Malaysia's big Budget approach to restore, uplift living standards

MALAYSIA seems to have opted for a Keynesian counter-cyclical approach to the economic dislocation triggered by the Covid-19 pandemic. The suite of measures the government introduced in its Budget last week shows plans to spend on infrastructure development, handouts to the poor, and calibrated tax measures - all to stimulate the economy.

At RM332.1 billion (S$107.5 billion), the 2022 Budget expenditure is up 3 per cent from this year, and the largest on record. At the same time, a revenue deficit of 6 per cent has been projected, pointing to the challenge of budgeting during a pandemic. The shortfall will be financed by borrowing. However, Finance Minister Tengku Zafrul Abdul Aziz struck an optimistic note in his speech, citing gross domestic product (GDP) growth forecasts of 5.5-6.5 per cent next year.

It is worth noting that Malaysia has seen three national Budgets under three different governments since the fateful 2018 election. The Budget for 2020 did not anticipate the pandemic and struggled to cope with the ensuing difficulties. Budget 2021 was predicated on an economic recovery that did not materialise. At its height earlier this year, daily Covid case numbers crossed 20,000 and health containment measures sent the economy reeling. Malaysia's revenue streams shrivelled up exactly when Putrajaya was spending more to help keep everyone struggling to stay afloat. This time, Tengku Zafrul's optimism perhaps stems from the fact that with about 75 per cent of the country's population now vaccinated against, the economy will revert to some semblance of normality. Given the detection of new variants and government plans to open borders to international tourists, some caution might be in order.

More importantly, the Budget does not attempt to reform the economic structural problems laid bare by the onset of the pandemic. For instance, some 25 per cent of people aged 20-24 are unemployed. Youth unemployment and under-employment, especially among graduates, with its potential for causing social unrest, must be addressed - the sooner the better.

Again, apart from the current Budget, successive administrations have held that their vision is for Malaysia to become an economy with the know-how and competitiveness to produce sophisticated goods and services that can command a market premium. While Malaysia has made some progress towards moving up the value chain, there remains a huge reliance on low-cost production models that lean on low-skilled cheap imported labour to keep a lid on wages to maintain business margins. Simply put, the local business community, for one reason or another, has not been able to bring about this transformation. Certainly, the relative ease of importing cheap low-skilled foreign workers into Malaysia had contributed to this situation. Now may be an opportune time, with cheap labour supply chains disrupted, to tackle this issue head-on.

Malaysians have grown poorer since Covid-19 stalled the economy - almost 13 per cent of those previously considered high-income earners have slid down to middle-income levels. Due to layoffs and wage cuts, around 600,000 to 1 million households (amounting to 20 per cent of the middle-income cohort) have fallen into the lowest income rungs. Unless the Budget helps to restore living standards quickly, there may be a backlash against the government in the 2022 general election.

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