Strategic focuses for Budget 2023


BUDGET 2023 should have three areas of strategic focus as short-term policy priorities to lay the foundation for medium-term objectives that are in line with the “Malaysia Madani” concept.  They are to: 

1. Secure and guarantee our food security into the future; 

2. Expand the tax base to diversify sources of revenue and promote a more equitable wealth redistribution eco-system; and 

3. Coordinate fiscal and monetary policies to strengthen economic fundamentals and resilience to face domestic and external challenges.

The immediate context

The federal government needs to take pro-active measures to ensure continuity in efforts to deal with inflationary pressures.

As the leading stakeholder in fiscal policy and endowed with unparalleled spending power, the government needs to design and formulate a comprehensive plan to stabilise the rate of inflation. 

Monitoring and enforcement capabilities need also be strengthened.

The points for each of the three strategic focuses are as follows:

Food security

The government needs to set and provide allocations to encourage and incentivise and promote food security in urban areas.

The allocation approach can be based on two main core areas: agriculture as industry as well as urban or community farming.

First, the allocation for agriculture as industry needs to be geared towards automation and digitalisation (Industrial Revolution 4.0/4IR) which is also in line with Strategy 4 (food security) and 5 (digital transformation”) of Anwar Ibrahim Innovation Agenda (IA) introduced by Emir Research.

Digitalisation of agriculture or precision farming as a whole takes two forms – agricultural methods and processes (from human labour to planting, watering and harvesting methods that involve automation, such as fertigation, drones and robots) and the supply chain.

Digitalisation is also useful to help farmers to analyse padi fields, farms and orchards before replanting. This will increase productivity and crop production as well as ensure cost savings for farmers that can be passed on to consumers.

Concomitant with those is an increase in farmers’ income. For example, chilli farmers in the Kuala Langat PPK (local farmers’ association) have achieved a 33% increase in yield and a 22% increase in income.

Digitalisation of the supply chain will also benefit all stakeholders from the farm (upstream) through wholesale and distribution channels (midstream) and finally retail (downstream) and food (consumer) because the technology ensures transparency, accessibility and a more efficient mechanism for the exchange and disseminating of information regarding supply, price, quality and safety. 

Digitalisation also plays a role in enabling track and trace so that the process of information retrieval becomes faster and in real-time. This is in line with Strategy 3 (curbing cost) of the IA.
  
Second, vertical farming – as an integral dimension of the wider urban farming – needs to be promoted on a large scale in urban areas such as Penang, Klang Valley and Iskandar Malaysia.

These efforts will also attract foreign investment (Strategy 6 – foreign investment) and promote the deployment of sunrise and emerging technologies (Strategy 6 – sunrise technologies).

Urban or community farming initiatives have already been introduced under the mentorship and sponsorship of the Agriculture Department. This effort needs to be pushed forward more vigorously to ensure the stability of the supply and price of vegetables in the conurbations and to reduce dependence on the middlemen in the supply chain.

Ideally, the government should also ensure the existence of local community farms in each parliamentary constituency to encourage better local self-sufficiency in vegetable production.

Tax base expansion

A structural challenge that needs to be given special attention in the national budget is the expansion of the tax base, to reduce dependence on dividends and contributions from Petronas income in the operating expenditure, for example.

We need to emulate Singapore’s example of excess taxes on high-income earners and a luxury car tax and stamp duty. 

In Malaysia, the government needs to introduce a capital gains tax in the ownership of shares. Wealth tax also needs to be implemented as one of the income redistribution measures in an effort to achieve a more equitable and progressive society (Strategy 1 – unity and tolerance)

A tax on luxury goods can also be introduced for consumer goods valued at a certain level.

A temporary windfall tax also needs to be imposed on the banking sector which has enjoyed large profits due to successive increases in the overnight interest rate (OPR).

Fiscal and monetary policies

The third structural issue is the lack of precision coordination and alignment between fiscal policy and monetary policy.

This is critical because fiscal policy always been implemented without specific reference to monetary policy and vice versa, especially. 

There’s a need for the relationship to be tightened and structuralised. 

Should the government intend to reduce the weight of the fiscal deficit in the form of fiscal consolidation, then it needs to ensure that the financial burden of the private sector and households is not affected. 

This requires coordination and alignment where monetary policy needs to support fiscal consolidation efforts by ensuring that the OPR remains low, ideally staying at 1.75% (or 1.5% maximum) for the long term or even in the context of the Medium-Term Fiscal Framework (MTFF) 2023-2025. 

