This article first appeared in The Edge Malaysia Weekly on October 16, 2023 - October 22, 2023

AT RM393.8 billion, Prime Minister and Finance Minister Datuk Seri Anwar Ibrahim’s expansionary Budget 2024 is the largest on record, at the point of tabling, while delivering the expected reduction in fiscal deficit to 4.3% of gross domestic product (GDP) from 5% this year.

Even though most economists — ­including those at the World Bank — are projecting expansion nearer to 4% for 2024, Anwar says he is confident the country’s economic growth could reach nearly 5% next year, driven by the execution of transformative programmes under the Madani economy framework.

Budget 2024 grabbed headlines for its size even before the revenue-positive measures were announced in his Budget 2024 speech in parliament on Oct 13. The budget measures are expected to bolster federal government receipts by RM4.56 billion next year.

The bulk of the expected additional revenue from Budget 2024 measures is RM3.45 billion from the increase in service tax to 8% from 6% (excluding essential services such as food and telecommunications) and the planned expansion to cover areas like logistics, brokerages, underwriting and karaoke services. Another RM1.15 billion in additional revenue is expected to come from excise duties. This may be from a new tax on chewing tobacco, higher taxes on sugary drinks to 50 sen from 40 sen per litre as well as plans to impose 5% to 10% tax on certain luxury goods such as jewellery and watches.

Federal government revenue of RM307.6 billion pencilled in for 2024 was already the highest on record — despite a lower dividend from Petroliam Nasional Bhd (Petronas) of RM32 billion for 2024 versus RM40 billion for 2023 — before the expected boost from additional tax measures, according to details appended in the 2024 Fiscal Outlook and Federal Government Revenue Estimates report.

If spending does not also go up in 2024, that RM4.56 billion additional revenue could potentially reduce the fiscal deficit further from 4.3% of GDP to just under 4.1% of GDP, back-of-the-envelope workings show.

Much hinges on the 2024 subsidies bill, specifically how successful the Anwar-led unity government is in executing targeted subsidies to better fund social assistance to those who need it.

In his Budget 2024 speech, Anwar said Budget 2023 had allocated RM64 billion for subsidies but reiterated his recent statement that actual expenditure for subsidies is expected to reach a whopping RM81 billion this year. Inefficiencies of the current blanket system mean that the beneficiaries of this mega subsidies bill — who should only be among the low- and middle-income groups — also include more than 3.5 million foreigners, plus diesel smugglers enticed by the huge arbitrage between market prices of about RM3.75/litre and the current ceiling of RM2.15/litre that is costing the government approximately RM1.5 billion a month. There is no question sizeable smuggling activities are going on, with the sale volume of subsidised diesel up 40% since 2019 while the number of diesel vehicles has risen by less than 3%.

The bigger-than-expected subsidies bill may well be why the revised Budget 2023 figure is now RM397.1 billion — up RM11 billion or 2.85% from the RM386.1 billion Budget 2023 tabled on Feb 24 — some 0.8% or RM3.3 billion higher than the just-tabled Budget 2024. That would change if the expected additional revenue from new Budget 2024 measures is mostly spent rather than saved. Additional income from the sugary drinks tax, for instance, is expected to be redirected to combat diabetes.

Expected savings from the phased approach taken to better target subsidies next year, for example, would be channelled to raise Sumbangan Tunai Rahmah cash transfers to RM10 billion from RM8 billion, Anwar said in his speech.

The expected subsidies bill of RM81 billion in 2023 is substantially larger than the current all-time high of RM70.3 billion in 2022 — RM58 billion under operating expenditure and RM12.3 billion under the Covid-19 fund — as compared with an annual average of RM15.2 billion the past 10 years, according to an article in the 2024 Fiscal Outlook report.

That RM58 billion for subsidies under operating expenditure for 2022 means that RM9.4 billion was spent on social assistance, given that the tally for subsidies and social assistance under operating expenditure was RM67.4 billion or 23% in 2022.

