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Malaysia Budget Day: What to expect

Kuala Lumpur, Malaysia.
JTB Photo | UIG | Getty Images
Kuala Lumpur, Malaysia.

Malaysian Prime Minister Najib Razak is expected to introduce additional deficit-slashing measures at this week's annual budget presentation, which could spell more pain for consumers, economists say.

Subsidy reforms and the implementation of a 6 percent goods and service tax (GST) are among the highlights, deemed necessary for the country's fiscal consolidation efforts. But analysts and citizens alike are worried about a resulting spike in inflation.

The two measures are expected to weaken purchasing power, reduce private consumption and household spending, and increase the cost of living, according to Australia New Zealand Banking (ANZ).

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"The government will have to strike a delicate balance of tough trade-offs between fiscal prudence and maintaining current growth momentum, while providing fiscal transfers to help cushion low-income households against the inflationary impact," ANZ economists said in a note.

GST implementation

The new GST is expected to take effect in April. Several banks expect it to push the annual consumer price index (CPI) above 4 percent in 2015, which would mark a more than six-year high.

"The issue therefore is less whether GST will be implemented, but how. In particular the list of items of the exempted or zero rated, which will in turn determine impact on inflation, as well as the fiscal position," Citi economists said.

"A simple analysis based solely on CPI weights of affected items suggests headline CPI could rise by 1 to 1.4 percentage points, less than the 1.8 percentage points estimated by the government," they added.

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However, Citi warned that the impact on CPI is not straightforward, and will be contingent on the extent to which the list of items included overlaps with coverage under the current sales and services tax.

Prime Minister Razak has staked his credibility on implementing the GST following years of delay and ahead of general elections in 2017.

Subsidy cuts

Reducing the country's decades-old reliance on energy and food subsidies is a priority for the government as it attempts to rein in the fiscal deficit. Subsidies account for around 21 percent of central government expenditure, ANZ data shows. Malaysia aims to reduce the deficit to 3.5 percent of gross domestic product (GDP) this year from 3.9 percent in 2013. It aims for a balanced budget by 2020.

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Last week, officials raised subsidized motor gasoline and diesel prices by 9-9.5 percent - the second hike in a year. They hiked electricity and natural gas tariffs earlier this year. Sugar subsidies were abolished in 2013.

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"A 10 percent fuel price hike should save about 1 billion ringgit - or 0.1 percent of GDP - in terms of expenditure. While this is not a huge amount, it does keep the government well on track to achieve its 3.5 percent budget deficit projection this year, and its 3 percent target for next year," HSBC economist Su Sian Lim said.

However, ratings agency Moody's warns that further reforms will be necessary if the government wants to makes a real dent in its public debt stock. At the end of 2013, the figure stood at 54.7 percent of GDP, well above the 41.4 percent average of countries with the same sovereign rating.

How worried should residents be?

Cash handouts from the government to eligible low-income families will temporarily mitigate the impact of a GST burden and subsidy rationalization for households, ANZ economists said.

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However, the handouts are unsustainable in the medium term and will need to be accompanied by higher productivity so households don't grow dependent on payouts, they added.

Other measures expected to be outlined in the budget include education assistance, subsidized housing and tax incentives.