This article first appeared in The Edge Malaysia Weekly on October 9, 2023 - October 15, 2023

MALAYSIA’s Budget 2024 — which will be tabled by Prime Minister and Finance Minister Datuk Seri Anwar Ibrahim this Friday (Oct 13) to round up his administration’s Madani economy narrative — may well be the nation’s biggest budget to date at the point of tabling. But it will have the lowest fiscal deficit since 2019 and a higher allocation for basic development expenditure (DevEx), numbers derived from official documents show.

The fiscal or budget deficit is expected to fall to between 4% and 4.5% of gross domestic product (GDP), below the 5% for Budget 2023 tabled in February this year but above 3.4% in the pre-pandemic Budget 2019. The expected reduction is in line with the fiscal deficit of between 3% and 3.5% in 2025, as stated in the 12th Malaysia Plan mid-term review (12MP MTR) report released in September, as well as the -3.2% by 2025 indicated in the medium-term fiscal framework (MTFF) in the fiscal outlook report released in February (see chart).

Maybank Investment Bank Research, for instance, expects the 2024 fiscal deficit at 4% to 4.3% of GDP while CGS-CIMB Research is projecting 4.3% of GDP, “with the budget focusing on the Madani framework and targeted subsidies”.

Yet, Budget 2024 can still be bigger than the revised Budget 2023’s RM386.14 billion (excluding RM2 billion for contingencies) or come close to Budget 2022’s RM395 billion with the fiscal deficit still below 5% of GDP, our back-of-the-envelope calculations show. This is derived from fiscal numbers appended in the 12MP MTR report released in September as well as numbers in the revised Budget 2023 (see table).

If the 12MP MTR figures are reflective, and assuming no material deviation in Budget 2023 numbers, Budget 2024 would be about RM395 billion, with about RM300 billion going to operating expenditure (OpEx) and RM94 billion to DevEx, our rough figures show. These simplistic numbers, however, would result in the fiscal deficit being over RM90 billion or closer to 4.5% to 4.8% of GDP, our estimates show, unless expenses are lower or revenue comes in higher than what is targeted in the 12MP MTR.

Numbers appended in CGS-CIMB’s note dated Oct 2 also indicate Budget 2024 of RM387 billion, slightly higher than the numbers tabled in Budget 2023 in February, but its economist seems to be expecting a lower deficit in 2023 itself on the back of revenue coming in higher than the growth in OpEx plus a slight reduction in DevEx.

What is worth noting about these numbers is that Budget 2024 could see the highest ever allocation on DevEx of some RM90 billion to RM94 billion, if indeed the revised target for 2025 is just over RM73 billion as per the 12MP MTR.

And while the RM94 billion we derived for 2024 looks lower than the RM97 billion DevEx tabled in the revised Budget 2023 tabled in February 2023, money that goes towards actual development spending should exceed the RM97 billion in Budget 2023 because the latter includes US$3 billion (about RM14 billion) to repay 1Malaysia Development Bhd (1MDB) bonds. As such, the comparable “apples to apples” number for 2023 should be RM83 billion and not RM97 billion.

This should shore up investors’ and analysts’ interest in development and investment projects that might be mentioned in Budget 2024 speech, to improve the country’s strategic infrastructure and positioning as well as the people’s skill, income and well-being.

Whatever the fiscal numbers are at the point of tabling, Anwar’s Budget 2024 speech will be closely watched as it culminates in his Malaysia Madani narrative that he introduced with the launch of the ambitious Madani economy framework on July 26, followed by the launch of the National Energy Transition Roadmap (NETR) in August and New Industrial Master Plan (NIMP) 2030 on Sept 1.

Economists and credit analysts eagerly await details on subsidy rationalisation, especially following the PM’s statement on Oct 4 that the subsidies bill in 2023 from electricity to fuel and food is expected to exceed RM81 billion this year — that works out to about 4.3% of GDP. Some RM3.8 billion alone went to keeping chicken and eggs affordable, Anwar reportedly said.

