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Malaysia targets biggest budget deficit since 2013

To plug the hole left by the scrapping of the consumption tax, the government aims for a deficit equivalent to 3.7% of GDP

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Finance Minister Lim Guan Eng, delivering the first Budget under the five-month-old government of Prime Minister Mahathir Mohamad, outlined a slew of tax measures and new revenue sources to improve the country's fiscal position.

Kuala Lumpur

MALAYSIA'S government will push its Budget deficit to the highest in five years, raise taxes and draw more income from the state oil company to help plug the shortfall.

In the first Budget since Prime Minister Mahathir Mohamad took office in May, the government is widening its deficit target for this year to 3.7 per cent of gross domestic product, from a 2.8 per cent target under the previous government.

The median estimate in a Bloomberg survey of nine economists was 3.2 per cent.

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The shortfall is set to ease to 3.4 per cent next year and 3 per cent in 2020, Finance Minister Lim Guan Eng said in his Budget speech on Friday.

To fund the gap, the government will more than double the amount of dividends it expects to receive next year from state oil company Petroliam Nasional Bhd to RM54 billion (S$17.9 billion).

Malaysia's deteriorating fiscal picture is a worry for investors and a risk to the nation's credit rating.

The Budget comes against a backdrop of a slowing economy and rising global trade risks. Growth is forecast to ease to 4.8 per cent this year from almost 6 per cent last year; growth is expected to be 4.9 per cent next year.

Dr Mahathir's scrapping of a consumption tax soon after winning the May 9 election left a hole in the state's finances, so Mr Lim lined up a range of tax measures and new revenue sources on Friday to narrow this deficit over time.

Stamp duty on properties worth a million ringgit or more will be raised to 4 per cent from 3 per cent. A levy on real-estate value gains will also be doubled to 10 per cent for non-residents, and set at 5 per cent for residents, who previously paid no taxes.

An airfare levy on passengers was set at RM20 for those travelling to South-east Asia and RM40 for those flying elsewhere

The government will set up a real-estate investment trust for airports, then sell 30 per cent of its stake to earn about RM4 billion.

Excise duty will be imposed on sugary drinks at 40 sen a litre, including those with more than 5 grams per 100 millilitres of added sugar, as well as fruit and vegetable juices with high sugar content.

Gaming companies must contribute 35 per cent of their gross income to the government, on top of higher licence fees at RM150 million, from RM120 million ringgit previously.

Market-determined fuel prices will be brought back, although small cars and motorcycles may still enjoy lower prices.

The corporate tax rate will be cut to 17 per cent from 18 per cent for companies with taxable income of up to RM500,000 and with paid-up capital of less than RM2.5 million.

The benchmark stock index ended almost 1 per cent higher; the ringgit strengthened 0.5 per cent to 4.1588 per dollar. The yield on 10-year government bonds fell 1 basis point to 4.09 per cent.

Andrew Wood, an analyst at S&P Global Ratings, said: "Risks to Malaysia's fiscal and debt profiles remain elevated as it works to manage a number of legacy issues and fund key priorities of the Pakatan Harapan government.

"However, we believe that the government's commitment to gradual fiscal consolidation is credible."

Mr Lim started his speech in Parliament by listing out the bad hand dealt to the nation by the previous government under former leader Najib Razak.

That includes RM43.9 billion in payments Malaysia must make on behalf of troubled state fund 1MDB. Najib's government has already paid almost RM7 billion of 1MDB's outstanding obligations, he said.

The new government is also saddled with RM35.4 billion of unpaid tax refunds. The amount of contingent liabilities has jumped 244 per cent to RM238 billion in the decade through last year. BLOOMBERG