Malaysia: 2015 budget aims to balance ongoing fiscal consolidation and economic growth
October 21, 2014
On October 10, Prime Minister Najib Razak unveiled the government’s budget for 2015 with no major surprises. The budget is designed to continue promoting fiscal consolidation and debt reduction, includes a restructuring of the country’s tax and subsidy system, and also features increased public spending and investment. Analysts point out that the government faces the task of balancing its push for fiscal consolidation with the goal of modernizing and growing the economy.
With the new budget, the government aims to reduce the fiscal deficit from an expected 3.5% of GDP this year to 3.0% of GDP in 2015. Moreover, the government is committed to ensuring that its public debt does not surpass a limit of 55% of GDP. In order to achieve this, the government will continue to make unpopular subsidy cuts. Total subsidies are set to be cut roughly 7.0%, from MYR 40.6 billion in 2014 to MYR 37.7 billion in 2015. A significant portion of this will likely come from the hike in fuel prices implemented earlier in the month. Najib, who also serves as Finance Minister, has pushed strongly for subsidy cuts on goods such as sugar and electricity during his tenure in order to relieve pressure on the government’s finances and strengthen the country’s standing in financial markets. Najib said that a new system for subsidized fuels will be announced soon, but did not offer any details.
In addition to subsidy cuts, the long-awaited goods and services tax (GST) will take effect in April 2015 at a rate of 6.0%, replacing the old sales and services tax. The new GST is structured to increase revenues, although concerns over the negative impact on household spending has led to a growing list of exemptions, including retail fuels, basic food items and medicines. Spending on welfare and cash assistance programs will also be used to cushion the impact of the GST on low-income households. After taking into account the exemptions, social spending, and foregone revenues from the abandoned sales and services tax, collections from the GST will be reduced from MYR 23.3 billion (USD 7 billion) to just MYR 690 million (USD 210 million), or about 0.1% of GDP. Moreover, some analysts are concerned that subsidy cuts and the GST will lead to unmanageable inflation.
In a speech announcing the budget, Prime Minister Najib also announced several major infrastructure projects to boost growth and competitiveness. Starting next year, at least MYR 75 billion (USD 23 billion) will be spent on national highways and the rail system surrounding the capital city Kuala Lumpur. The budget also includes incentives for the development of human capital, technology and innovation. These initiatives are geared toward the Economic Transformation Program—an initiative launched in 2010 with the goal of transforming Malaysia into an advanced, high-income economy by 2020. The government projects GDP growth of 5.0%–6.0% for 2015, following an upwardly-revised estimate of 5.5%–6.0% for 2014. Growth for this year was initially estimated to be 5.0%–5.5%.
Author: Carl Kelly, Economist