Budget to put Malaysia on road to ‘high-income society’ status

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PETALING JAYA: The Malaysian economy is headed towards being a high-income society, starting with a major restructuring of the current subsidy system.

The restructuring is likely to be announced by Prime Minister Datuk Seri Najib Tun Razak when he tables Budget 2010 today.

Potential moves that will boost efficiency and the momentum for economic recovery include:

● Investment incentives for research and development, creativity and innovation;

● Incentives for green technology which has been identified as the next global engine of growth;

● Aggressive targets for reducing government operating expenditure;

● No major tax cuts; some tax increases but not in productive sectors;

● Major focus on the services sector in Islamic finance, education, information and communications, tourism, professional and healthcare services;

● Issuance of Islamic savings bonds, setting up of private pension funds and capital value propositions of foreign players in banking licences and;

● Measures to boost private investment, the corporate sector and small and medium scale industries.

“The 2010 budget is also expected to provide some clarity on the status of the Goods & Services Tax (GST) as part of the overhaul of the Malaysian tax system,” CIMB Investment Bank economic research head Lee Heng Guie said in a recent report.

Fiscal reform, he added, was likely to be a core element of the new economic growth model.

A crucial question facing the government would be whether it could afford another year of large deficit spending although the national debt, at 48% of Gross Domestic Product, was still manageable.

From recent remarks by Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah to cut next year’s operating expenses by 15%, it can be inferred that “the proposed cut in operating expenditure is much needed to realign it with the shortfall in revenue collection.”

“Indications are that the cut will fall on equipment acquisition and official trips abroad, including implementing more targeted subsidies for deserving people rather than across-the-board,” said Lee.

The bulk of the increases in recent years came from subsidies (3.8 percentage points or 10.2% of total expenditure) followed by emoluments (3.5 percentage points or 27.1% of total), supplies and services (2.5 percentage points or 17.6% of total), grants and transfers (2.6% percentage points or 22.5% of total).

With the US economy still in a tailspin and US consumers revamping their spending habits, Malaysian exporters will also have to restructure their export network.

To ensure a stronger growth momentum, the government has to urgently come up with measures to defend domestic consumption, turn around private investment and groom its own regional champions.