Budget 2024 will reveal a “concrete move” away from blanket subsidies, a decision that may generate savings of at least US$1 billion to US$2 billion annually, Economy Minister Rafizi Ramli told Bloomberg TV last week.

The central database hub (Padu), which Rafizi said in September is about 60% complete, would prove invaluable in restoring the nation’s fiscal health over the medium term if it helps Putrajaya correctly channel subsidies and assistance only to those who need them.

After all, Putrajaya clearly did not have anything like what Padu is meant to achieve when it rolled out the Goods and Services Tax (GST) in April 2015, only to scrap it in June 2018. Malaysia, under the unity government, is also moving away from divisive politics towards nation-building. The current administration has about three years to show the electorate the benefits of targeting subsidies before campaigning begins again in the run-up to the 16th general election (GE16), which only needs to happen closer to the end of 2027 or early 2028.

Put another way, delaying implementation would also shorten the time available to demonstrate to the people that the new system is better before GE16 campaigns hit.

Anwar’s statement on the RM81 billion subsidies bill for 2023 means the subsidies bill in the second half of this year is higher than that in the first half of this year.

Subsidies for RON95 petrol, diesel and liquefied petroleum gas (LPG) for cooking account for RM15.9 billion, or just over 51% the RM31.1 billion already spent by the government in the first half of 2023 to reduce the cost of living, according to details appended in the Budget 2023 mid-term review report released by the Ministry of Finance in September. Putrajaya’s other sizeable subsidy expenses in the first six months of the year include RM6.8 billion for electricity, which it says benefited 9.7 million users.

In May, Deputy Finance Minister I Datuk Seri Ahmad Maslan told reporters that the top 20 (T20) group will no longer enjoy benefits for RON95 petrol meant for the middle- and lower-income groups next year, a move that should yield substantial savings, given that big cars guzzle more fuel than smaller-capacity cars and motorcycles.

Economists, including UOB Bank Malaysia’s senior economist Julia Goh, have previously estimated that the government stands to save as much as RM5 billion a year with every 20 sen reduction in subsidies for RON95 petrol and diesel, which are currently capped at RM2.05 and RM2.15 per litre respectively.

Assuming there is no change to the current mechanism, CGS-CIMB economist Nazmi Idrus estimates the government’s subsidy bill for RON95 and diesel at RM23.1 billion, with Brent crude oil at US$85 per barrel; RM27.1 billion with Brent at US$90 per barrel; RM39 billion with Brent at US$100 per barrel but only RM15.2 billion with Brent at US$70 per barrel and RM7.3 billion with Brent at US$60 (assuming US$1 = RM4.50), according to data appended in a note dated Oct 2.

“Given the possible higher Brent oil average next year (we project US$85 per barrel in 2024 vs US$80 in 2023), any adjustment in fuel to market price is likely to be done gradually. In the past, changes to fuel prices were in the range of five to 30 sen,” the note read.

CGS-CIMB, which expects Padu to be ready by 1Q2024 and announcements on subsidy targeting to be done in 2Q2024, expects cash handouts in the form of e-wallet credit to targeted groups to offset the gradual reduction in RON95 and diesel subsidies.

Redirecting some of the fuel subsidies going into expensive cars should prove handy in increasing cash transfers to the lower- and middle-income groups. Cash transfers in 1H2023 include the RM5 billion Sumbangan Tunai Rahmah that benefited 8.7 million people, RM2.6 billion Bantuan Khas Kewangan for 1.3 million civil servants and more than one million public service pensioners, and RM825 million for Bantuan Awal Persekolahan that benefited over five million students.

Over the long run, however, these savings alone would not suffice to cover future needs as society ages, especially if federal government revenue does not increase fast enough.

No stranger to the finance portfolio, Anwar — who in August promised that the Madani government would announce a marginal salary increment for the civil service in Budget 2024, pending the completion of a comprehensive review of the civil service salary scheme — would know that new sizeable and sustainable revenue sources are needed even if public spending is done well under his watch. It is time to walk the talk. 

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