BofAML Malaysia in Focus: Budget Preview – Maintaining Discipline

BofAML Malaysia in Focus: Budget Preview – Maintaining Discipline

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Prime Minister Najib Razak will table Budget 2015 on 10th October. According to

PM Najib, Budget 2015 is aimed at “stimulating growth, improving the fiscal

position and raising the people's living standard”. We expect the government to

maintain fiscal discipline: targeting a 3% deficit for 2015, unveiling details on the

GST scheme (scheduled for 1 April), and continuing with subsidy rationalization.

The government is on track to achieve its deficit target of 3.5% of GDP in 2014,

improving from the 3.9% in 2013 (see Chart 1). For the first half of 2014, the

deficit came in at 3.7% of GDP in 1H14, largely on a cutback in development

expenditure (-12.6%). Revenue has been strong (+6.8%) in the first half, driven

largely by non-tax revenue (+19.2%). Operating expenditure however rose at a

faster pace (+7.9%), driven by a jump in civil servant salaries (+15.8%). The

ballooning bureaucracy size remains a concern. Subsidies rose at a more modest

pace (+2.1%), as fuel prices are adjusted closer to market rates.

The fiscal deficit tends to be smaller in 2H, as revenue is typically stronger.

Announced fuel subsidy cuts should save another 0.1% of GDP for 4Q. Recent

drop in global oil prices will also cut subsidies, reducing the gap between global

and subsidized domestic fuel prices. Revised RON95 and diesel prices at

RM2.30/liter & RM2.20/liter are only about a 15% discount from market prices.

Focus will be on the 6% goods & services tax (GST), slated from 1 April 2015.

Details on the zero rated items are expected, which will impact revenue and

inflation. Water & basic foodstuff will be GST-exempt, while electricity will be

partially GST-exempt. About one-third of the 944 items within the CPI basket may

be zero-rated.1 We expect broader exemptions and lower net revenue than

previous guidance. Indication was that the 6% GST would raise RM22bn, which

will be partly negated by revenue loss of RM16bn from the abolishment of the

existing sales tax. Net revenue impact was estimated at about +RM6bn for the

first year, which may be lowered because of broader exemptions.

There will be a mitigation or GST-offset package for lower-income households

and civil servants, to soften the impact. An allocation of about RM150m has been

provided to help SMES to move to the GST system and another RM100m for

GST training programs. Note that GST may result in lower prices on certain items

such as cars, where the 6% GST will replace the current 10% sales tax. Telcos

will also see the services tax replaced by GST.

 Budget 2015 will continue with subsidy rationalization and unveil details on a fuel

rationing scheme or mechanism, which will target subsidies for lower income

individuals (rather than current blanket subsidy). This may be implemented in the

first half of 2015. There may also be details on a Fuel Cost Pass-Through (FCPT)

system for electricity tariffs, which will peg tariffs to international gas price.

Budget 2015 will also increase handouts – 1Malaysia People's Aid (BR1M) – to

the lower and middle income households, to help them cope with rising costs of

living (Chart 3). Over the past year, fuel prices have been hiked twice, sugar

subsidies removed, and electricity tariffs increased. Headline inflation averaged

3.2% in the past 12 months (Sep13-Aug14) vs. 1.6% in preceding 12 months.

Government has already committed to cutting corporate (by 1%) and individual

income taxes (by 1%-3%) effective 2015. Further income tax cuts are unlikely.

We do not expect more property cooling measures, as property price increases

are already moderating, while transactions and mortgage applications are falling.

There are risks of higher sin taxes, particularly on tobacco and gaming.

Overall, Budget 2015 will likely ensure that fiscal discipline is maintained. The

fiscal deficit has been cut by almost half from about 7% of GDP in 2009. With the

GST, the government will diversify its revenue base and depend less on volatile

petroleum and income taxes. The GST will allow the government to cut corporate

and income tax rates, closing the gap with Singapore and ensuring tax

competitiveness. More remains to be done to contain the quasi-public debt and

government guarantees, but the fiscal targets so far appears to be on track.