Malaysia: 2019 Budget Consultation

HIGHLIGHTS

2019 Budget Consultation

• Fiscal reforms in Budget 2019 are aimed at promoting sustainable, equitable and inclusive growth while ensuring credibility, accountability and transparency.
• Cost cutting is not the government’s only focus, as economic expansion and wage gains for the B40 and M40 households are deemed equally crucial policy goals.
• The pro-consumer agenda and fiscal constraints mean businesses will have to play a key role in improving productivity and lowering costs in the economy.
• The government appears optimistic that the pain of reform adjustments can be shared without sacrificing economic growth (MOF: 5.0-5.5% in 2019 vs. CIMB: +5.0%)
• Delays in implementation and productivity gains may entail a trade-off between 1) economic growth, 2) near-term fiscal discipline or 3) a pared down reform agenda.

Fiscal reset to achieve sustainable and equitable growth
We attended the 2019 Budget Consultation today at Putrajaya, chaired by Finance Minister YB Lim Guan Eng (FM). Fiscal reforms in Budget 2019 are part of policies aimed at promoting sustainable, equitable and inclusive growth while ensuring credibility, accountability and transparency.

Key focus areas for reforms
The government’s top structural challenges were 1) incomprehensive social safety nets and rising costs of living, 2) stagnant productivity growth and low returns to labour, 3) insufficient high-skill, high income jobs for locals and a need for the labour force to adapt to technological disruptions and 4) non-inclusive and unbalanced economic development.

Government remains upbeat on economic prognosis
The FM believes robust economic growth provides the fiscal room for reforms. At this juncture, the FM expects Malaysia’s economic expansion to sustain at a pace of 5.5-6.0% in 2018 (CIMB: +5.2%) and 5.0-5.5% in 2019 (CIMB: +5.0%), though he acknowledged that the forecasts may be refined along the way up to the tabling of Budget 2019, tentatively slated for 2 November 2018. In particular, the government is monitoring external developments such as the global trade tensions, geopolitical uncertainty as well as volatile movements in the financial and commodity markets.

Room to manoeuvre limited by fiscal constraints
The FM intends to maintain fiscal discipline with the budget deficit to “remain low” without providing a target, and was keen to manage expectations on additional fiscal space for government expenditure. Public procurement processes would be improved to stem leakages and government tenders would be judged by financial viability. The government would consider projects that are not financially viable if they produce large positive externalities for the economy, but only under rigorous cost controls. The government expects to retain its credit rating and would engage with ratings agencies to explain the scope of its policies.

Boosting labour’s share of income alongside cost of living cuts
A recurring theme during the event was the need to raise Malaysia’s labour share of income, which stood at 35% of GNI (vs. ~40% in advanced economies). In the FM’s view, reforms are needed to improve income growth for the B40 and M40 groups as the trickledown economics approach of the previous regime has worked too slowly. However, he acknowledged that wage growth has to go hand-in-hand with higher productivity. Addressing market inefficiencies and distortions such as monopolies, price floors/ceilings or government subsidies were also means to reducing the cost of living.

Squaring the circle via productivity growth and private sector
With government finances pinched, the FM said the onus falls on greater efficiency and productivity from the corporate GLC and private sector to drive the economy. Participants from the floor raised concerns that businesses are bearing the burden of economic adjustments through higher costs of doing business and domestic policy uncertainty, particularly surrounding tax and foreign labour. Inevitably, reducing market distortions and improving the cost of living requires both lower deadweight losses and compressed producer surpluses.

Achieving ideal outcome rests on implementation
The Budget Consultation did not reveal further details on specific policies, which is understandable as many Cabinet ministers have only recently taken over their portfolios. Proposals are likely to crystallise as the budgetary process continues in the next three months. Our key takeaway is that the government appears optimistic that the pain of adjustments to reforms can be shared without sacrificing growth. If implementation timelines slip or reforms take longer to bear the fruits of productivity gains, then policymakers may have to be prepared to sacrifice 1) economic growth, 2) near-term fiscal discipline and the budget deficit target or 3) pare down its reform agenda.

Originally published by CIMB Research and Economics on 12 July 2018.