This article first appeared in The Edge Malaysia Weekly on September 18, 2023 - September 24, 2023

In the 12th Malaysia Plan Mid-Term Review (12MP MTR), the government raised the spending ceiling to accommodate an additional RM15 billion in public expenditure.

The extra allocation will be spent on development expenditure (DE), lifting the annual sum to RM90 billion for 2023 to 2025. This means the total DE allocation increases to RM415 billion for the five-year period from 2021 to 2025, from RM400 billion originally.

Interestingly, the additional allocation is not stated in the MTR document.

Some view the increase in DE — which has been flattish as over 90% of public revenue has to be allocated for ballooning operating expenditure over the years — as demonstrating the unity government’s emphasis on infrastructure building, particularly public transport.

Prime Minister Datuk Seri Anwar Ibrahim, who is also the finance minister, told parliament last week at the 12MP MTR that the government would emphasise the development of a sustainable and reliable transport and logistics infrastructure.

A total of 10 transport projects have been highlighted in the review, including the Penang light rail transit (LRT) project; widening of the North-South Highway in phases; expansion of Bus Rapid Transit (BRT) and intra-city bus services, including in Johor Bahru and the Klang Valley; Penang International Airport expansion; and redevelopment of Sultan Abdul Aziz Shah Airport, Subang.

The Mass Rail Transit Line 3 in the Klang Valley is, however, not on the list.

“A major shift in strengthening the public transport network will provide better access and connectivity. More people will enjoy public transport services that are increasingly efficient, reliable, affordable and safe,” said Anwar, who is finance minister for the second time.

From an economic perspective, higher DE is much needed as a stimulus to drive growth, considering the external headwinds amid the softer-than-expected China recovery, sticky downward inflation that results in high interest rates, and volatile commodity prices, among others.

MIDF Research says in a report: “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 (gross domestic product) growth would be no less than 5%.

“The government also aims to ensure that 60% of DE will be allocated for basic DE, as part of the improvement in the fiscal and budget management.”

In the revised Budget 2023 tabled in February, the government has allocated RM95 billion for DE, a significant jump from RM75.6 billion in 2022 and RM64 billion in 2021, mainly for infrastructure development.

Nonetheless, CGS-CIMB Research reckons that the higher DE target is to “account for the recent higher inflation rather than any material changes in spending direction”.

“Overall, we think the government is striking [the] right balance between the various priorities for growth, and providing enough clarity for investors to see Malaysia’s medium-term potential,” CGS-CIMB says in a report.

Under the 12MP MTR, the government has raised targeted annual economic growth of 5% to 6% between 2021 and 2025 from the 4.5% to 5.5% estimated earlier. The stronger growth is driven by resilient private consumption, stronger private investment growth as well as robust expansion in the manufacturing and services sectors.

A bigger budget for DE has raised concerns about an even wider fiscal deficit, even as it is generally considered an essential and wise move. Furthermore, Anwar, who never had a budget deficit when he was finance minister in the 1990s, is maintaining the fiscal deficit goal at 3% to 3.5% of GDP by 2025, from 5.6% in 2022.

Economists wonder how Anwar will be able to rein in the widening deficit — a major challenge for the government over the decade, as the past administrations increasingly relied on borrowings.

Operating expenditure (opex) is expected to grow by RM194 billion, to RM1.43 trillion, from 2021 to 2025, from the RM1.23 trillion estimated earlier. Big-ticket items in the opex include civil servant emoluments and pensions — which account for slightly more than 40% of the grand total — debt service charges and subsidies.

Kenanga Research describes the fiscal deficit target as “challenging” without the implementation of an efficient consumption tax system such as the goods and services tax (GST), given that sales and services tax (SST) collection remains lower than that of the previous GST.

“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.

The research house has maintained its fiscal deficit forecast at between 5% and 5.2% of GDP for 2023, with a modest improvement projected in 2024 to fall between 4.5% and 5%.

Now, will the unity government be able to afford higher DE without taking up more borrowings?

Economy Minister Mohd Rafizi Ramli says the additional RM15 billion allocation for DE will not come from borrowings but from expected better economic growth in 2024/25 and domestic savings through better governance.

“The RM415 billion ceiling has been agreed upon after taking into account expectations that Malaysia will remain within the 3.5% deficit target by 2025.

“This means that we are confident we can spend more, with more allocations and without having to borrow more,” he told a press conference after the 12MP MTR presentation session in parliament last Monday.

Meanwhile, the Institute for Democracy and Economic Affairs (IDEAS) has expressed concern about the additional RM15 billion allocated for DE. In a statement last Thursday, the think tank said that while the increase is positive, historically, the government has not had the capacity to fully utilise the allocated expenditure.

According to IDEAS, budget documents show that the government spent only 91% of the estimated development expenditure from 2011 to 2021, except in 2018, when it spent more than the estimated figure.

The increase would have some implications for Malaysia’s debt burden.

“While the economic affairs minister states that Malaysia would still maintain a fiscal deficit target of 3.5% by 2025, despite the increase, such a statement should be backed by mid-term expenditure and revenue forecasts,” the think tank says.

Anwar has hinted that the government will be introducing the capital gains tax in 2024 and taking steps to remove blanket subsidies before implementing the GST.

In an interview with Bloomberg at the 10th Annual Asia Summit of the Milken Institute, Anwar acknowledged that GST was an efficient and transparent tax system.

“When do we implement it? It depends on the threshold. When people are living in abject poverty, you have to introduce progressive tax policies, but not a broad-base policy that affects the very poor.

“So, you have to give some time, but then do you do nothing? No. You have to broaden the tax base, for sure. But you first have to reduce subsidies for the rich,” he said.

The GST was introduced in 2015 at 6% and subsequently abolished in 2018. It was reported that the government collected RM44 billion and RM41 billion in GST in 2017 and 2016 respectively. Currently, Malaysia is one of three Asean countries that do not impose consumption tax such as GST or value-added tax (VAT). The other two countries are Brunei and Myanmar.

Under the existing SST system, the government collected an estimated revenue of RM26.7 billion and RM27.9 billion in 2020 and 2021 respectively, which means it lost about RM20 billion in revenue after the GST was abolished.

Having said that, the Inland Revenue Board (IRB) could be a beacon of hope.

In an interview with The Edge in June, IRB CEO Datuk Mohd Nizom Sairi projected a record-high direct tax revenue of RM210.48 billion this year, 20% higher than the RM175.4 billion collected in 2022. IRB collected RM144.1 billion of direct tax revenue in 2021.

IRB is tapping the Special Voluntary Disclosure Programme (SVDP 2.0) — which is in effect between June 6, 2023, and May 31, 2024 — and the implementation of e-invoicing, which is expected to go online in mid-2024.

The first SVDP was implemented not too long ago in November 2018, when the Pakatan Harapan coalition came to power. It managed to generate an additional RM7.1 billion in taxes for the country.

Mohd Nizom hopes SVDP 2.0 will help bring in income that was previously off the radar, while the e-invoicing initiative will force most transactions to leave behind a digital footprint, enhancing IRB’s ability to trace income that is subject to tax.

Apart from corporate and personal income tax, other tax revenue that comes under the purview of IRB includes the Real Property Gains Tax, petroleum income tax and stamp duties.

Anwar will table Budget 2024 on Oct 13. Will he be able to pull a rabbit out of the hat to spend more and rein in the fiscal deficit? The public will know in four weeks. 

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