Malaysia's Great Disappointment – Nation's Biggest-Ever Budget

Spending plan fails to tackle the real problems facing the nation

By: Murray Hunter

Amid speculation about when Prime Minister Ismail Sabri Yaakob will call an election, floods, a falling ringgit, and post-pandemic recovery, the 2023 budget was delivered by Finance Minister Tengku Zafrul Abdul Aziz to the Dewan Rakyat on the afternoon of October 8. It is a budget crucial for Ismail Sabri’s electoral popularity, as it will be the last before the 15th general election due by September 2023.

It is a spending document that has ignored economic reform and added to continued bloating of the public service sector. Most of the development expenditure will go to contractors, while assistance to the poor and needy is very modest. Employers are unlikely to take up subsidies to employ the youth, and disabled. The budget fails to go far enough to tackle the major issues in education and health. On the whole, it is disappointing. The beneficiaries will be politically-connected contractors, a decades-old story in Malaysia.

The Pakatan Harapan opposition could attempt to block approval on the grounds that it is against the philosophy of a multi-racial Malaysia favoring Bumiputeras, particularly cronies of the current government, that spending within the budget won’t not solve the real problems facing the economy, requiring the government to negotiate some of the terms. Such action would show up the government’s weak position in the Dewan Rakyat. By highlighting some of the unjust aspects, the opposition could gain popularity for standing up against the government, which it didn’t do last year, earning criticism.

The key area the budget must tackle is inflation, although that is difficult if not impossible. Global inflation is running at a 7.0 percent annual rate, bleeding into domestic prices. Domestic food prices are 7 percent in August compared with the same time last year. The annual inflation rate is now 4.7 percent. With the falling ringgit against the US dollar – a function of rising US interest rates, which are draining investment capital out of emerging markets – prices of food are likely to continue rising. Rising interest rates could further fuel inflation as finance costs rise for SMEs.

Higher oil revenue will enable the government to spend more without increasing the deficit. This has also allowed some tax relief. As predicted the government has increased spending RM40.2 billion from last year to RM372.3 billion, representing 20.5 percent of GDP, in what could be clearly described as an election priming budget.

The Ministry of Finance forecasts that federal government revenue will be RM272.6 billion, or 15 percent of GDP, with a budget deficit of RM99.7 billion. Non-tax revenue will be down 23 percent due to lower dividend income. The ministry forecasts a rise in tax revenue from economic recovery and more efficient tax collection to help make up for the shortfall. Petronas is expected to provide an RM35 billion dividend due to the high price of crude oil.

The government is planning the introduction of a Tax Identity Number (TIN), and to crack down on illicit cigarette trading, to clamp down upon the cash economy. This could potentially have undesirable effects on the informal economy many traders depend upon to survive.

Creating youth employment is a major part of the budget, with a number of initiatives announced. RM305 million will be provided for youth enterprise start-up loans, along with RM50 million for a youth trader scheme. The government will bear the costs of e-hailing, taxi, and motorcycle licenses for youths. A special internet package of RM30 for three months will be introduced. Clearly, the government is trying to woo the youth vote here.

RM1 billion has been allocated to fight poverty, although there are few details about how this is to be spent. RM7.8 billion has been allocated to the Bantuan Keluaraga Malaysia (BKM) which will reportedly assist 8.7 million people.

Payments to civil servants represent 33.3 percent of operating expenditure. Of this, retirement commitments will be RM29.1 billion, or 10.7 percent of operating expenditure, a cost that will continue to grow over the coming years. The Mystep program aims to create 50,000 new jobs, 15,000 within public service, and 35,000 in GLCs. This will expand and already bloated public service and make GLCs more inefficient as they absorb these new job placements.

The budget will pay out RM42 billion in fuel and agriculture-related subsidies, together with cash and welfare assistance. The government has opted to allow parts of the economy to remain inefficient, rather than solve these problems through restructuring and innovation.

RM4.5 billion has been allocated to repair and replace dilapidated infrastructure within the school system, which will put money into the hands of class F contractors.

The government has committed to provide RM9 billion to SMEs. The success will be in the details of how easy it will be for needy SMEs to access this scheme. The RM45 billion allocation to the Semarak Niaga scheme, being a mix of loans and selected grants, may not be easy to take up by SMEs.

Healthcare has been allocated RM30 billion, with most development allocations targeted on construction and payments to private health finds. The increase in expenditure over the year before doesn’t cover inflation.

The RM94 billion development expenditure will be a windfall to major contractors. Subang Jaya PKR MP Wong Chen was quick to criticize this spending, claiming much of these funds will find their way back to government parties as political donations ahead of GE 15. None of this expenditure is aimed at creating any needed structural change within the economy.

The government has taken measures to stem the rise in food costs through subsidies and grants to lower income groups. According to the Economic Outlook 2023 Report, the rising price of food is the major contributor to inflation. However, with more than RM1.2 billion subsidies for the logistic industry, and RM1.8 billion subsidies for farmers and fishermen may be absorbed rather than passed on in lower prices to consumers. 

Taxpayers have been given a modest 2 percent reduced taxation rate for those earning between RM50,001 and RM100,000 per annum. Income tax exemptions have also been provided to micro-SMEs and income tax exceptions provided for Tadika and day care. Funding allocated to e-wallets in e-Pemula, amounting to RM8.30 per month for the M40. This has restricted the use of specific products in specific outlets.