Malaysia: Government presents 2014 budget, ushers in fiscal reform and restructuring measures
November 8, 2013
On 25 October, Prime Minister Najib Razak announced the government's budget for 2014. The budget is designed to address not only the large fiscal deficit, but also a shrinking current account surplus and growing debt. Moreover, the government seeks to tackle these issues without compromising economic growth. According to many analysts, the two main components of the budget are a new goods and services tax (GST) and a restructuring of the subsidy system.
The long-awaited GST will officially take effect on April 2015 at a higher-than-expected rate of 6.0%. The new tax is structured to broaden the taxpayer base for increased revenues, although effective implementation is crucial. There will be exemptions for essential foods, transport and medical services, and poor households will receive one-time cash payments aimed at lessening the financial impact. The budget also includes a reduction in subsidy allocations of 15.6% for 2014, equivalent to 0.7% of GDP. While sugar subsidies were terminated immediately upon presentation of the budget, the reduction will come primarily from a cut in fuel subsidies. The government is expected to raise fuel prices by 10.0% in 2014. The government emphasized that subsidies are detrimental to growth if not well targeted and that further adjustments are likely. Some measures to offset the two main components of the new budget were also presented, including a reduction in the corporate tax rate from 25.0% to 24.0% and a cut in personal tax rates by 1.0-3.0 percentage points.
The government projects GDP growth of 5.0%-5.5% for 2014, following an estimated 4.5%-5.0% for 2013. One of the goals of the new budget is to help reduce the fiscal deficit from 4.0% in 2013 to 3.5% in 2014. For this year, the public debt to GDP ratio is expected to rise from 53.3% in 2012 to 54.8%, just below the 55.0% debt ceiling.
Author: Carl Kelly, Economist