KUCHING: The government is set to lean towards consolidating its budget deficit further, which is deemed as necessary and positive for the capital market given rising twin deficit concerns in emerging market economies and following the downgrade of the country’s sovereign rating outlook to negative by Fitch Ratings late July.
RHB Research Institute Sdn Bhd (RHB Research) underlined this in its economic update report, adding that whilst the government would like to fulfill all its promises made during the general election in the forthcoming Budget 2014, it could potentially be constrained by its unfavourable fiscal position, after suffering 16 consecutive years of budget deficit and as the debt burden becomes heavier.
Nevertheless, the research firm highlighted that the government is already looking to bring down its budget deficit further to 3.5 per cent of gross domestic product (GDP) or RM37.6 billion in 2014, and has set a target to reduce it to three per cent of GDP in 2015. It has also aimed for a balanced budget by 2020.
“This will likely be done via both the revenue and expenditure sides. From the revenue side, the key focus will be on the announcement of the Goods & Services Tax (GST), although the implementation will likely begin from January 2015,” it added.
The GST is important to aid the government in broadening its tax base that will assuage the international rating agencies to not hurry into downgrading the country’s sovereign rating.
The research firm viewed that enhance its revenue, the government will likely announce during Budget 2014, the date to implement the GST, which will likely be in 2015 and at a rate of around four to five per cent.
“Also, we expect the government to carry out more stringent tax audits and investigations to ensure greater compliance and reduce tax evasion. Indeed, we understand that the income tax collection will likely surprise on the upside in 2013, after recording better-than-expected collections in the last two years.
“On the expenditure side, apart from the resumption of the rationalisation of fuel subsidies, what the budget will do is to emphasis the commitment to award contracts based on open tender that will save costs for the government,” RHB Research said, noting that the government could cut the subsidy and raise fuel prices again six to nine months down the road.
On developments in Malaysia, the research firm opined that the government may liquidate some assets (parcels of land bank for example) and lower equity stakes of government-linked companies (GLCs) to raise revenues.
At the same time, future projects will be planned based on the Public-Private Partnership (PPP) basis that will not require significant government spending upfront.
While there are doubts that the government may not achieve its budget deficit target of four per cent GDP or RM40 billion in 2013, given various handouts given to the public in the first half of 2013 (1H13), the research firm viewed that it will likely meet its target as planned, this year.
“This is because the government will likely reduce its expenditure elsewhere to foot the bill of the handouts and it has two good years of track record of achieving its budget deficit on target in 2011 to 2012.
“Already, the real public investment fell by 6.4 per cent year-on-year (y-o-y) in the second quarter (2Q), after surging by 17.3 per cent in the 1Q and it has been growing at between 13 and 27 per in the last three quarters of 2012,” it opined.
On the other hand, it added, public consumption saw a significant jump of 11.1 per cent y-o-y in the 2Q, after growing at a mere 0.1per cent in the 1Q.
Sufficient measures undertaken in the Budget 2014 that try to address the persistent fiscal deficit and high government debt as well as the rescheduling of some low multiplier and high import content infrastructure related projects to prevent the current account in the balance of payments from falling into a deficit are deemed necessary and positive for the equity market.
“This is despite it being a tight budget with the fiscal deficit projected to narrow further to 3.5 per cent of GDP in 2014, from four per cent of GDP in 2013, and potentially higher ‘sin taxes’ imposed to raise revenue for the Federal government,” RHB Research pointed out.
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