Commentary: The big expectations for Malaysia’s 2020 budget

KUALA LUMPUR: When campaigning for the May 2018 general election, Malaysias Pakatan Harapan (PH) promised to reduce people's burden and implement institutional reforms.

In keeping the pledges shortly after coming into power, Finance Minister Lim Guan Eng announced that the hugely unpopular Goods and Services Tax (GST) would be zero-rated from the initial 6 per cent between June and August, before the Sales and Service Tax (SST) was reintroduced in September that year.



Private consumption rose faster in the subsequent two quarters as a result of the tax holiday and purchases of big-ticket items such as passenger vehicles have soared, as consumers leapt at the opportunity to avoid paying consumption levy.

In his maiden budget speech last year, Mr Lim shared that the administration was committed a path of fiscal consolidation in order to reduce the budget deficit from 3.7 per cent in 2018 to 2.8 per cent in 2021.

Subsequently, public investment has been drastically reined in as several mega infrastructure projects were cancelled or put on hold subject to further renegotiation, following the revelation that the governments debt, including guaranteed loans and other liabilities, had breached the RM1 trillion mark.

This Friday (Oct 11), PH will unveil Malaysia's 2020 budget. All eyes will be on its fiscal policies and stimulus programmes for signs of which sectors will get support and how much boost the economy might enjoy.




The PH governments goal to reduce the government deficit and debt is a challenging task in todays worsening global economic environment.

Since April 2018, the International Monetary Fund (IMF) has made five consecutive downward revisions to global growth projection, citing the ongoing US-China trade tensions as a threat to the global supply chain of intermediate goods, which Malaysia is highly dependent on.

Malaysian Finance Minister Lim Guan Eng reacting to members of parliament at the start of his budget speech on Nov 2, 2018. (Screengrab: Facebook/Malaysia's Ministry of Finance)

In view of the risks, Bank Negara Malaysia, the nations central bank, had in March revised gross domestic product (GDP) growth from 4.9 per cent to between 4.3 per cent and 4.8 per cent.

As such, expectations are high for Budget 2020 to involve expansionary, counter-cyclical measures that buffers the Malaysian economy against further external shocks.

In fact, manufactured goods accounted for some 86 per cent of Malaysias total exports. Nearly half are electrical and electronic (E&E) products. A large portion of this are intermediate goods bound for China for further value-add before re-export to the US as final goods.

According to a recent survey by the Federation of Malaysian Manufacturers (FMM), only 25 per cent of members, mostly small and medium-sized manufacturers, expected higher export sales in the second half of the year, signalling weaker business sentiment moving forward. This may provide the case for highly targeted intervention to boost capacity utilisation and private investment.

Cost levels for harvesting palm fruits can differ, depending on factors such height of the trees and whether they in the prime harvesting age of between 10 to 15 years. (Photo: Vincent Tan)

While no longer the primary source of national income, the downward pressure on global demand for palm oil and crude petroleum products may invite special policy attention, especially for the former, in the upcoming budget.

Small plantation owners from the rural Malay heartland have traditionally wielded enormous clout in local politics.

Weak crude palm oil and palm kernel prices, coupled with anti-palm oil movements, have hit the smallholders hard, prompting them to demand for subsidies and incentives.

READ: Malaysias palm oil growers fall on hard times

Meanwhile, the rising incident of unsold properties, predominantly in the high-end category, has done little to deter property developers from launching new projects, albeit at a slower pace, as they embark on aggressive campaigns to provide attractive financing options to homebuyers.

While property developers look forward to new incentives that can help mop up the excess supply of houses, it is more crucial for the government to ensure that existing demand and supply mismatch in the housing market does not get distorted further through subsidies.

With all these competing demands, does the government have the wherewithal to pursue an expansionary budget?


The abolishment of GST has had the effect of reversing an initial success in broadening the countrys tax base.

As a result, the share of indirect tax revenue is forecast to fall from 28 per cent in 2017 to 15.7 per cent of total tax revenue in 2019, amounting to a potential loss of RM20 billion (US$4.78 billion) in tax revenue every year.

READ: Commentary: Hard truths, tough choices ahead after Malaysias scrapping of the GST

Malaysia's annual economic growth slowed down to 5.4 per cent in the first quarter of 2018 (Photo: AFP/Mohd Rasfan)

READ: Commentary: Malaysia goes in search of a more inclusive growth formula

Eyebrows were also raised earlier this year when it was reported that national oil company Petronas would make a one-off special dividend of RM30 billion to the government, prompting concerns over the government not being able to keep their hands off the cookie jar after years of weaning itself off oil riches.

But it may not be as helpful to introduce new tax measures at a time of slow growth, as already strongly hinted by Mr Lim.

As the tax holiday effect dissipates, the chronic failure to address the rising cost of living continues to haunt the government of the day.

The low consumer price index growth belies the reality of persistently high prices of basic food that has more to do with Malaysias increasing food import bill and profiteering practices rather than the consumption tax.

The upcoming budget will also be the last for the 11th Malaysia Plan – the countrys five-year development plan. Already, stakeholder discussions have been held nationwide by various ministries and agencies to develop the 12th Malaysia Plan based on Prime Minister Mahathir Mohamads new national vision of Shared Prosperity.

As such, the budget will provide clues as to how the government intends to put in practice the elimination of income and wealth gaps across all ethnic groups and regions by 2030.

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