World Economy

Malaysia's Najib frames budget to woo support, cut deficit


Malaysia's Prime Minister Najib Razak delivered a budget on Friday to help the less well off and bolster economic growth in a country hit hard by weak global energy prices, but raised income tax rates to help bring down the fiscal deficit.

Under fire over allegations of corruption at state-fund 1Malaysia Development Bhd, Najib will hope the budget measures, which included increased cash support for low income families, extra funds for affordable housing projects and higher development spending, will help soothe criticism of his leadership.

A government economic report, released before the budget speech, forecast Malaysia's current account surplus would be more than halved in 2016 to 11.3 billion ringgit ($2.63 billion), extending a negative trend that has been a key factor behind the ringgit's 17 percent fall this year.

More positively, it predicted economic growth of 4.0 to 5.0 percent next year - barely changed from the 4.5-5.0 percent forecast for this year - and a lower budget deficit, which would support investment grade ratings for Malaysia's sovereign debt.

Malaysian Prime Minister Najib Razak on April 3, 2014 in Perth, Australia
Richard Wainwright | Getty Images

Najib stressed his budget's aim of looking after the welfare of the people, while supporting growth and controlling the fiscal deficit.

"This Budget and future Budgets will be premised on striking a balance between the Capital Economy and People Economy. In addition, we need to achieve an inclusive and sustainable growth as well as build a competitive, progressive and a morally strong nation, with a society that is united," he told parliament.

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Delivering on that, Najib announced more funds for education and modernising the farm sector, and assigned zero tax rates to basic items like over-the-counter drugs, baby milk, and noodles, effectively exempting them from the highly unpopular Goods and Services Tax (GST) introduced last April.

He also allocated 1.1 billion ringgit for Malaysia's 1.6 million civil servants salary increases.

Najib assigned more funds to rural areas, promising to improve infrastructure in villages, including building houses and water supply and projects.

Several infrastructure and social incentives were given to Sabah and Sarawak, two Malaysian states on Borneo island that are crucial to the ruling party's fortunes.

Despite the increased outlays, the fiscal deficit was projected to fall from 3.4 percent last year to 3.2 percent this year and 3.1 percent in 2016.

The passage of the budget through parliament could test the support Najib commands in the ruling United Malays National Organisation (UMNO) as he fights for political survival.

Opposition leaders called on all parliamentarians to reject Najib's budget as a show of no confidence against him. They have also launched moves to bring a formal confidence vote.

If it did happen, Najib would likely survive, but he still needs to convince worried UMNO members that he can overcome 1MDB scandal to lead them into an election due by 2018.

Read More Malaysia's Leader, Najib Razak, Faces U.S. Corruption Inquiry

The political crisis, the low oil prices and the slowdown in China has deeply impacted the Southeast Asian country's economy, putting pressure on finances.

The 2016 budget allocation was put at 267.2 billion ringgit, 6.5 billion ringgit more than in 2015. Revenues are forecast to go up to 225.7 billion ringgit in 2016, an increase of 3.2 billion ringgit over 2015.

Oil and gas related revenues are expected to total 14.1 percent of the government's total revenue in 2016, down from 19.7 percent in 2015.

The ringgit, having plumbed 17 year lows in recent weeks, rallied to 4.222 ringgit against the dollar on Friday after the budget was presented. The stock market ended 0.34 percent higher before Najib finished his speech.