“No interest in tightening the purse.”
That was the initial feedback from an opposition MP an hour after Prime Minister Najib Razak delivered his long and winding Budget 2014 speech on Friday in Parliament.
Many had expected the premier, who is also the finance minister, to take a firm stand on reducing the deficit in his first budget since his Barisan Nasional coalition won re-election in May.
And while some very bold and broad measures were announced — the 6% goods and services tax grabbed the headlines — some still think the budget was not tough enough.
Their scepticism can be understood. Fitch Ratings earlier this year warned that if Malaysia does not undertake fiscal reforms to address its relative credit weakness, its sovereign rating would be downgraded.
To be fair, Najib did announce some drastic measures that will change the taxation regime. The gradual shift from an overdependence on corporate and personal taxes, along with reductions in subsidies, is visible. He even threw a spanner into the overheating engine of the property sector to cool it.
“It is brilliant and brave of him to come up with several measures to address the weakness and put the country on a stronger footing amid concerns about China’s weakness and the contingent impact on the region” said one analyst.
“We have to give credit to Najib for taking bold steps and it is properly laid down.”
The opposition was less generous, saying that overspending by the BRN on handouts and subsidies to keep voters onside for the past 15 years had put the country in a tight spot fiscally.
The budget calls for total spending of 264.2 billion ringgit, with 82% for government operating expenditure, on the high side by the standards of many countries, and the rest for investment.
Supporters of Najib, however, say he is cutting where he needs to and raising where it is appropriate.
One turning point for the government to earn its keep will be the introduction of the long-rumoured goods and services tax (GST), which will take effect on April 1, 2015. That gives the government 17 months to do public relations and prepare citizens for the change, in the hope that it won’t be the butt of April Fool’s jokes when the new regime replaces the current sales tax.
Najib assured the public that the GST would not leave them worse off, adding that the time was right to introduce it as inflation is low. At 6%, the rate is among the lowest in the region and excludes essential foods, education, housing, public transport and healthcare.
Elsewhere, corporate taxes will come down by one percentage point to 24%. Personal tax rates will also be reduced by one to three percentage points.
To create a more progressive personal tax structure, chargeable income subject to the maximum rate will be increased from M100,000 and above to RM400,000 and above. That puts Malaysia on the same plane as Singapore and is a welcome sign for middle-income earners who complain that they are subsidising the poor as well as the rich.
The government forecasts corporate tax collections will reach 65.73 billion ringgit in 2014, a rise of 8.8% from RM60.4 billion estimated this year. Personal income tax collections are forecast to increase 11% to RM28.7 billion.
To ease the sting of the GST and keep low-income earners happy, Najib is continuing with cash handouts to households with monthly incomes below 3,000 ringgit and increasing the sum to RM650 from RM500.
After giving more money to the poor and taxing the rich, the premier goes on to address the housing issue for middle-income earners, though not as thoroughly as some had hoped.
The rich can afford homes costing RM1 million and above, and the poor have affordable homes built for them, but sandwiched between these two are people who see housing prices soaring beyond their means.
Najib’s response was to revise the real property gains tax (RPGT) to ensure stable house prices and control speculation.
For gains on properties disposed of within the first three years of the holding period, the RPGT rate was increased to 30%. It falls to 20% in the fourth year and 15% in the fifth.
He also does not want foreigners to buy homes that are meant for middle-income earners, so he has raised the minimum price of property that can be purchased by foreigners from RM500,000 to RM1 million.
For non-citizens, the RPGT rate is 30% on gains from properties disposed of within the first five years. For the sixth and subsequent years, the rate is just 5%.
In a nutshell, Budget 2014 is all about strengthening Malaysia’s economic resilience, stimulating growth and introducing a new tax regime, the GST, in hopes that all these steps will improve the government’s finances for the medium and long term.
The government aims to cut the fiscal deficit to 4% this year, 3.5% next year and 3% in 2015. Gross domestic product next year is forecast to expand in a range of 5% to 5.5%, up from an estimated 4.5% to 5.0% in 2013.
Najib also said fuel and other subsidies would be cut by nearly 16% to 39.4 billion ringgit next year, with details to be announced later. Fuel prices rose earlier this year for the first time since 2012 but Malaysian drivers still enjoy some of the cheapest petrol in Asia (95 octane petrol is the equivalent of 22 baht a litre), so the government has some room to manoeuvre.
One sweet surprise in Budget 2014, though, was an immediate end to the subsidy for sugar. The aim is to stop overindulgence in sugar to help arrest what health experts say is the worrisome growth of diabetes in the country. And that is a well-thought-out plan too. Kudos to him.