KUALA LUMPUR, Oct 23 — Malaysian Prime Minister Datuk Seri Najib Razak is embracing a Robin Hood approach in his 2016 budget, increasing the tax on the country’s highest earners to fund measures to boost consumption and investment needed to shore up a cooling economy.
Those earning RM600,000 to RM1 million annually will be taxed at 26 per cent from 25 per cent now, while those making more than RM1 million a year will pay a rate of 28 per cent, Najib said in his annual budget speech in Kuala Lumpur today.
He announced billions of ringgit in funding to build rural roads, boost Internet speeds, agriculture and tourism, and increase civil servant salaries.
The budget’s focus underscores the political and economic challenges Najib faces in keeping the nation on track to achieve high-income nation status by the end of the decade.
The plunge in oil prices and a slowing global economy is hurting export earnings and government revenue, while the embattled leader faces calls to step down after a multi-million-dollar funding scandal contributed to a pullout by foreign investors from stocks and bonds and a weakening currency.
“Despite the constrains on financial resources, the government remains sensitive to the difficulties faced” by Malaysians, Najib said in Parliament.
Najib is counting on domestic demand to shore up a cooling economy as global growth falters, pledging to boost consumption, spur private investment and accelerate selected public infrastructure projects next year.
And he plans to achieve this without deepening the budget deficit even as oil revenue shrinks.
The government predicts gross domestic product will expand 4 per cent to 5 per cent in 2016, from 4.5 per cent to 5.5 per cent this year, the Ministry of Finance said in its 2015/2016 economic report released Friday. The fiscal shortfall is forecast to narrow to 3.1 per cent of GDP in 2016, from a revised 3.2 per cent this year.
“Taking into cognizance the weaker external environment, the government will implement policies that will further strengthen the resilience of the domestic economy,” the ministry said. “Efforts will be taken to boost consumption by raising disposable income through creating more jobs and addressing the rising cost of living.”
Najib’s administration will intensify efforts to draw foreign direct investments, build a 1,796-kilometre highway spanning the eastern Sabah and Sarawak states, boost the social safety net and enhance utilities in rural areas, according to the report.
“The challenges confronting the economy in 2015 are expected to persist in 2016,” the finance ministry said, highlighting concerns including heightened financial market volatility and a slowing Chinese economy.
Najib reiterated a commitment to balance the budget by 2020 amid increased challenges, according to the report.
The federal government debt is estimated to be 54 per cent of GDP as of end-June, from 52.7 per cent in 2014, and will be within the 55 per cent limit in 2016, the report said.
“The government will continue to strike a delicate balance between supporting the growth momentum and ongoing reform initiatives while ensuring public finances remain sound,” Najib said in the report.
The ringgit strengthened 1.6 per cent to 4.2205 per dollar on Friday, following a 3.9 per cent loss in the last five trading days, according to prices from local banks compiled by Bloomberg.
The currency is the worst performer in Asia this year and has depreciated about 17 per cent against the US dollar.
Najib is counting on a 6 per cent goods and services tax started in April to offset reduced revenues from oil. The government expects to collect RM27 billion from GST this year, and RM39 billion in 2016, it said.
Consumer prices are forecast to rise 2 per cent to 3 per cent in 2016, compared with 2 per cent to 2.5 per cent this year, the finance ministry said Friday. Inflation averaged 1.9 per cent in the first eight months this year.
Despite a weak ringgit, inflation is expected to remain benign because of low oil prices and the waning impact of GST, it said. The central bank left interest rates unchanged for a seventh meeting last month.
“The monetary policy stance remains accommodative of economic activity,” the finance ministry said in the report.
“Given the heightened uncertainties in the global environment, both external and domestic developments are closely monitored to assess their impact on macroeconomic stability and growth prospects of the economy.”
Najib’s administration forecasts federal spending of RM265.2 billion in 2016, according to the finance ministry’s report. Total expenditure for this year is estimated at RM260.7 billion.
The government will spend RM50 billion on development expenditure next year, up from an estimated RM47.4 billion in 2015.
Operating expenditure is projected to rise to RM215.2 billion in 2016 from RM213.3 billion in 2015. — Bloomberg