The dynamic balance between fiscal policy and monetary policy should centre on the government’s fiscal burden and the saving desires of the private sector and households. 

Otherwise, what will happen is that the government will continue to pay higher debt service charges, thereby derailing its fiscal consolidation efforts.

Without coordination, fiscal consolidation efforts won’t be stable – even as it fluctuates according to the exigencies of the current economic situation. That is, the deficit will go up in downturns – and with the government still having to bear the pre-existing debt interest for previous issuance of bonds. 

The MTFF’s goal for the fiscal deficit to consolidate at a gradual pace towards averaging at 4.4% of GDP is unrealistic given the continuing geo-economic and geo-political uncertainties, not to mention the scarring effects of Covid-19. 

The fiscal deficit goal should always refer to the real and not nominal economic context, e.g., levels of household debt to GDP ratio, unemployment and under-employment levels, OPR rates and business sentiment via surveys, data and indices. 

In conclusion, monetary policy should be accommodative of fiscal policy and fiscal consolidation should always take into account the conditions of the real economy.

If not, it can result in the case of reducing the deficit too fast, too soon. 

The still-fragile and uncertain economic outlook is set against the backdrop of consecutive OPR increases which burdens the government in terms of higher interest payments;  burdens the private sector that’s still experiencing cash flow problems compounded by higher interest payments; and burdens households who are facing weakened purchasing power and saddled with higher interest payments.

It’s advisable that the fiscal deficit be increased to 7-8%. Therefore, the government should rethink its intention to reduce the deficit to 5% under the re-presented Budget 2023.

Oil prices for this year is expected to remain below US$100 (RM430) per barrel, perhaps hovering around US$75 to US$85. The market has generally factored in or expected the future price of oil (priced in) where the futures contract has dropped in value – albeit at a moderate level – which Emir Research had highlighted last year already (“The domino effect of the OPR hike”, May 27, 2022).

The contribution from Petronas is expected to be lower this year. Therefore, it’s critical to plug the fiscal gap) by expanding tax base as alluded to. In addition, a special GST targeted at certain sectors only (such as gambling, luxury cars) could be implemented without causing inflationary pressure.

At the same time, Budget 2023 should also provide for a tax cut of 2%-5% targeted at the middle-income group (M40) as well as the B40 who are eligible to pay tax. This to also counterbalance the effect of the consecutive OPR hikes.

In addition, local small- and medium-sized enterprises (SMEs) also need more tax breaks where the tax rate on the first RM1 million of taxable income is reduced from 17% to 15% (and not RM100,000 as announced in the original Budget 2023).

Budget 2023 should also provide tax incentives for joint-ventures between our SMEs with the multinational companies (MNCs) to promote the localisation of the export sector’s supply-chain.

The Malaysia Investment Development Authority must liberalise the industry and de-regulate, aiming for a so-called “big bang” of de-regulation for the manufacturing industry.

This is where licence legislation and bureaucratic requirements are completely eliminated or reduced. 

In order to facilitate the transfer of technology, the Industrial Coordination Act (1975) needs to be amended to allow international companies to co-own SMEs for a maximum period of 10 years – so that the supply chain will become more resilient and reduce dependence on the import of raw materials and semi-processes, especially semi-processed and capital goods. 

The gap or distance between our exports and imports is narrowing. Last year, for the first time, our imports reached RM1 trillion – which is RM600 billion less than exports in the same year. This gap is expected to be further reduced in the coming years. So, the supply chain for MNCs needs to be localised to reduce dependence and enhance resilience. 

Furthermore, repatriation of earnings by MNCs, which has been made worse by the pandemic, will continue to dilute the value of our trade surplus (“The necessity of a low interest rate environment – or why inflation-targeting is unhelpful”, Emir Research, March 16, 2022).

Finally, in closing, in order to ensure that domestic demand can be protected from a looming recession, if at all, it’s necessary that the Bank Negara takes steps now to reduce the OPR successively at the next monetary policy committee meeting to promote a soft landing on the back of interest rate stability.

Once the recession is over, the government should be able to return the tax cuts to previous levels for some sectors such as the SMEs and take steps to gradually reduce the fiscal deficit and the overall debt burden.

Domestic demand must always be supported and accommodated by the government’s fiscal policy for the public sector from time to time taking into account the state and dynamics of the private sector and households as well as the export sector. – February 24, 2023.

* Jason Loh Seong Wei is social, law and human rights heads at Emir Research.
 

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.



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