Malaysia: 2016 Budget sees modest decrease in fiscal deficit
November 12, 2015
Prime Minister Najib Razak announced Malaysia’s 2016 budget on 23 October against a backdrop of political turmoil, dwindling government revenues, a collapsing ringgit and slower growth prospects. Although the government included some growth-boosting measures, the main objective was clearly in line with the long-term path of fiscal consolidation. The government expects to achieve a fiscal deficit of 3.1% of GDP in 2016, slightly down from the 3.2% it expects for 2015. The narrowing of the deficit is based primarily on improved revenues rather than cuts in spending. Najib’s government is counting on higher revenues from the Goods and Services Tax (GST) imposed in April of this year, and GDP growth in the range of 4.0–5.0%, which is a modest deceleration from the 4.5–5.0% it expects for 2015.
As demand for commodities waned last year, Malaysia observed a sharp decline in revenues from key exports, particularly oil and gas. Although the country grew a robust 5.3% in the first half of this year, the second half is expected to play out differently. Global demand has not picked up, and some of the strong performance in H1 was likely due to a build-up of purchases ahead of the GST implementation in April. Given the current macro-economic uncertainty in the country, and the continued political instability, downside risks to growth persist. Expansionary measures in this year’s budget have been limited due to the government’s self-imposed debt ceiling of 55% of GDP, and what expansionary spending is included will likely have only a modest and transitory effect on growth. Moreover, the Central Bank is unlikely to lend any support to growth through accommodative monetary policy as it struggles to support the depreciating ringgit.
The government had initially planned a deficit of 3.0% in 2015, however that target has been revised upwards to 3.2%, and according to the budget, the government expects to trim the deficit by 0.1 percentage points in 2016 mainly thanks to higher tax revenues. The government expects GST revenues to increase to MYR 39 billion next year from MYR 27 billion this year. The GST will play a salient role in the Government’s finances in the coming year. Revenue from the GST overshot the government’s expectations in 2015, and the government is relying heavily on the tax in order to compensate for lost revenues from the oil sector in 2016. However, this strong dependency on the GST poses a risk as it is possible that revenues from the GST fall short of the target, thus jeopardising the government’s fiscal targets.
If the current economic situation in the country worsens, or if the GST fails to provide enough revenue, the deficit target of 3.1% of GDP could be missed, thereby jeopardizing the progress that has been made in the consolidation of public finances.
The 2016 budget includes a 0.9% increase in operating expenditure from last year’s budget, mostly on the back on higher civil servant salaries. The budget includes measures to boost domestic demand in the coming year, such as tax breaks for lower and middle income Malaysians, increased minimum wage and higher subsides for lower income households. A substantial amount has been earmarked for development spending in areas such as affordable housing, telecommunication and transportation infrastructure, and agriculture. However, development is set to increase only 5.4% since last year’s revised budget, marking a significant slowdown compared to the 20.0% increase in the 2015 budget.
Attempts by the government to shore up its fiscal position are seen as progress. Amidst the 2008 crisis, Malaysia saw its budget deficit climb to 7.0% of GDP. Najib Razak, who was elected as Prime Minster in 2009, has tried to reassure markets in the past by pledging to cut the deficit in prior budgets, and thanks to strong growth, some progress has been made on this front. However, uncertainty surrounding the oil and gas industry, as well as a shift in power dynamics with Najib’s own party, pose risks to growth, and also on the government’s fiscal projections. FocusEconomics Consensus panelist’s forecasts for the fiscal deficit are in line with the government’s forecasts of 3.1% of GDP.
Author: Robert Hill, Economist