In Budget 2014, Putrajaya faces a crossroad

KUALA LUMPUR, Oct 25 — More than ever, Malaysians are keeping a close watch over the tabling of Budget 2014 today to see whether Putrajaya will choose between finally tackling its deficit problem or continue to pump a deflating economy.

The choice is made even harder as the government faces an angry public growing increasingly dissatisfied over spiraling living costs and income uncertainty, amid a worldwide slump and consequences from delaying structural reforms.

Chief among most concerns is the expectation that Putrajaya will finally introduce the Goods and Services Tax (GST),replacing the current Sales and Services Tax at a rate of between 4 and 7 per cent, a move meant to widen the government’s tax base and remedy its deficit problem.

The tax was first announced during Budget 2005 and was originally scheduled to be implemented in 2007 before it was deferred, repeatedly, but Prime Minister Datuk Seri Najib Razak signaled yesterday that the government was finally ready for it.

“The government will do what is right for our economy. Some measures may not be popular now, but over the medium term, what is good for the economy is also good for the people,” Najib said in an emailed statement late yesterday.

The proposed GST comes as Malaysia’s sovereign debt outlook took a beating from global ratings agency Fitch Ratings, which revised it from “Stable” to “Negative” in July owing to rising government debt and budget deficit.

Malaysia runs a relatively high government debt of 53 per cent of its gross domestic product (GDP) ― just under the legal ceiling of 55 per cent ― and has one of Asia’s highest household debt levels, at over 80 per cent of GDP.

Putrajaya has stated that it aims to reduce its budget deficit-to-GDP ratio to 4 per cent this year and gradually to 3 per cent by 2015.

The introduction of GST will likely incense the public who was just subjected to fuel subsidy cuts in September, which saw a 20 sen per litre increase in pump prices.

A prediction by the Asian Development Bank (ADB) said Malaysia’s inflation rate will increase to 2.2 per cent in 2014 from the cuts, while Putrajaya predicted the figure as closer to 2.3 per cent.

Fueling tempers further, federal opposition pact Pakatan Rakyat (PR) insisted in its alternative budget released yesterday that a balanced budget can be achieved within its first term - even without implementing the GST.

Latest figures from the Malaysian Institute of Economic Research (MIER) showed that Malaysian consumers’ confidence have slumped for the second quarter in a row, with the Consumer Sentiments Index scoring just above the 100-point threshold level and the lowest since the first quarter of 2009.

“Consumer sentiments are clearly riding on a wave of job and income uncertainty ... Financial expectations registered the biggest dip, followed by job expectations and current income,” said MIER in its report.

This follows the CSI’s steepest plunge in since the fourth quarter of 2008, which AmBank noted this month as similar to when a global financial crisis erupted following the bankruptcy of US-based financial services firm Lehman Brothers.

MIER reported that economic uncertainty has seen Malaysians are holding off on plonking down big bucks for housing, cars and major consumer goods in the coming months.

This comes even as the latest data from the Economic Planning Unit shows that that the average national income in 2012 grew by 24 per cent from RM4,025 to RM5,000, its highest ever yet.

Malaysians reluctance to spend will likely affect retailers, with research firm Retail Group Malaysia predicting last month that the industry will grow at a slower rate of 6 per cent compared to an estimated rate of 6.2 per cent in 2013.

“Malaysian consumers are expected to face a few challenges next year. The main challenges are the rising cost of living and reduced purchasing power. These are due to the increasing prices of goods and services as well as the higher borrowing costs,” said its quarterly report here.

Manufacturers also have reported declining demand resulting in a notable build up in inventories, especially for electrical and electronic products, prompting sluggish outlook in the months to come.

MIER’s Business Conditions Survey for the third quarter of 2013 signalled a contraction in the manufacturing sector, with its Business Conditions Index dropping 15.6 percentage points to 98.6 per cent quarter-to-quarter.

To placate the public, Putrajaya is also expected to announce an increase in the 1Malaysia People’s Aid (BR1M) cash handouts, to lessen the burden from either subsidy cuts or the implementation of the GST due 2015 earliest.

However, the consensus among most economists is that consumption-driven economy is unsustainable in a longer term, despite a relatively steady private consumption buoyed by the cash handouts. 

Malaysia has seen its 2013 GDP growth outlook cut down by several agencies, including its own Bank Negara Malaysia, from 5.6 per cent to between 4.5 and 5 per cent.

The ADB had similarly cut its outlook from 5.3 per cent to 4.3 per cent, owing to a lacklustre performance that was also shared among neighbouring economies in Southeast Asia.

On top of that, Malaysia seemed to have trouble attracting foreign direct investment (FDI), slipping sharply to 25^th position from 10^th on AT Kearney’s 2013 FDI Confidence Index in June.

As such, MIER had this week warned Putrajaya that there must be no delay in implementing important structural reforms and transformation process in Budget 2014 to restore the public’s faith in government.