As it is, Budget 2024 has pencilled in RM52.8 billion for subsidies and social assistance or 17.4% of operating expenditure, down from RM64.2 billion or 21.4% in 2023.

The government still bears some RM16 billion of electricity subsidies for households and small and medium enterprises in 2023, even though some targeting for electricity has happened this year to exclude the top 10% high users — which enjoyed 50% of subsidies in 2022 while the bottom 50% only enjoyed 10%.

The bigger-than-expected subsidies bill has already caused Budget 2022 — which started out at RM332.1 billion, at the point of tabling — to increase by a whopping RM63 billion or 19% to RM395.2 billion — which is bigger than the newly tabled Budget 2024.

A big part of the bigger-than-expected subsidies bill is due to fuel, not just diesel but also RON95 petrol, for which subsidies targeting was not specifically mentioned in the Budget 2024 speech. According to the 2024 Fiscal Outlook report, fuel subsidies accounted for some 71.6% or about RM160 billion of the RM223.5 billion that the government spent on subsidies between 2012 and 2022. That leaves about RM63.5 billion for subsidies on interest rates, agriculture inputs, cooking oil, electricity, toll compensation, transport, chicken and eggs as well as other consumer items over the same 10-year period.

Excluding the RM70.3 billion for 2022, total subsidies averaged only RM15.3 billion a year between 2012 and 2021, back-of-the-envelope calculations show. Even the relatively smaller sum could have made a deeper impact on those who need aid with better targeting.

Given that official figures show spending on subsidies and social assistance had totalled RM363.06 billion or 14.4% of total operating expenditure between 2012 and 2022, the RM223.5 billion tally for subsidies alone implies that RM139.5 billion or 5.5% of operating expenditure went to social assistance during that period (excluding allocations from elsewhere such as the Covid-19 fund).

Apart from rationalising subsidies to get a bigger bang out of every ringgit the government spends, a greater effort needs to be made to shore up the country’s revenue earning capabilities. Anwar had mentioned that Malaysia’s RON95 fuel price of RM2.05/litre is among the cheapest in the world, cheaper than major oil producer Saudi Arabia’s RM2.94/litre, Indonesia’s RM4.45/litre and Thailand’s RM5.99/litre.

On top of the outsized subsidies, the country’s tax collection ratio of 11.8% of GDP is behind Thailand’s 16.4% of GDP and 12.6% of GDP in Singapore, which is known as a low-tax regime. This, Anwar says, is why the government needs to broaden its tax base, while taking care not to burden the majority of the people.

There was no mention, though, of bringing back a broad-based consumption tax, something that no one was expecting to happen just yet.

Even as the government works out its revenue options, it is worth noting that debt service charges had totalled RM318.8 billion or 12.6% of operating expenditure between 2012 and 2022, even as direct federal government debt doubled from about RM500 billion as at end-2012 to above RM1 trillion by the first quarter of 2022. As at end-June 2023, federal government debt was RM1.145 trillion or 61.9% of GDP.

From RM41.3 billion in 2022, debt service charges are projected to rise to RM46.1 billion in 2023 and RM49.8 billion in 2024 with direct federal government debt expected to reach RM1.26 trillion by the end of next year or 63.5% of GDP — just a shade below the statutory debt ceiling of 65% of GDP.

By 2025, debt service charges could be closer to RM53 billion, our back-of-the-envelope calculations show.

Between 2012 and 2024 alone, some RM414.7 billion would have gone towards interest payments on direct federal government debt alone. Not only does that exceed the RM403 billion in dividends received from Petronas during the same period, it is also more than the entire individual tax collection of about RM406.5 billion over the same period.

That is yet more food for thought, even as the government repositions the country for better quality growth and works towards generating better economic outcomes for the people. In ending his speech, Anwar reminded everyone that stability is essential for the government to generate prosperity for all and called upon the people to unite, “prioritise the future of the nation” and “return to constructive politics to rebuild the nation”. 

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