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Friday, November 1, 2013

`Right turn' towards fiscal discipline

Publication: NST
Date of publication: Oct 26, 2013
Section heading: Business Times
Page number: 001
Byline / Author: By Rupa Damodaran

KUALA LUMPUR: The 2014 Budget marks a "right turn" at the crossroads in pursuit of fiscal discipline through efficient and effective government expenditure, say economists.

Analysts were pleased that the budget had stuck to an earlier pledge to achieve fiscal deficit of 3.5 per cent of gross domestic product (GDP).

The six per cent goods and service tax (GST), which will be introduced from April 1 2015, will broaden the revenue base and help narrow the deficit, said OCBC Bank economist Selena Ling.

"Given that a four per cent GST rate will largely be revenue-neutral, the six per cent rate bodes well in terms of signalling the government's serious intent to improve its fiscal housekeeping."

The 2014 Budget, she said, has exceeded market expectations on the key deliverables of the GST.

"This should garner positive market reactions and bode well for ringgit-denominated risk assets in the nearterm," she said.

Santitarn Sathirathai of Credit Suisse estimated that the six per cent threshold should raise fiscal revenue by about 0.7 to 0.8 per cent of GDP.

However, this must be considered together with various tax cuts that will offset some of these gains, he added.

He said the budget also aims to strike a balance between fiscal consolidation and two other goals - robust GDP growth and better living standards.

"From a macroeconomic point of view, what seems to be the key difference in this budget announcement from the previous ones was the emphasis on improving fiscal discipline, as opposed to mainly focusing on the details of `people-friendly' measures."

On the reduction in subsidy bills, Santitarn felt that measures such as abolishing the sugar subsidy will not be enough to achieve the targeted decrease in subsidy expense. "According to our calculations, the government will need to at least hike the electricity tariffs, along with raising the subsidised fuel prices (of similar magnitude back in September) further in 2014."

He thinks the targeted reduction in subsidy is quite ambitious and remains cautious about the actual implementation.

CIMB Investment Bank chief economist Lee Heng Guie described the 2014 Budget and the accompanying 2013/2014 Economic Report as a realistic set of macro targets for next year with GDP of 5.0 to 5.5 per cent and a budget deficit.

"The reality is that the government needs to plan its spending within its financial capacity.

"It is a responsible budget for both growth and fiscal discipline as it sets out clear fiscal rules that should put the budget deficit and debt on a firm downward trajectory."

The fiscal action plans, he said, demonstrate the government's strong conviction to prevent fiscal slippage or a deterioration in public finance, which bodes well for Malaysia's credit profile.

For the man in the street, OCBC Bank's Ling said the economic benefits are a low unemployment rate, which is expected to stay at 3.1 per cent next year (similar to the current August 2013 print of 3.1 per cent), and higher per capita income, which is forecast to reach RM34,126.

"In addition, the expanded and more generous BR1M (the 1Malaysia People's Aid) programme should help soothe the anticipated GST effect during the transition period."

She said the macro-prudential measures to help cool sentiments in the housing sector, such as hikes in the real property gains tax, a higher minimum property price threshold for foreigners, and prohibitions for developers from implementing projects that have features of Developer Interest Bearing Scheme, are in line with regional measures to tackle their respective asset inflation stories.

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