Govt on target to reduce budget deficit

Posted on September 17, 2013, Tuesday

KUCHING: Although there are doubts that the government will be able to achieve its budget deficit target for 2013, owing to its generous handouts to ease people’s financial burden in the first half (1H) 2013 and the early salary increment for civil servants in July, the government indicated that it is confident of achieving the target and reiterated its commitment to bring down its budget deficit gradually to a more manageable level.

As it stands, the government is estimated to have spent RM3.9 billion on the various cash assistance programmes in 2013, up from RM3 billion in 2012. The salary increment, together with the streamlining of the salary scales for armed forces, is expected to cost the government an additional spending of RM2 billion.

Nonetheless, the government said that it is on track to narrow its budget deficit to four per cent of gross domestic product (GDP) or RM40 billion, from a budget deficit of 4.5 per cent of GDP or RM42 billion in 2012 noted RHB Research Institute Sdn Bhd (RHB Research).

“Thus far, the government had two years of good track record in achieving the deficit targets it set in 2011 to 2012. This was made possible on the back of better-than-expected collections from corporate income tax and oil revenue as well as a reduction in its planned gross development expenditure by around RM2.9 billion each in 2011 and 2012. The former was aided by tax audits and investigations to reduce tax evasion,” stated the research house.

“We also believe the government will be able to achieve its target of a budget deficit of four per cent of GDP for 2013. This is reflected in an unexpected sharp drop in gross development expenditure of the government by 33.5 per cent year on year (y-o-y) in the second quarter (2Q), suggesting that the government had temporary suspended its development spending and used the money to part finance the handouts so that it will not worsen its fiscal position significantly.”

The move, though, was at the expense of growth and economic growth in the 2Q was affected somewhat. Also, RHB Research understood that the government’s income tax collection will likely surprise again on the upside, as it enhances its corporate income tax collections.

In addition, the government cut its subsidy and raised fuel prices on September 3 that could save the government RM1.1 billion in 2013 and RM3.3 billion annually. Furthermore, the government indicated that it is targeting to reduce its budget deficit to 3.5 per cent of GDP in 2014 and to three per cent of GDP in 2015.

It has set a target to achieve a balanced budget by 2020.

Apart from enhancing its revenue through better tax management, the government will likely broaden its tax-base through the implementation of Goods & Services Tax (GST), which the government indicated recently that the GST is ‘a must’ and ‘not an option’.

While the government officials are ready to implement the GST, a strong political will is still needed for the government to implement it.

On the expenditure side, the government will likely reinforce measures implemented earlier to rein in its discretionary spending and it has signalled that it will likely reschedule big projects with high import content and low multiplier impact on the economy but will continue those with low import content and high impact multiplier on the economy to prevent a knee-jerk impact on economic growth.

“Meanwhile, we believe more could be done by scrutinising transfer make to statutory bodies and funds, which account for a relatively large portion of the government’s operating expenditure,” the research house stated.

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