KUALA LUMPUR, July 5 — The federal budget deficit could rise to 3.6 per cent of GDP in 2018 as Pakatan Harapan’s pledged policies may negate previous efforts to rein in chronic government overspending, said BMI Research.
In its latest outlook, the Fitch Group unit attributed its prediction that the deficit could rise from the current 2.8 per cent to the ruling coalition’s policies to deliver on its election pledges, such as the removal of the Goods and Services Tax (GST)
“We estimate that the PH government will likely incur a wider fiscal deficit of RM23.4 billion in 2018 as a result of its policies, all else equal.
“The reinstatement of the Sales and Services Tax (SST) is unlikely to be sufficient to cover the loss of revenue from the abolition the Goods and Services Tax (GST) from June 1 and increased expenditures due to the reintroduction of fuel subsidies,” said the study.
BMI previously revised the deficit prediction to 4 per cent as a ratio of the economy, but lowered this to 3.6 per cent following the announcement on the SST.
It reported that the estimated cost due to the government’s policies since May to be RM31.3 billion (2.1 per cent of GDP), based on the loss of RM28.3 billion in GST revenue and the RM3 billion for the reintroduced fuel subsidy.
On June 7 the Finance Ministry announced the government will fix prices for RON95 petrol at RM2.20 per litre and diesel at RM2.18 per litre amounting to a subsidy of 33 sen per litre.
“Beyond 2018, we expect the cost of this subsidy to increase overtime for two reasons. First, the 2018 subsidy represents the figure for about half a year, and costs for 2019 onwards will likely require more than twice the RM3 billion amount.
“Second, rising oil prices — our Oil & Gas team forecasts an average Brent crude price of US$78.0/bbl in 2019 as compared with US$73.0/bbl in 2018 — will lead to higher fuel prices and the amount of subsidy required to maintain prices at their current levels will therefore increase.
BMI Research was also critical over the reimplementation of SST saying that it will not be able to cover the hole created by the loss from GST’s zero-rating. From September till year end, it estimated that the government will be able to collect RM7.8 billion from SST.
It also made an educated assumption that SST’s revenue collection will be roughly similar to the 2011-2014 period which is about 1.6 per cent of the GDP compared to the 3.3 per cent of GDP collected under the GST.
