KUALA LUMPUR (Sept 12): The government’s recently announced GDP growth target of 5%-5.5% from 2023-2025 is seen as optimistic, analysts said, citing normalising effects from pent-up demand and external headwinds post-pandemic.

Commenting on the revised national targets under the 12th Malaysia Plan Mid-Term Review, they pointed to the “challenging” fiscal deficit target of 3%-3.5% by 2025, in absence of an effective mechanism to meaningfully boost revenue or cut expenditure.

In a note, Kenanga Research said growth acceleration, anticipated to be largely driven by domestic demand and structural economic reforms that emphasise high-value-added activities, is “somewhat ambitious and challenging to reach”.

It took into account that “the substantial growth observed in 2021 and 2022 was primarily attributed to a lower base effect, pandemic-related stimulus, and the surge in pent-up demand when the economy fully reopened in April 2022”.

The research house’s own growth projection stands at 3.5%-4% for 2023, and 4.9% for 2024. The two would bring average growth of just 4.3% in the two years, it said.

“Assuming growth would exceed 5% in 2025, the average three-year growth will still be significantly lower than the revised 12MP target,” it added.

On Putrajaya’s fiscal deficit target, Kenanga Research said it was “sceptical” if this is achievable ithout implementing an efficient consumption tax system like the GST (goods and services tax), given that sales and services tax (SST) collection remains lower than the previous GST collection.

“The resulting shortfall in tax revenue poses structural issues as there is a need for the government to accelerate development spending and cover its increasing expenses, such as emoluments and the effort to increase salaries and wages among government servants,” it said.

“Consequently, we're maintaining our fiscal deficit forecast at between 5%-5.2% of GDP for 2023, with a modest improvement projected in 2024 to fall between 4.5%-5%,” it added.

Meanwhile, MIDF Research opined that the consolidation of fiscal deficit may extend beyond 2025, given the sustained and large fiscal development spending of around RM90 billion annually for the remaining 12MP period.

This marks an increase of RM15 billion in the total development expenditure in 2021-2025 to RM415 billion, from RM400 billion provided previously.

“We view this as the government’s intention to play an active role to directly support the economy and to ensure the country’s GDP growth would be no less than 5%,” it said.

“For the government to reach the lower 3% target, this will either require a larger boost to fiscal revenue or reduction in operating expenditures to see a quicker reduction in the size of fiscal deficits,” it added.

It estimated the deficit-to-GDP ratio may hover around 4% and 4.5% by 2025.

“In our opinion, the 12MP-MTR has given more prominence to the construction sector given that the planned development expenditure has been increased,” it said.

Separately, CGSCIMB Research has kept its growth forecasts of 4% for 2023 and 4.6% for 2024, citing “no surprises” from the report announced on Monday.

The higher development expenditure target is seen to “take into account the recent higher inflation rather than any material changes in spending direction”.

“Overall, we think the government is striking a right balance between the various priorities for growth, and providing enough clarity for investors to see Malaysia’s medium-term potential,” CGSCIMB said.

To address the government’s debt and liability management, Prime Minister Datuk Seri Anwar Ibrahim said the Fiscal Responsibility Act is to be tabled in the Parliament in October.

Putrajaya is also further exploring a progressive tax policy, which includes the planned roll-out of capital gains tax in 2024, progressive taxes on unhealthy products, multi-tier foreign worker levy and an ongoing Voluntary Disclosure Programme.

The government is open to other methods to achieve a wider revenue base “whether it's going to be the capital gains tax, goods and services tax, or any form of direct or indirect taxes”, Economy Minister Rafizi Ramli told reporters.

The government is also looking to repurpose unutilised allocated funds of government-linked companies (GLCs) and statutory bodies to optimise available resources which will part-fund the higher development expenditure targeted in the 12MP period.