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Malaysia Fiscal November 2021

Malaysia: Government announces record-high spending in 2022 budget to support post-Covid-19 growth

On 29 October, Finance Minister Tengku Zafrul Aziz presented the government’s 2022 draft budget. Following 2021’s record-high expenditure, the 2022 draft bill raises the bar further, envisaging the highest spending in the country’s history in order to spur post-pandemic growth. The draft budget has three main pillars: supporting the citizens most affected by the pandemic, enhancing business resilience, and promoting sustainable growth. Notably, despite sticking to fiscal consolidation, the expansionary plan’s looser approach (compared to last year’s fiscal deficit goals) highlights that the economic recovery is the government’s focus for 2022.

Spending for 2022 is forecast at MYR 332.1 billion (around USD 80.7 billion; 2021 revised figure: MYR 320.6 billion), corresponding to more than 20% of GDP and marking an increase of roughly 3.6% relative to 2021’s budget. Looking at individual spending areas, social spending is at the forefront, with MYR 8.2 billion earmarked for direct cash assistance for low-income households and vulnerable groups, while MYR 31.0 billion will be channeled into subsidies and forms of aid to reduce the rising cost of living. Spending under the second pillar includes the establishment of business financing initiatives as well as several tax-easing schemes. Additional initiatives include a special strategic investment fund of MYR 2.0 billion to attract foreign investment, as well as direct spending on selected sectors such as tourism, retail and agriculture. Finally, under the third pillar, notable spending plans include an MYR 10.0 billion fund to finance environmentally-friendly projects, MYR 3.5 billion for infrastructure projects and MYR 0.7 billion to improve digital connectivity.

For its part, revenue is forecast to expand by 5.9% to MYR 234 billion (around USD 56 billion; 2021 revised figure: MYR 221 billion). The estimate rests on expectations of a rise in tax collection (2022: MYR 171.4 billion; 2021: MYR 161.8 billion), largely on higher corporate earnings and revenues from petroleum income tax. Moreover, non-tax revenues are seen at MYR 62.6 billion, rising from 59.2 billion in 2021, on higher investment income and a projected increase in dividend payouts from state oil firm Petronas. Meanwhile, a significant addition to the budget is the introduction of a one-off prosperity tax of 33.0%—9.0% above the blanket tax—for companies with taxable earnings above MYR 100 million in 2022.

The budget rests on a GDP growth forecast of 5.5%–6.5% in 2022 (2021 forecast: 3.0%–4.0%) and estimates the fiscal deficit to decline to 6.0% next year, from 2021’s projected 6.5%. The GDP estimate is broadly in line with our panelists’ predictions—they see GDP growth at 5.8% in 2022—while the government’s fiscal deficit forecast seems somewhat less optimistic compared to our panel’s projection of 5.7% of GDP. In addition, public debt is forecast to reduce to 63.4% of GDP, below the new debt ceiling of 65.0%, signaling the government’s commitment to fiscal consolidation.

Commenting on the government’s estimates, Julia Goh and Loke Siew Ting, economists at United Overseas Bank, warn:

“Targets are ambitious while continued fiscal support and reforms has its own cost as the budget pivots towards a prosperity sharing path. Beyond 2022, further efforts to enhance spending efficiency, reduce leakages, optimise operating expenditure, and broaden the non-oil revenue base are crucial to preserve fiscal sustainability in the new norm.”

However, economists at ANZ share a different view:

“These budgetary assumptions and estimates are conservative, in our view. This is all the more the case as tax rates on certain products have been raised. At the same time, the scale of expenditures also underscores the primacy of fiscal policy in reviving the economy. As such, based on official real GDP estimates, government spending is estimated to contribute only 1.3 percentage points to overall growth of 6%, the midpoint of the official forecast range. However, this arithmetical exercise does not incorporate the multiplier effects of government spending.”

Focusing on the government’s medium-term fiscal consolidation targets—for the fiscal deficit to average 5.0% in 2022–2024—analysts at Nomura highlight:

“While we think the 2022 targets are realistic, the visibility of the overall fiscal outlook from 2023 onwards remains low. Despite a slower-than-expected change in the deficit between 2021 and 2022, we note that the Medium-Term Fiscal Framework sets a more ambitious fiscal consolidation path than the period following the global financial crisis in 2008–09. […] Importantly, the political environment likely represents a risk to keep in mind, even though the landscape appears relatively calm at this stage. We continue to assume that elections will be called after the pandemic is brought under control (i.e., by H2 2022), as the new government seeks a fresh mandate. If so, the implementation of the medium-term fiscal measures as announced in Budget 2022 remains subject to significant uncertainty, in our view.”

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