KL Budget 2015 to ease inflation concerns, but will stick to fiscal cuts

Kuala Lumpur

TO contain discontent over spiralling prices, Malaysia's Budget 2015 is expected to dish out aid to lower income households and civil servants, yet demonstrate a continued commitment to fiscal consolidation.

Prime Minister Najib Razak who will table the budget on Friday had previously hinted at the three-pronged objectives of stimulating growth, improving the fiscal position, and lifting living standards.

On the fiscal front, Mr Najib who is also the finance minister, last week finally pushed through a 10 per cent fuel hike that had been anticipated as far back as May. Many consider the move aimed at appeasing the rating agencies given that it comes just a few weeks to the budget and three months to the year-end by which it hopes to meet its target of shrinking the fiscal deficit to 3.5 per cent of GDP.

The pass-on-effect of the hike is bound to burden Malaysians, who in a recent Nielsen poll picked fuel and food prices as among their top concerns given the looming implementation of a 6 per cent goods & services tax (GST) in April.

Economists forecast the annual cash handouts to lower income households could be stepped-up to RM800 (S$312), for instance, from RM650 for households that earn less than RM3,000 per month.

Civil servants - an important vote bank - are also expected to receive a month's bonus though government emoluments already account for a whopping 28 per cent of total revenue. The fact that operating expenditure has been inching up annually - also at the expense of development expenditure - is worrying. RHB Investment noted that it soared to a high of 105 per cent of revenue in the first half of 2014.

Subsidies continue to be a thorn in the government's side. While subsidy spending has moderated in recent years, it remains high and unsustainable at nearly a fifth of revenue.

Still, more gradual cuts cause less pain to growth. Businesses say that a specific timeline of reductions would aid planning. However, implementation needs to be abided by to be credible.

One area that also needs more details is the GST - the consumption tax introduced to broaden the tax base and reduce reliance on petroleum income. The GST is forecast to net an additional RM2.5 billion in 2015 and RM8 billion to RM9 billion in 2016.

Government officials have indicated that almost a third of 900-plus items in the CPI-basket will be zero rated from GST, but tax experts want more details - including if fuel will be spared the tax - so that the implementation of the new tax will be smoother.

Budget 2014 provided personal income tax cuts of one to 3 per cent from 2015 and corporate tax of one per cent from 2016. Even so, as in recent years, the collection of taxes is projected to improve in 2015 owing to more vigilance at customs and the Inland Revenue Board.