Malaysia budget looks to soften fiscal tightening blow

Malaysia's government looked to shore up its support base on Friday by announcing a budget that took the sting out of cuts to fuel subsidies and a new consumer tax by announcing lower income taxes and more money for assistance programmes.

Prime Minister Najib Razak, in his annual speech to parliament, said he would cut individual income taxes by between 1 and 3 percentage points, while he took steps to considerably soften the impact of a new goods and services tax that was announced last year and comes into effect in April.

Najib Razak
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Najib Razak

Earlier this month, the government had announced a round of fuel subsidy cuts as it tries to move closer to its target of achieving a balanced budget by 2020.

Najib used his speech to assure the rakyat - Malay for people - that they would not be faced with a sharp rise in living costs.

"The government gives top priority to the rakyat particularly in terms of their daily cost of living," Najib said.

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While Malaysia's economy is on a strong growth trajectory - the government forecast expansion of 5.0 to 6.0 percent in 2015 following expected growth of 5.5 to 6.0 percent this year - investors have been worried by the country's high debt levels.

Malaysia needs to chip away at a mountain of debt that is expected to fall to 52.8 percent of GDP by the end of this year from 54.7 percent in 2013.

In the economic report released just ahead of Najib's speech, the Prime Minister said the government was committed to its plan to lower the deficit to 3.0 percent of gross domestic product in 2015 from 3.5 percent this year, with the aim of balancing the budget by 2020.

Najib is forecasting total expenditure in the 2015 budget would be 273.9 billion ringgit, up 3.7 percent from 2014, although tax revenues are forecast to rise 4.5 percent to 235.2 billion.

Analysts said that the government will have its work cut out achieving the 3 percent target, but has a chance if GDP growth stays on track.

The budget contained little to move markets either way, according to analysts, which should be a relief for a country where around 47 percent of the government's bonds are held by foreigners.

"I would say probably largely a non-event from the market perspective," said Wellian Wiranto, an economist at OCBC Bank in Singapore. "It's not highlighting anything new...but in many ways the lack of surprises is actually a good thing."

Otherwise, investors are becoming increasingly wary of emerging market economies that fail to take steps to put their financial house in order ahead of an expected rise in U.S. interest rates next year.

Shoring up support

However Najib is faced also with the challenge of lowering the fiscal deficit without losing more support ahead of elections in 2018.

The ruling National Front, led by Najib's United Malay National Organisation (UMNO), is worried that support has ebbed from the ethnic Malay majority. The coalition is dependent on Malays and ethnic groups in Sabah and Sarawak for votes, and has shored up support through subsidies and cash handouts.

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Najib said that while the new sales tax set at 6 percent would raise a total revenue of 23.2 billion ringgit, once exemptions and the abolition of the previous sales and services tax are accounted for, it would bring in a net revenue of 5.6 billion ringgit. Of that total, 4.9 billion ringgit will be channelled back to people through assistance programmes, such as increases in cash handouts.

Having raised administered prices for diesel and a cheaper grade of gasoline earlier this month to reduce the subsidy bill earlier this month, Najib promised in the budget speech that he would soon announce a new mechanism to "rationalise" the fuel subsidies that would benefit the less well off.

"The rationalisation aims to ensure a more targeted subsidy, reduce leakages and smuggling," he said.

Second finance minister Ahmad Husni Mohamad Hanadzlah said plans for the subsidies will be announced in a few weeks time, and implemented next year.

"One (plan) is for private ownership vehicles and the other is for commercial vehicles," he said.

An extension of the stamp duty exemption for first time home buyers was also announced, increasing the purchase limit from 400,000 ringgit to 500,000 ringgit.