khazanah, which talks about this formula of calculating what a certain income level can afford. So, they were looking at someone who earns RM8,000 for example, and applying that formula, the house you can afford is just about RM290,000. In the Klang Valley for example, where can you find a house of this value now. You can waive the stamp duties and waive all the loan fees, and things like that, but are we helping people to get into that which ultimately they are not able to repay? I think we need an out of the box solution, as to how to get the property prices down. There was IBS which some people said was not so effective etc. Maybe more research and development is needed in this area, to lower the cost of building, so that we can bring the prices down.
Q: The introduction of the so-called stamp duty increase in two years’ time ... that perhaps might dampen demand for properties priced RM1 million and above?
Theresa: Realistically, if you look at the one per cent increase, I would feel that many people in the M40 would also suffer. Because a linked house in Klang Valley easily cost RM1 million already, and you are not buying any luxury property. It is just a linked house. Like in One Utama, for example, it is easily over a million. So, who are the people who are buying these houses? It is the M40 group? It’s not the top 20.
Azlan: You can view houses in two ways. Like Steve mentioned, from one side, it is a social good, something that the government is responsible to make sure everybody in need at the right age and income, it is affordable for them. But on the other side, there is also an industry — the property industry that also keeps up the economy in certain ways.
To me, when prices seem to be out of control ... in Malaysia we are always talking about B40. Their income is about RM3,300 downward. If you use that formula, 40 per cent of the households in Malaysia, it means that in most cases, houses today are not affordable to them. In that situation, I believe there is a role for the government.
Q: Dr Kamaruddin, do you want to add on those points?
Kamaruddin: If you look at the measures, the incentives mostly caters for B40s, and the left out group is the M40s. I’m looking at it more on the bigger picture, in terms of the overall ecosystem of housing. What are the pressing issues that bring up the price? We keep on talking about people who can’t afford to buy a house because there is lack of financing. Ok, you address the financing.
We have been doing this for quite a long time. For example, DBKL (Kuala Lumpur City Hall) has public housing, some very cheap comparatively. You have an “in” system, meaning people who are eligible, but how about the “out” system? A lot of things in Malaysia, welfare wise, you keep on registering the beneficiaries and applicants, but you don’t have a proper “out” system for people to graduate from the system.
Steven: I think one part of the ecosystem is this: there is only land. You can use the land for commercial purposes, for residential purposes, for industrial purposes, you can make your choice. That’s all in the structural master plan, but there’s just land. All these pieces of land are not disconnected from one another.
So if you build a massive property development (targeted at) the luxury high-end market, you sell for RM2,500 to RM3,000 a square foot. Eventually, this property is connected because there’s only land to Puchong, to Seri Kembangan, to Nilai and further out. In other words, the kind of pricing that you do in the KL centre has got effects all down the chain. It pulls up all the prices of the land.
In Part II tomorrow, the panellists discuss income levels, foreign labour, BR1M, GST and how to overcome operational leakages.