The Malaysian Insight

THE RM332 billion Budget 2022 will put the country’s economy on a firm footing as it recovers from the twin health and economic crises, but revenue collection remains a challenge, said economists.

The national spending plan, Keluarga Malaysia Makmur Sejahtera, tabled by Finance Minister Tengku Zafrul Tengku Abdul Aziz yesterday, is the largest so far.

It is also the second annual budget to be tabled amid the Covid-19 pandemic.

Bank Islam chief economist Mohd Afzanizam Abdul Rashid told The Malaysian Insight that the sizeable allocation suggests that the financial impact is likely to be significant.

“Cash transfers to the needy and subsidies, alongside a better outlook for crude oil prices, will help the government steer the country’s economy onto firmer footing.

“This is reflected in higher GDP projections for next year of 5.5-6.5% from an estimated 3-4% this year,” he said.

He added that the government is committed to table the Fiscal Responsibility Act sometime next year.

Afzanizam said this is critical to ensure better transparency and discipline, to keep government finances in check.

The proposed act, which Tengku Zafrul announced yesterday, aims to improve governance, accountability and transparency as the government increases spending on economic recovery and Covid-19 management amid difficulty collecting revenue.

Revenue challenges

OCBC Bank economist Wellian Wiranto said it is not surprising that the Budget remained expansionary, surpassing last year’s RM323 billion, as there is a need to boost economic recovery. Spending is also driven by the possibility of a general election next year, he added.

“Indeed, at 6% of GDP, the deficit is higher than the 5-5.5% we had in mind, signalling the government’s keenness in maximising whatever financial space it has on hand,” he said in a note.

Although the higher development expenditure allocation of RM75.6 billion (compared to RM62 billion for 2021) is still lower than expected, it should still help to boost growth in the near term and lay foundations over the medium term.

OCBC had projected this figure to be around RM80 billion as the government had projected the five-year 12th Malaysia Plan to cost about RM400 billion.

Wellian said the smaller number could be due to the tight financial reality, with no plans for a major revenue boost such as reimposing the goods and services tax (GST).

“The spending plan is easily the largest budget on record. Without a requisite marked uptick in revenue – still no mention of GST, for one – the deficit is left wide.”

He noted that the government had relied on a strategy involving a rapid uptick in growth for last year, only to be upended by the Covid-19 pandemic.

“Hopefully, the same scenario would not recur.”

The new taxes announced in the budget showed that the government is pursuing an expansionary outlay while trying to keep the deficit broadly in check, Wellian added.

These new initiatives include the personal income tax for permanent residents deriving income from overseas and excise duties on sugary drinks and nicotine-based liquids for e-cigarettes, even though these seem more like a health-push initiative rather than financial, he said.

He also noted the windfall or prosperity tax on corporations. Under the so-called Cukai Makmur initiative, taxable incomes of more than RM100 million in 2022 will be levied at a higher rate of 33% rather than the prevailing 24% corporate tax.

“The windfall tax is slated to be a one-off initiative, due to the high expenditure requirement of the government given the pandemic,” he said, adding that this could come as a surprise for some companies.

“These new initiatives should go some ways in giving the government some uptick in tax revenues, but fundamentally the supposedly one-off nature of the windfall tax (and the uncertainty about how the global taxation will be rolled out) means that the revenue stream remains dependent on the usual suspect: petroleum revenue.”

RM43.9 billion is expected from petroleum, with more than half coming from dividends from state-owned oil and gas company Petronas.

“At 18.8% of total revenue, the proportion is a tad lower than the 19.2% that it now expects for Budget 2021,” said Wellian.

He concluded that the uptick in spending should help to maintain economic recovery momentum, barring the grim outlook surrounding the export market of China and the global economy that remains tied to the pandemic.

“If growth were to falter, not only would it push up the deficit-to-GDP ratio, it would also necessitate even higher expenditure from any new stimulus packages.

“With the deficit already high at 6%, and statutory debt-to-GDP ratio already projected to be elevated at 63.4% of GDP, there is not much financial room to spare,” he said.

If all goes well, including growth picking up as robustly as the government hopes, then there is little issue, although the dynamics can work the other way round as well, as 2021 unfortunately turned out to be.”

Clarity on revenue needed

Meanwhile, Nur Ain Shahrier, senior lecturer at Sunway University, said more clarity is needed on how the government plans to generate revenue to cover its financial deficit, besides relying on dividends from Petronas, and the new excise duties on sugary drinks and nicotine products.

“Economic growth that generates revenue should not only come from short-term demand side such as stimulus packages, but more importantly, address the long-term structural problems emanating from the supply-side including human capital development, education, infrastructure development, connectivity, technologies and productivity,” she said.

“Debt sustainability can only be achieved when our economic growth is sustained and exceeds the government’s borrowing.”

She lauded the government’s commitment towards upskilling initiatives, but noted that it is equally important to address the problems of semi-skilled and low-skilled workers who are vulnerable to retrenchment due to technologies and artificial intelligence taking over.

She said this could also affect workers in the informal sector whose livelihoods have been severely affected by lockdowns.

“With these budget initiatives, it is hoped that not only can we generate short- and long-term economic growth, but more importantly, ensure that we narrow income inequality through more redistributive wage dispersion,” she said. – October 30, 2021.