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Malaysia budget 2019 – A balancing act for the new government

Firas Raad's picture
Also available in: Bahasa Melayu
Malaysia’s latest budget points to many encouraging directions. How the government balances its priorities is key to ensuring low-income populations get to share in the benefits of development. (Photo: Samuel Goh/World Bank)

The unveiling of Malaysia’s much-anticipated 2019 budget last Friday by the Minister of Finance, Lim Guan Eng comes at a challenging time for the country. On the external side, Malaysia’s exports are facing growing headwinds – as opposed to the fair winds of recent years – due to heightened trade tensions and slower global growth. On the domestic front, a new emphasis on addressing the stock of government debt and contingent liabilities is likely to narrow fiscal space and prevent public investment from driving economic activity as it did before. In this situation, Malaysia will depend more on private consumption and investment to support economic growth in the next few years.

This year’s budget required a careful balancing act between safeguarding growth, sustaining private sector confidence, promoting fiscal responsibility, managing debt sustainability and protecting the vulnerable. In recent years, lower-income households in Malaysia were disproportionately affected by the rising cost of living, propelling the new government to think of ways to improve the effectiveness of the country’s social protection system.
 
Analyzing Malaysia’s new budget, one sees many encouraging directions. First, efforts to strengthen good governance, fiscal responsibility and transparency are positive steps forward. Second, better targeting of cash transfers through the new Bantuan Sara Hidup Rakyat (BSH) program to account for household size, and of fuel subsidies are also steps in the right direction. Third, the new budget’s focus on promoting education, skills and entrepreneurship is a highly welcome development. This latter priority is critical for Malaysia to compete and thrive in the new digital economy. As indicated by the global Human Capital Index recently launched by the World Bank, Malaysia’s human capital outcomes could be better for its development ambitions, particularly in relation to the quality of education in math and science. 
 
Another positive aspect of the new budget focuses on taxation. The decision to include ‘imported services’ within the scope of the Sales and Services Tax (SST), particular those related to the digital economy, is a timely initiative and is well-aligned with growing international practice. More can be done over the coming years to further expand the scope of the SST. The move to make the taxation system more progressive by broadening the coverage of individuals and businesses paying income taxes, and by increasing the real property gains tax and stamp duties on premium properties is also a constructive measure embedded in the budget.
 
In the area of debt sustainability, however, prudent management of fiscal commitments over the short and medium-terms will be required. Part of these fiscal management responsibilities include the development of an effective mechanism for targeting fuel subsidies. Malaysia will also need to bolster efforts to diversify fiscal revenues. An appreciable narrowing of consumption-based taxation in 2018-2019 and a greater dependence on less-stable oil revenues could constrain fiscal adjustment measures in the future, particularly with unexpected declines in oil prices. It could also encourage the adoption of pro-cyclical fiscal policies. 
 
During his budget speech, Minister Lim Guan Eng declared that the “it is not the business of government to be in business”. This policy direction, if pursued, will boost investor confidence and promote pro-competition economic reforms. While Malaysia’s ‘government linked-companies’ (GLCs) form an important part of the economy, some of their activities given their market dominance have distorted economic activity and prevented competition -- with consumers ending up paying the price. If the heavy lifting of economic growth and job creation in the coming years is going to be shouldered by the private sector, then the public sector getting out of the way is an important first step. The recent and significant improvement in Malaysia’s global Doing Business ranking from 24th to 15th symbolizes this country’s ambition to further enable private-led development. It also reveals Malaysia’s economic potential to compete at the global frontier and become an Asian Tiger.

A version of this blog appeared in The Star

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