PUTRAJAYA might have no choice but to implement an expansionary Budget 2020 as it deals with the fallout from the US-China trade war and fears of recession that are dampening consumer and investor sentiments, said economists.

Apart from the ongoing trade war, the slowdown in global economic growth and fears of negative impacts caused by Brexit will also prompt the government to resort to an expansionary budget to counter possible headwinds, they told The Malaysian Insight.

An expansionary budget means the government resorts to tools to expand the money supply in the economy, so that the people can increase spending.

Senior research fellow at the Malaysian Institute of Economic Research (MIER) Shankaran Nambiar told The Malaysian Insight that an expansionary budget may come out of “choicelessness”.

“The finance minister will have to go in for a moderately expansionary budget. He will have little choice in the matter given that global economy will be tepid,” Shankaran said.

The US-China trade war may heat up, as the US draws closer to its election cycle, he said.

“Although the trade war might bring Malaysia some gains, this is not likely to materialise with the snap of one’s fingers.  China’s growth can also be expected to go limp.  All of these factors do not bode well for Malaysia.

“That is why I think an expansionary budget will come out of choicelessness.  But there will have to be some revenue raising to match the expansion,” he added.

Finance Minister Lim Guan Eng earlier suggested that the government will consider implementing an expansionary budget next year to weather the negative effects of the Sino-American trade war, despite its aim of consolidating the fiscal debt.

Sunway Business School professor of economics Dr Yeah Kim Leng said the government will have to relook at its expenses and reprioritise allocations.

This can be done by allotting more money for development and cutting corners on operating expenditure, he said.

“An expansionary budget is also one that is growth-stimulus and counter-cyclical if it reduces tax burden or does not increase the tax burden as the finance minister had said ‘no new taxes’,” Yeah told The Malaysian Insight.

“Besides supporting growth through lower tax burden, which essentially adds to the disposable income of households and businesses, the government can increase the size of the budget that covers operating and development spending,” added the member of Bank Negara Malaysia’s monetary policy committee.

Allocating more funds for development, which will be used on infrastructure and economic projects, will have a higher multiplier effect, he said.

Additionally, allocating more incentives and subsidies to spur private consumption and investments will also be a stimulus.

“Here, we are looking at higher allocations and fiscal incentives to encourage firms and entrepreneurs to invest in technology upgrading, R&D and innovations, especially Industry 4.0 and other digital technologies.

“The government can also cut operating expenses, especially supplies and services, while holding down emolument costs and redirect to development spending which has a higher multiplier effect on the economy through an increase in direct public investment.”

Allocations for civil servants, including emoluments and pensions, have accounted for a lion’s share of operating expenditure in past budgets.

Under Budget 2019, emoluments were estimated to be around RM82 billion, up from RM81.3 billion in the previous year.

The government also allocated RM259.9 billion for operational expenditure and RM54.7billion for development.

Yeah said the government can consolidate its debt through monetising and diversifying non-core assets and oil tax revenue.

“On the revenue side, there is a possibility of higher oil tax revenue if world oil prices remaining higher,” he said.

The government can also monetise or divest non-core assets, particularly properties owned by Khazanah Nasional Bhd and other government-linked companies in other countries, he said.

“These entities can then upstream more dividend income to the government.”

There is still has some fiscal space left to undertake an expansionary budget to support the economy, including financing the expansion of social, health, educational and skills training programmes that are needed to alleviate the cost-of-living burden in the immediate term and uplift the living standard of the B40 group in the medium- to long-term, Yeah said.

“I find it hard to imagine how the government can spend more without raising debt or tax revenue.  Quick possibilities that come to mind are through shaving operating expenditure, perhaps by freezing government jobs or by cutting pension payments, as has been hinted at,” Shankaran said.

“One cannot expect largesse from a government that is cash-strapped. There is likely to be some hold-back on allocations for public institutions.”

Budget 2020, the second budget under Pakatan Harapan, will be tabled on October 11. – September 21, 2019.