Malaysia’s Fiscal outlook also improves with the passing of the Fiscal Responsibility Act, cited CGSCIMB today (Oct 16)
A mildly expansionary budget – the Budget 2024 announcement on 13 Oct and the subsequent fiscal projections indicate a move away from profligacy.
Budget 2024 is focused on raising taxable income an reduction of subsidy commitments, but still generous with raising cash handouts from RM8bn to RM10bn as well as a significant, albeit one-off, increase in public servant’s incentive to the maximum tune of RM2,000.
GST does not make it, but service tax does
On taxes, there are a few hits and misses vs. CGSCIMB’s initial expectations. Capital gains tax on unlisted shares were announced as widely expected. Our predictions of a sugar tax on premixed beverages did not happen but were substituted by higher excise duty on sugary drinks.
Meanwhile, despite CGSCIMB’s call for reintroducing the Goods & Services Tax (GST), the Government opted for raising the service tax rate to 8% from 6% instead. According to the government, the expected increase in service tax revenue is only RM3.5bn, indicating still limited revenue addition, in their view.
With this move, the opportunity to announce GST is still there but the window is narrowing as we are closing in on this current election term.
Alternatively, the government may also extend the increase in sales tax in future years.
Wait for announcement on targeted subsidies
Review of the subsidy mechanism takes a central focus in the budget. There are clear efforts to try to address the ballooning subsidy commitment. However, no concrete measures are announced thus far.
A few key takeaways are:
Electricity tariff to see adjustments to the top 10% of users. Calculations shows this may involve domestic users above the 600kWh per month usage (RM220 monthly bill) and may come as early as Dec 23 following the 1H24 electricity tariff review period.
No commitment on RON95, only on diesel, as the government may want to wait until the Central Database Hub (PADU) is completed in 1Q24.
Chicken and eggs subsidy announcement to come in two weeks. Currently, there is a RM0.10 subsidy for every egg sold, and RM0.80/kg for chicken.
Fiscal consolidation boosted by the Fiscal Responsibility Act
Bottom line, CGSCIMB applauds the fiscal consolidation efforts with 2024 fiscal deficit targeted to improve to 4.3% of GDP vs. 5.0% in 2023. However, other debt metrics could worsen as government debt is projected to rise to 64% of GDP (2023: 61.9%), while debt service charges could rise to 15.9% of revenue (2023: 15.0%).
On a more positive note, the Parliament’s passing of the Fiscal Responsibility Act days before the budget somewhat improves the medium-term fiscal outlook.
Four major targets included were capping government guarantees at 25% of GDP, development expenditure of at least 3% of GDP, fiscal deficit cap of 3% in three to five years, and a lower debt ceiling of 60% of GDP.
