It was a John Maynard Keynes’s expansionary budget in many ways as our economists ordered.
The 2020 Budget, the second for Pakatan Harapan and the last for the 11th Malaysia Plan, had to be expansionary as the great English economist would have recommended.
Malaysia in 2020 is a far cry from the 1930 Depression-hit countries of the time, but the fiscal policy foot had to be on the expansionary accelerator to drive demand and boost growth in Malaysia.
In some ways, being in a RM1 trillion debt bind makes us feel how 1930 must have been. But that is another story for another time.
Keynesians — and we have many here — place their faith in consumer demand as the primary driver of the economy. Makes sense. We may not have the 70 million people Prime Minister Tun Dr Mahathir Mohamad wanted in his first term in office, but should the 34 million we do have stop buying, Malaysia’s economy will grind to a halt.
So, wisely, our Finance Minister Lim Guan Eng has put the money where the demand is: infrastructure, employment benefits and education. And yes, in things digital, to the ever present cyber damsel of our distress.
But Guan Eng had to tread carefully with his 2020 Budget, themed “Driving Growth and Equitable Outcomes Towards Shared Prosperity”, as the rating agencies are keeping their keen eyes on Malaysia.
Mr Prudence, or Ms Prudence, if you insist, dictated a path of moderation. And rightly so. So it is a deficit budget yet again — RM297 billion, RM19.5 billion more than 2018’s budget — but one lower than the 2019 Budget, which pulled the brakes at 3.4 per cent. A deficit of 3.2 per cent isn’t too bad a place to halt. Rating agencies may have preferred a three per cent deficit, but a lumbering economy needs an impetus such as this. Rating agencies need to understand this. Different strokes for different folks, fellas. It is true our 2019 second quarter gross domestic product registered a decent 4.9 per cent. But external threats are aplenty. Volatility is the name of the game. Now and then, as we have come to know.
But this may not be enough for two reasons. One, no less than the International Monetary Fund (IMF) has issued a warning; expect a notable slowdown in the world economy. Global growth, the IMF says in its July report, is forecast at 3.2 per cent this year, picking up to 3.5 per cent next year.
GDP releases so far this year, together with generally softening inflation, the IMF highlights, point to weaker-than-anticipated global activity. Two, this is bad news for Malaysia as we are an export-dependent nation. Our total trade last year was RM1.9 trillion. Given this and the strategy to travel the deficit path of 3.2 per cent, it is only to be expected that the 2020 Budget is one of revenue expansion.
The government expects to collect RM244.5 billion in revenue next year — an increase of RM11.2 billion from last year.
To meet its revenue target, the government may have to work hard on its tax collection. Guan Eng tells us that we managed to collect taxes equivalent to only 13.7 per cent of the GDP compared with Vietnam (19 per cent), Chile (17.4 per cent), Poland (16.8 per cent) and South Korea (15.4 per cent).
Perhaps this is why the 2020 Budget, is, for the first time, expanding the tax band to income above RM2 million, to be taxed at 30 per cent. Presently, the tax band stops dead at 28 per cent. The taxman is looking at some 2,000 top income earners in the band due to this change.
An attempt at shared prosperity? Perhaps. A bit here, a tad there, and a modicum everywhere, as Cambridge economist Ha-Joon Chang is wont to say, though in a different context.
But there was a surprise. Being adamant on not wanting to bring back the Goods and Services Tax, the PH government took a swing elsewhere: Digital Services Tax. To be introduced on Jan 1, such services will extend to, and in a very lawyerly language, not limited to, downloaded software, music, videos and digital advertising.
How much of this will flow into the government’s coffers is hard to estimate. Enforcement will be an issue, as it is in other things Malaysian.
And a pleasant surprise for international investors, too. The 2020 Budget’s strategy of enticing Fortune 500 companies to invest here through a customised special investment incentive package of RM1 billion over five years is a step in the right direction. Unicorns do not come our way that easily, let alone global ones. Some want a better clime. The 2020 Budget has read this well.
If investments are what we want, we must make it easy for others to come here and set up shop with the ease they do in their home country.
The 2020 Budget also has very good news for local businesses. A total of RM5 billion spread over five years — RM1 billion a year — was allocated for companies that are able to export their products and services. This is expected to create 100,000 jobs over five years. Our small- and medium-sized enterprises — the bulk of our economy, really — would welcome this.
All said and done, the 2020 Budget had, to borrow some of the words of economist Chang, a bit here, a tad there, and a modicum everywhere, for everyone. It wasn’t exactly a people’s budget as the media well-practisedly labelled them in the past. Tan Sri Ramon Navaratnam — who had a hand in working on budget speeches in his days as deputy secretary-general of the Treasury — sees the 2020 Budget in the right light: a mildly expansionary budget to appease the rating agencies. An attempt to keep a downgrade at bay. Such a downgrade will drive investors elsewhere, negating the 2020 Budget’s efforts to entice Fortune 500 unicorns. Did Guan Eng have his eyes on the rating agencies? Maybe yes, maybe not. We will ask him when we meet him next.