SINGAPORE – Malaysian Prime Minister Anwar Ibrahim has unveiled the largest budget in his nation’s history replete with measures aimed at lowering the cost of living through subsidies and direct cash payments, even as his three-month-old administration claims to be trying to narrow the fiscal deficit.
The record 388.1 billion ringgit (US$87.5 billion) spending plan for 2023 was tabled in parliament by Anwar, who is also finance minister, on February 24 with a self-claimed emphasis on good governance and fiscal prudence. But with state polls due in July, the first electoral bellwether for the premier’s “unity government”, analysts and observers also see political dimensions to the budget.
With a projected slowdown in Malaysia’s export-driven economy, the supply bill’s ostensible focus is on shoring up economic resilience in the face of intensifying global headwinds. Economic growth is expected to moderate to 4.5% this year, down sharply from a stronger-than-expected 8.7% in 2022, the highest rate in two decades.
Whether or not Anwar, who came to power with support from former arch-rival the United Malaysia National Organization (UMNO) and others after November polls, can successfully navigate Malaysia’s economy through geopolitically precarious times will be key to his political staying power, say analysts, with the nation having gone through four premiers in as many years.
Anwar’s approval rating stands at 68%, according to local pollster Merdeka Center, slightly lower than his recent predecessors during their first few months in office. While the upcoming state elections will have no direct bearing on parliament’s numbers and balance, a strong performance by the ethno-nationalist opposition bloc would likely test the fledging government’s stability.
In his first budget speech since his last stint as finance minister 26 years ago, Anwar called on the wealthy to take “joint responsibility” by shouldering new taxes targeting luxury goods and capital gains on the sales of unlisted company shares. He explicitly ruled out a broad-based goods and services tax (GST), saying now was not the right time to re-introduce the politically-sensitive levy.
“The government has no plans to bring back GST. In a situation where most people are still struggling, food inflation at over 5% and low wage rates, it is evident that it is not the right time to implement it,” he said in reference to the tax, which was unpopularly enacted in 2015 at 6%, only to be abolished in 2018 and replaced with a narrower tax on sales and services.
Those with a taxable annual income above 100,000 ringgit ($22,547) will see an increase in taxes of between 0.5% to 2%, while middle-income earners who take home between 35,000 and 100,000 ringgit annually will get a 2% tax reduction. Anwar said his tax hike would impact less than 150,000 higher-earning taxpayers while approximately 2.4 million would benefit from tax cuts.
Putting cost of living issues front and center, Anwar’s plan gives households with incomes of less than 2,500 ringgit ($563) per month cash aid equal to that amount, along with direct cash payments to rice farmers, government pensioners, civil servants and Islamic religious teachers. Retirees with less than 10,000 ringgit ($2,254) in savings will also receive government aid.
“The budget makes sense politically – increasing taxes on the wealthy and cutting taxes and boosting spending on the less well-off. This budget is, or appears to be, more redistributive than those introduced by other Malaysian governments in recent years,” noted Peter Mumford, a Southeast Asia analyst with the Eurasia Group consultancy.
“That should play well with the electorate, as will the fact he did not roll back affirmative action policies for the ethnic Malay majority,” Mumford told Asia Times, who added that “refraining from reintroducing GST, as expected, is a popular move but one that is likely detrimental to Malaysia’s longer-term financial footing.”
Anwar said in his address that reducing the country’s burgeoning debt load was a top priority. Malaysia’s national debt is expected to reach 1.2 trillion ringgit ($270.6 billion) in 2023, or around 62% of gross domestic product (GDP), up from 60.4% last year. When various contingent liabilities are included, the figure reaches 1.5 trillion ringgit ($338.2 billion) or 81% of GDP.
The premier said his government is committed to gradually reducing public debt to pre-pandemic levels, when the debt ceiling was at 55%. Malaysia’s borrowings increased substantially during the Covid-19 pandemic to fund massive stimulus programs. Anwar said 46 billion ringgit ($10.3 billion), or 16% of government revenue, would go to paying off interest payments alone in the coming year.
Malaysia’s government is soon expected to table a Fiscal Responsibility Act (FRA) that would cap the government’s maximum debt percentage at 65% of GDP and debt service charges at 15% of the annual budget. The bill would reportedly commit the government to fund its operating expenditure through revenue, with borrowing only allowed for development expenditure.
However, observers are uncertain whether the new taxes will be sufficient to raise revenue to cover the government’s expansionary outlays. While the proposed capital gains tax could meaningfully raise revenues, the luxury goods tax is not seen as a significant revenue earner. Neither of the proposed taxes has been finalized, making their impact hard to gauge, analysts say.
Dividends from state-oil company Petronas are still the main source of Malaysia’s non-tax revenue. Amid higher global energy prices, the firm made one of its highest-ever dividend payments for 2022, totaling 50 billion ringgit ($11.2 billion). Petronas is expected to pay about 40 billion ringgit ($9 billion) in dividends in 2023, with its petroleum revenues projected to fall by 20.9% due to lower global oil prices.
“New taxes introduced target those with extra disposable income, but with oil prices stabilizing, it is unclear if these would be sufficient to cover the fiscal gap,” said Hafidzi Razali, an associate director at the BowerGroupAsia consultancy. “Taxation aside, Anwar did not address the elephant in the room: blanket fuel subsidies which cost the government more than it spent on healthcare last year.”
Malaysia maintains a slew of subsidies to keep essentials such as gasoline, diesel, liquefied petroleum gas, cooking oil, flour and electricity at below-market prices. Last year, 67.4 billion ringgit was set aside for subsidies but higher commodity prices ballooned that figure to a record 80 billion ringgit ($18 billion). Subsidies for 2023 are expected to hit 64 billion ringgit ($14.4 billion).
Earlier this month, the World Bank recommended the Malaysian government move away from broad-based subsidies in favor of a more targeted subsidy framework. The multilateral lender also said Malaysia’s revenue level remains low and trails peers, with the country routinely under-collecting in personal and consumption taxes.
Anwar’s government had ordered a review of Malaysia’s subsidy program with the stated aim of lowering subsidies that benefit the wealthy, with his administration having already slashed power subsidies for large businesses and multinationals. Government revenue is nonetheless forecast to drop to 291.5 billion ringgit, down from 294.4 billion ringgit last year.
Despite the 2023 budget being 16% higher than last year’s, Anwar has targeted a more ambitious deficit reduction of 5% of GDP, down from 5.6% last year. Previous premier Ismail Sabri Yaakob had aimed to reduce the deficit to 5.5% of GDP, though his administration’s budget proposal, tabled prior to November’s polls, was never approved by parliament.
“Anwar is seeking a faster pace of fiscal consolidation than that originally proposed in the 2023 budget tabled in the final days of the last government. While this aspiration may be welcomed by markets there will be concerns as to whether it is achievable given political pressure to spend more and the risk – for exporter Malaysia – that commodity prices and revenue soften,” said Mumford.
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