Balancing act by Najib

October 28, 2013

Malaysia is an economic crossroads and the prime minister needs to balance between shrinking national income against soaring public expenditure.

by P Vijian

PETALING JAYA: Prime Minister Najib Tun Razak deftly launched his road map for fiscal consolidation last Friday, introducing the unpopular consumption tax and subsidy cuts to raise revenue and check fiscal deficit.

Malaysia is at an economic crossroads and Najib is forced to balance between shrinking national income against rising public expenditure, and shield Malaysia from regular external economic shocks that may hurt the local stock market and the local currency.

Najib, 60, also the finance minister, is finding it hard to correct the nation’s macroeconomic imbalances, as global hawk-eyed rating agencies continue to monitor Malaysia’s financial health.

His task is to swiftly instill confidence among investors and foreign rating agencies, by tackling the 15-year-chronic fiscal deficit of 4% in 2013 and trim down to 3.5% in 2014, before achieving fiscal target of zero deficit by 2020.

In addition, he needs to offset the ballooning subsidies of RM46.7 billion this year, of which RM24 billion is meant for fuel subsidy.

While unveiling the RM264.2 billion Budget 2014 in Parliament last Friday, Najib announced the Goods and Services Tax (GST), with the rate pegged at 6%, and the removal of the 34 sen sugar subsidy — a clear sign that Putrajaya is shifting away from the traditional source of income generation.

The GST would come into force on Apri1 2015, some 17 months after the announcement.

It would broaden the economic base and is expected to generate RM26 billion revenue for the exchequer.

These fiscal management measures are crucial to nurse the nation’s financial health and stave off the wrath of global rating agency, Fitch Ratings, that downgraded Malaysia’s economic outlook to negative from neutral in July.

The downgrade was primarily due to lack of budgetary reforms and the swelling national debt that neared 53% of the gross domestic product, considered the highest in the region.

“The government is on the right path of fiscal consolidation, he (Najib) was brave to introduce GST. It is very positive, there won’t be downgrading, he has addressed structural issues,” PricewaterhouseCoopers Taxation Services Sdn Bhd senior executive director SM Thanneermalai told The Malaysian Reserve on Saturday.

But Najib’s grand road map is not comprehensive enough, say some economists. They say GST is not the panacea for the financial woes, nor were stringent steps taken to plug leakages in the system, especially in government departments.

“Raising revenue is a concern. GST is not a silver bullet, it can’t solve all problems. GST will start in 2015 and will take another two years to stabilise.

“It doesn’t translate into steady revenue, so for next the four years tax revenue is not going to improve,” said Emeritus Prof Datuk Dr Mohamed Ariff Abdul Kareem, professor of economics and governance at International Centre for Education in Islamic Finance.

Mohamed Ariff said the budget was on the assumption that it could resolve all woes troubling the country, but when economic slowdown or recession sets in, the budget could be derailed.

On the other hand, the global outlook is not so good for next year, according to the World Bank and International Monetary Fund reports. Lot of bubbles in developed countries, like debts in India and China, are worrying policymakers.

“The global outlook for this year and the next is not terribly promising. In the light of this breeze of pessimism, one wonders if there will be strong takers for investment projects in regional corridors. The timing may be flawed,” said Malaysian Institute of Economic Research’s assistant director and senior research fellow Shankaran Nambiar.

The question of leakages remain, as the Auditor General’s Report suggests, and generous handouts in different forms continue. The cost of maintaining a high ratio of civil servants to population would remain a burden, said Shankaran.

Najib tried to roll out a fairly sensible budget, to raise revenue by introducing the not-so friendly tax regime, while protecting those likely to be hit hard, the low income earners.

He cut individual income tax rates by 1% to 3% for all taxpayers, Real Property Gains Tax moved up 30% to stop speculation in property market, the 1Malaysia People’s Aid (BR1M) payment increased to RM650 from the current RM500 for household income below RM3,000 and a half-month bonus for civil servants.

“Najib is preparing the whole system and the marketplace will now contain rising house prices, BR1M gives back to the people and subsidies distorting the market have to go. GST is not a popular decision but good for the country.

It’s a responsible budget,” said M&A Securities Sdn Bhd research head Rosnani Rasul.