This article first appeared in The Edge Malaysia Weekly on October 21, 2024 - October 27, 2024

MALAYSIA expectedly raised 2024 economic growth projections to between 4.8% and 5.3% and signalled the potential for further expansion next year. Gross domestic product (GDP) is forecast to grow between 4.5% and 5.5% for 2025, “anchored by the implementation of outlined strategic initiatives” under the Madani economy framework.

“Our commitment to prudent debt management and the transition to targeted subsidies are central to fiscal reforms, ensuring a sustainable and strong financial position for Malaysia. This provides a secure foundation for our future economic growth,” Prime Minister Datuk Seri Anwar Ibrahim said in the preface of the 2025 Economic Outlook report, noting that fiscal deficit “is anticipated to further improve to 3% of GDP in the medium term” without committing to a specific deadline.

Given Anwar’s recent plea for patience as his administration seeks to strike the right balance between stepping up necessary reforms and staying on the right side of the electorate, it is no real surprise that Budget 2025, tabled on Oct 18, is yet again not only expansionary but also the largest ever tabled to date.

The 2025 fiscal deficit was pencilled in at 3.8% of GDP. This is short of the 3.2% implied in the 2023 to 2025 medium-term fiscal framework (MTFF) but down from 5% of GDP in 2023 and an estimated 4.3% for 2024.

As civil service emoluments and a pension hike had been pre-announced, and sensing continued resistance on goods and services tax (GST), most economists had expected Budget 2025 to sport a headline fiscal deficit that is closer to 4% of GDP rather than just above 3% of GDP.

Based on the average fiscal deficit of 3.5% of GDP under the 2025 to 2027 MTFF, appended in the 2025 Fiscal Outlook report, indications are that the fiscal deficit will only move to 3.5% of GDP in 2026 and 3.2% of GDP in 2027, back-of-the-envelope calculations show. [See Chart 1]

At the current trajectory, our workings show direct federal government debt is poised to surpass RM1.3 trillion in 2025 (about 64% of GDP) and reach RM1.5 trillion by end-2027 (about 63% of GDP) from RM1.23 trillion as at end-June 2024 (63.1% of GDP). This excludes debt directly guaranteed by the federal government, which stood at RM330.8 billion or 17% of GDP as at end-June 2024.

In the 2025 Fiscal Outlook report, however, the government says its total debt and liabilities amounted to RM1.5968 trillion or 82.1% of GDP as at end-June 2024. This is a sum of direct federal government debt of RM1.23 trillion (63.1% of GDP), committed guarantees — basically guarantees where the government has been tapped to step in — of RM231.4 billion (11.9% of GDP) as well as other financial liabilities of RM137.9 billion (7.1% of GDP).

Malaysia last had a budget surplus in 1997, incidentally when Anwar was finance minister in Tun Dr Mahathir Mohamad’s cabinet.

As a result of nearly three decades of fiscal deficit, the country’s debt-to-GDP ratio doubled from 31.9% in 1997 to 64.3% in 2023 as direct federal government debt surged 13 times from RM90 billion to RM1.17 trillion over 26 years. [See Chart 2]

Between 1998 and 2023, official figures show Malaysia had collectively spent RM1.06 trillion more money than it earned. Ironically, debt service charges — basically interest payment on debt taken to fund the excess spending — added up to RM537 billion or half of that RM1.06 trillion.

By 2027, our calculations show that this excess spending on top of revenue collection is poised to exceed RM1.2 trillion with debt service charges making up close to RM633 billion or just under 52%.

There is no doubt that Malaysia needs to spend better. To do that, Putrajaya needs more revenue and cannot go on subsidising foreigners and locals who can afford to pay more.

Malaysia has been funding with debt almost all of its development expenditure (DevEx) for some two decades now because there is very little current balance or money left over after paying for operating expenditure (OpEx). [See Chart 3]

Between 2010 and 2023, current balance averaged at only RM2.5 billion a year, at least RM50 billion short every year when compared with development expenditure needs.

In pandemic-hit 2020, where extra borrowings were taken to fund overheads with the special Covid-19 fund, the current balance was as little as RM500 million. Instead of a current balance of RM3.8 billion pencilled in when Budget 2024 was tabled in October 2023, current balance may only be RM600 million this year, according to revised 2024 numbers appended in the 2025 Fiscal Outlook and Federal Government Estimates report that kept 2024 fiscal deficit at 4.3% of GDP.

To borrow Anwar’s words, Putrajaya is not “frozen in action”, having started targeting diesel subsidies from May this year and also rolled back subsidies for high users of electricity and water. When tabling Budget 2025, he said from “mid-2025”, some RM8 billion worth of RON95 fuel subsidy will be targeted away from the top 15% of the people and foreigners for the benefit of the bottom 85% still subsidised. He did not elaborate on the quantum or mechanism of the targeting or potential savings. His administration had also boldly announced that new civil service recruits will no longer be eligible for the defined benefit (DB)-based public pension that is fully funded by the government and taxpayers.

