‘Inclusive’ budget vulnerable to external factors, economists say

Raevathi Supramaniam

The government has forecast a 4-5% GDP growth for next year. – The Malaysian Insight file pic, October 8, 2022.

BUDGET 2023, while relatively inclusive, is open to global economic headwinds, economists said.

They said while the government has predicted a 4-5% GDP growth for next year, this is contingent upon external factors beyond Malaysia’s control.

That, coupled with a fiscal deficit of 5.5%, is concerning, they said.

Sunway University economics professor Yeah Kim Leng said the RM372 billion budget met expectations for the low-income group.

“There is no question the government has to sustain recovery and look at measures to alleviate the economic burden on the low-income and vulnerable groups,” Yeah told The Malaysian Insight.

“From an economist’s perspective, the economy is on track to recovery; theoretically (the government) should withdraw the various stimulus and strengthen (the country’s) financial position by reducing deficit.”

That the government is now providing more targeted subsidies based on the number of household members is a positive sign, he said.

“The only question is whether it is sustainable,” he said.

“More efforts should be made to increase income, such as by cultivating entrepreneurial abilities or upskilling.”

Under the Bantuan Keluarga Malaysia scheme, Putrajaya is handing out RM2,500, the most ever, to households with five children or more with a monthly income of less than the same amount.

RM7.8 billion has been allocated to the fund to benefit 8.7 million recipients.

Yeah said the government should have introduced more measures to reduce the fiscal deficit which is higher than the GDP.

The last three budgets have led to a fiscal deficit of 6%, which is worrying, he said.

“(This means) the deficit for 2023 is approximately RM100 million, which has to be financed through borrowing.”

Foreign reserves stood at US$107 billion as at July 15, down US$9.9 billion from end-2021 and down US$5.8 billion from end-May. It is sufficient to finance 5.7 months of imports of goods and services.

Statutory debt stood at 60.4% of GDP in June. The cap is 65% of GDP.

This is an increase from 58.5% of GDP (RM958.5 billion) in April, when direct federal government debt stood at RM1.078 trillion, or 62% of GDP, according to MOF’s pre-budget statement.

Strong oil and gas prices has put Malaysia is a position to fund a mammoth budget. – The Malaysian Insight file pic, October 8, 2022.

To fund the budget, Yeah said the government has three options: borrow, sell assets, and public-private partnership.

“Revenue projections for next year appear to be aggressive; (the government is) expecting RM270 billion in revenue collection.

“However, there is some uncertainty over whether that is achievable with a global slowdown and our firms making less profit.

“Coupled with the 2% tax cut for the lower income brackets, there will be less revenue.”

Sales tax is another other source of income for the country but its scope is much narrower compared to the GST’s, Yeah said.

“Even if the revenue targets are realised, we still have a fiscal deficit of 5.5%, which could grow higher than the target because of lower revenue collection and increased spending,” he said.

Penang Institute director Lim Kim Hwa said the government is able to fund such a massive budget thanks to high oil and gas prices.

“As government debt is mainly domestic, the ringgit’s depreciation against the US dollar will not have a significant impact,” Lim said.

The ringgit has been depreciating steadily against the greenback due to hawkish policies of the US Federal Reserve, which has so far raised interest rates by 300 basis points.

The central bank has dismissed pegging the ringgit to the dollar.

Lim warned that the government’s expected inflation rate of 2.8% based on the CPI could be overly optimistic.

“Food inflation in 2022 has certainly surpassed the 3.3% CPI rate.”

What the budget failed to recognise is the middle-income trap, he added.

The government is paying RM100 to each of eight million households with income below RM100,000. – October 8, 2022.

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