Budget 2014: Commitment to cut deficit

Published: Saturday October 26, 2013 MYT 12:00:00 AM 

Updated: Saturday October 26, 2013 MYT 11:42:07 AM

Prime Minister Datuk Seri Najib Tun Razak, who is also finance minister,
ready to present the budget. With him are Second Finance Minister
Datuk Seri Ahmad Husni Hanadzlah (left) and Deputy Finance Minister Datuk Ahmad Maslan.

THE Government is committed to reducing the country’s fiscal deficit gradually, with the aim of achieving a balanced budget by 2020.

Prime Minister Datuk Seri Najib Tun Razak said the Government was also committed to ensure that the Federal debt level would remain low and not exceed 55% of the country’s gross domestic product (GDP).

Najib, who tabled Budget 2014 in Parliament yesterday, said the Government was on track to reducing its fiscal deficit from 4.5% of GDP in 2012 to 4% of GDP this year and 3.5% of GDP in 2014.

According to Najib, who is also Finance Minister, Budget 2014 was formulated to ensure that Malaysia’s economy would continue to grow at a healthy pace while its fiscal deficit continue to decline.

The overall objective, he said, was to prosper the nation and promote the well-being of the rakyat.

Themed Strengthening Economic Resilience, Accelerating Transformation and Fulfilling Promises, Budget 2014 contained five key thrusts – invigorating economic activity, strengthening fiscal management, inculcating excellence in human capital, intensifying urban and rural development, and ensuring the people’s well-being.

Najib revealed that a total of RM264.2bil would be allocated under Budget 2014 to implement programmes and projects for national development, with RM217.7bil for operating expenditure and RM46.5bil for development expenditure.

According to Najib, the Government’s revenue collection in 2014 was estimated at RM224.1bil, which represented an increase of RM4bil from 2013.

“Taking into account the estimated revenue and expenditure, the Federal Government fiscal deficit will further decline from 4% of GDP in 2013 to 3.5% in 2014. This clearly indicates the Government’s commitment towards fiscal consolidation to further strengthen the financial position of the nation,” he said.

As part of the Government’s fiscal consolidation measures, Najib also announced the implementation of goods and services tax (GST) from April 1, 2015, at 6% to replace the existing sales and services tax.

“The Government believes this is the best time to implement GST as the inflation rate is low and contained. With the implementation of GST, the Government will be able to address the weaknesses in the current taxation system,” he added.

Malaysia’s inflation rate is expected to range between 2% and 3% next year, while its economy is projected to expand at a stronger pace of 5% to 5.5%, driven by private investment and private consumption, compared with a projected GDP growth of 4.5%-5% this year.

RHB Research Institute Sdn Bhd’s economists opine that the stronger economic growth projected for 2014 by the Government was “reasonable” and broadly in line with their expectation, amid strong domestic demand and the global economic recovery.

On the Government’s fiscal deficit target, they said: “This is prudent and important, given the need to address concerns raised by Fitch Ratings Agency and to prevent the country’s sovereign rating from being downgraded in the immediate term.

“However, we reckon that its impact on the economy is unlikely to be significant, as the reduction remains gradual. Furthermore, a recovery in exports could help to pick up the slack.”

Budget 2014 must have been one of the most keenly watched economic policies ever, as Malaysia faced the risk of having its sovereign credit rating downgraded byFitch Ratings.

The international credit rating agency had in July downgraded its outlook for Malaysia from “stable” to “negative” based on its assessment that fiscal consolidation and structural fiscal reform to address the relative credit weakness of Malaysia’s public finances had become less likely in the wake of the Government’s relatively weak showing in the 2013 general elections.

“While Budget 2014 is an important input to Fitch’s ongoing assessment of Malaysia’s public finances and broader sovereign credit profile, we believe it is even more important to monitor the implementation and execution of budget measures over time,” Fitch’s head of Asia-Pacific sovereigns Andrew Colquhoun told StarBizWeekin an e-mail.

“Moreover, the negative outlook partly reflects the risk that the broader public sector deficit (beyond the Federal Government) will drive the emergence of a current account deficit, which could potentially increase Malaysia’s vulnerability to renewed market tensions when US Federal Reserve’s tapering once again moves up the agenda. The agency will also therefore monitor the broader public sector position,” Colquhoun said.

OCBC Bank (M) Bhd economist Selena Ling, however, believed that Budget 2014 had exceeded market expectations based on the key deliverable of the GST.

“This should garner positive market reactions and bode well for ringgit-denominated risk assets in the near term,” Ling said.

According to CIMB Investment Bank Bhd chief economist Lee Heng Guie, Budget 2014 is a responsible budget for both growth and fiscal discipline as it sets out clear fiscal rules that should put the country’s budget deficit and debt on a firm downward trajectory.

“The budget is broadly in line with our expectation and contained welcome announcements, namely the implementation of the GST. The fiscal action plans demonstrate the Government’s strong conviction to prevent fiscal slippage or a deterioration in public finance, which bodes well for Malaysia’s credit profile,” Lee said.