These moves are, alas, far from enough because the underlying issue of low wages and operating expenditure growing much faster than revenue growth have been allowed to snowball for some time. There is still a need to ensure that the government has enough revenue to continue paying for the public pension of civil servants who are already eligible for it.

In the 2025 Fiscal Outlook report, the Ministry of Finance said the salary increase for civil servants “is expected to have a positive impact on the collection of individual income tax, with more civil servants to be included in the taxable bracket” without providing an estimate to the potential upside which is more likely than not a mere fraction of the outlay.

Since 2015, more than 40% of federal government revenue was necessary to pay civil service emoluments and retirement charges. With debt service charges taking up 16% of federal government revenue to service every year, easily 60% or 60 sen of every ringgit collected and earned goes to just these three major items: emoluments, retirement charges and interest payments.

In 2022 and 2023, annual debt service charges exceeded the annual collection of individual income tax and this situation is projected to continue in 2024 and 2025, official data show. Debt service charges of RM54.7 billion estimated for 2025 is larger than the RM46.7 billion expected receipts from the sales and service tax (SST), individual income tax collection of RM44 billion as well as dividend from Petroliam Nasional Bhd (Petronas) of RM32 billion.

It is not immediately certain how much additional revenue is expected with the expanded SST from May 1, 2025 that he said will tax imported food like salmon and avocado but not basic essential goods. SST will also be expanded to include commercial services, including fee-based financial services. It remains to be seen if the expanded SST will be as efficient and as wide as Goods and Services Tax (GST) where input rebates ensure that there is no SST-type tax-cascading problem. 

According to the note appended in the 2025 Fiscal Outlook report, RM5 billion additional revenue is expected from the change in SST next year, of which RM2.8 billion is from higher service tax and RM2.2 billion from sales tax amendments.

The demonised broader GST, however, would have potentially raked in over RM60 billion, assuming collection at 3% of GDP, back-of-the-envelope calculations show.

While GST undoubtedly caused grief in 2015 to 2018, it was largely due to poor implementation, ranging from delays in refund claim payments to ineffective cash transfers. GST collection of RM41.2 billion in 2016 and RM44.3 billion in 2017 were 3.3% of GDP and 3.2% of GDP, respectively. [See Chart 4]

Assuming collection being maintained at around 3% of GDP, and the country’s economy continues to expand as the momentum from reforms build up, GST receipts could potentially be at least RM65 billion in 2026 and exceed RM70 billion in 2027, back-of-the-envelope calculations show.

This is at least RM15 billion more a year (around 0.7% of GDP) compared to SST collection, assuming collection continues to stay around 2.2% to 2.4% of GDP.

To be sure, the lower- and middle-income group would need help coping with a higher cost of living. This can be done with targeted cash transfers using savings from subsidy rationalisation as well as additional consumption tax collection. In addition, expectations are for basic food items and essential goods to be zero-rated or exempted from GST.

The Edge has previously written that Malaysia needs to recast the narrative surrounding GST or value-added tax (VAT) as the country’s spending needs will only go up as the population ages. [Scan to read ‘Correcting the flawed narrative that made low income a GST hurdle for Malaysia but not six Asean peers’ which appeared in The Edge Malaysia dated Aug 28, 2023.]

There is still great reluctance going by the recent narrative, one reason most economists and observers had largely expected a small fall in fiscal deficit and much larger Budget 2025 due to higher operating expenses.

On Oct 13, Anwar (the politician rather than statesman) reportedly said “I agree, GST is the most transparent and efficient tax system” that would better fill government coffers and improve Malaysia’s fiscal position but went on to say that the government needs to “make sure that the [people’s] income threshold increases to a minimum of RM3,000 to RM4,000” first before “adjusting the policy”. This was reportedly compared with the current minimum wage of RM1,500 a month, which is set to rise to RM1,700 by February 2025.

As at March 2024, more than two million or one-third of the six million plus wage earners in the formal sector are paid less than RM2,000 a month, according to data from the Department of Statistics Malaysia (DoSM). There is a lack of data on the remaining 10 million also counted as among Malaysia’s 16 million labour force.

It is not immediately certain how much information collated in the central database (PADU) can bolster the government’s hand in implementing targeted subsidies and if system readiness is why RON95 targeting will only happen mid next year.

Just as political parties came to a consensus to not further disrupt parliament sitting and work together for the country’s development, a consensus needs to be arrived at to de-demonise GST — a move that would benefit whoever takes Putrajaya and the country’s fiscal health.

If nothing is done about the country’s fiscal position, Anwar plainly admitted that “the continued situation would only take us on the road to bankruptcy” and that the executive body (mostly made up of elected representatives) would have failed to responsibly govern the country, let alone bring it and the people forward.

Early in his Budget 2025 speech which lasted two and a half hours, Anwar said the “culture of complacency” (reminiscing on past actions and performance) has to stop and that national debt will only continue to increase if the budget deficit does not come down. And just before speaking of the grave mistake of blanket subsidies, he said “if you make a mistake and do not correct it, this is a true mistake”. Now that the teaser for further reforms by mid-2025 has been announced, the sooner clarity on what is coming is communicated and communicated well, the faster Malaysia would be on the road towards fiscal sustainability. 

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