Malaysia - AmResearch on challenges to be tackled in 2012 Budget

The 2012 Budget will be more challenging for policymakers to ensure a sustainable growth path for the Malaysian economy given the weak global conditions, said AmResearch director of economic research, Manokaran Mottain.

“While focusing on the need to pump-prime the economy in preparation of a potential global economic downturn, the government also needs to address the continuing fiscal deficit for the 15th year in 2012,” he said in a report.

He expects the 2012 Budget to deliver more good news. “Given the safe assumption that snap elections are likely to happen early next year, we do not expect any major surprises.”

Since Malaysia will not be immune to the headwinds experienced in the world markets, one of the major downside risks for the Malaysian economy would be a fall in external demand, potentially impacting trade as well as manufacturing and services.

The research house has maintained its 2011 gross domestic product growth at a flat 5 per cent.

The 2012 Budget will play a key role in complementing the Economic Transformation Programme (ETP) with a four-pronged strategy – people’s well-being and quality of life, accelerate economic activities, business friendly environment; and developing and retaining a first world talent base.

Manokaran expects that with inflation and a sticky wage growth, the budget would focus on relieving the burden due to a higher cost of living, either through cash vouchers (which can be redeemed at 1Malaysia outlets or other fair-price shops) or direct assistance to the less-privileged people like single mothers, fishermen, taxi drivers and estate workers as well as the low-income group.

More rebates may be introduced for the middle-income group for certain purchases as well as tax rebates or higher relieve.

To spur domestic demand, the government may introduce measures such as a voluntary reduction in employees’ contribution to Employees Provident Fund from 11 per cent to 9 per cent. This, he said, can release about RM700 million as disposable income and will become an additional option for the lower-income group to tackle the rising cost of living.

“The Budget may also focus on tax incentives to make Malaysia more competitive in the region, at a time when it is spearheading private investment in ETP.”

The government may further liberalise the investment guidelines by raising foreign ownership in certain sectors of economy like oil and gas, healthcare, education and business professional services.

The current tax structure may be streamlined by reducing individual income tax by 1 per cent. As it stands, the current corporate tax rate remains at 25 per cent, while the highest band of individual income tax stands at 26 per cent.

“This will also be a positive step in preparing for the introduction of the Goods and Services tax (GST) by 2014 or 2015.”

Lower personal income tax will make it easier for the government-owned Talent Corp to attract skilled workers back to Malaysia.

Manokaran, who was recently appointed a member of the National Economic Action Council, expects the deficit to be around 5.2 per cent of GDP in 2012 from 5.5 per cent in 2011. “The government will face challenges in this, as cutting development expenditure will be difficult at a time when growth was decelerating globally.”

Besides the anticipated increase in the excise duty on cigarettes, measures that can help reduce the fiscal deficit include the introduction of a clear schedule regarding the GST, the broad-based consumption tax. Another tool that could be used by the government to rein in the fiscal deficit is to continue with the subsidy rationalisation programme, as proposed by the Performance Management and Delivery Unit.

Prices of RON95 petrol and diesel are expected to be raised by 10 sen per litre every six months this year, which would bring prices to RM2.10 and RM2.00 respectively by year-end.

Other proposals include a 20 sen per kg per six-month increase in sugar prices, a 25 sen per kg per six-month price increase in flour and also a 15 per cent increase in cooking oil prices.

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