The Business Times

Najib tackles fiscal deficit, unveils 6% GST

Removal of sugar subsidies, property cooling measures are also announced

Published Fri, Oct 25, 2013 · 10:00 PM
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Kuala Lumpur

MALAYSIAN Prime Minister Najib Razak yesterday unveiled a 2014 Budget designed to tame the country's fiscal deficit, shrinking current account surplus and growing debt.

The government's expenditure-and-revenue plan will abolish sugar subsidies from today, cool the property market and - controversially - introduce a 6 per cent Goods and Services Tax (GST) by April 2015.

The mention of the GST brought jeers from the opposition, which gave Mr Najib the opening to announce the tax cushions to be implemented. Essential food items such as rice and flour would be exempted from this tax, along with public transport, government services, utilities and property purchases.

In addition, changes will be made to the tax system: Income taxes will be lowered by between 1 and 3 per cent, with the maximum tax rate levied on those with incomes exceeding RM400,000 (S$157,000) a year, up from the current RM100,000.

On the other end of the scale, families earning RM4,000 or less will be off the tax roll.

Corporate taxes will be cut by one percentage point to 24 per cent from 2016.

All told, he proposed a relatively flat Budget: Total spending will rise 0.8 per cent to RM264.2 billion, against revenues of RM224 billion.

The country's Budget deficit will come down to 3.5 per cent of gross domestic product (GDP) next year, from an estimated 4 per cent this year.

The Budget projects GDP growth of between 4.5 and 5 per cent this year, and between 5 and 5.5 per cent for next year. Growth will be driven by private investment (12.7 per cent).

Inflation is projected to remain benign, and there would be full employment at 3.1 per cent.

The Budget revealed that foreign direct investment rose 14 per cent to US$18.2 billion in the first half of this year, while Malaysia's international reserves remained at a strong US$140 billion.

The country's per capita income is expected to reach RM34,126 in 2014; Mr Najib added that the administration has forecast that gross national income of RM46,000 would be reached earlier than the targeted 2020, eliciting cheers from government backbenchers.

Budget 2014 is likely to rally the markets and reassure the international rating agencies. In July, Fitch had kept Malaysia's investment-grade rating but cut its outlook from "stable" to "negative", citing fears about the government's distressed financial position.

Fitch could well restore the country's financial outlook, said Yeah Kim Leng, an economist with the Rating Agency of Malaysia. "The government is bringing down the fiscal gap, and growth remains strong at around 5 per cent. There are no reasonable grounds for Fitch to downgrade (the country's outlook)."

Even so, total federal government debt is expected to rise to RM541.3 billion - 54.8 per cent of the GDP this year and just a shade under the 55 per cent debt ceiling permitted by law.

The only silver lining in that is that more than 96 per cent of the debt is from domestic sources.

Mr Najib also announced that financial assistance to poor households would continue; RM4 billion has been allocated for this purpose. Civil servants will get a half-month bonus, and pensioners, a one-off RM250 payment.

Although the subsidy on sugar will be removed, the government will set aside RM47 billion - a fifth of the total budget allocation - to fund subsidies in 2014. Mr Najib did not say so directly, but implied that more fuel price hikes can be expected, coming after last month's 10 per cent hike.

And in response to the people's complaints about the rising unaffordability of housing - prices in Kuala Lumpur have gone up almost 30 per cent - he unveiled measures to cool the property market. Real property gains tax will be raised, among other changes.

The Budget also listed 13 proposals to help small- and medium-scale enterprises (SMEs), allocating them RM2.6 billion in funding. SMEs are projected to contribute 41 per cent to Malaysia's GDP by 2020.

In a seeming nod to the Indian community which had stood by the ruling coalition in this year's general election, Mr Najib allocated to it RM100 million for education.

A further RM50 million was set aside for the development of entrepreneurs.

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