By Jeremy Grant
Malaysia is to introduce a consumption tax and cut a key levy on business as the government of Prime Minister Najib Razak seeks to assuage investor anxiety over a widening fiscal deficit while shoring up domestic political support with cash handouts for the poor.
In his first budget since narrowly winning a general election five months ago – the most closely fought since Malaysian independence in 1957 – Mr Najib said a 6 per cent “general sales tax” would from April 2015 replacethe existing sales tax and service tax.
The levy, which would broaden the tax base, would “improve public finances for the medium and long-term benefit of the people,” he said.
Corporate income tax would be cut by 1 percentage point to 24 per cent from 2016. Income tax for small- and medium-sized enterprises would also be reduced from 20 per cent to 19 per cent from 2016.
The budget moves, revealed in a speech to parliament on Friday, helped send the ringgit higher, signalling investor relief that Kuala Lumpur is finally addressing a chronic shortage in government revenues.
“This budget ensures that the economy expands at a strong pace, the fiscal deficit is reduced and the nation and the people continue to prosper,” Mr Najib told parliament.
The budget would also increase an existing cash handout to households with monthly income of below Rm3,000 ($959) to Rm650, from Rm500, and would provide tax relief to help middle-income groups of Rm2,000 for taxpayers with monthly income of up to Rm8,000 this year.
In July Fitch, the rating agency, downgraded the country’s outlook to negative because of a lack of fiscal reform. Only 1m out of a total population of 29m Malaysians pay tax, amounting to only 6 per cent of the workforce, according to Credit Suisse.
Government debt as a percentage of gross domestic product has hit 53.3 per cent, just shy of the government’s self-imposed ceiling of 55 per cent – one of the highest levels in Asia.
Mr Najib predicted that his measures, including the abolition of a sugar subsidy, effective on Saturday, would help cut the country’s overall fiscal deficit from 4 per cent of gross domestic product to 3.5 per cent next year.
The government aims to cut the fiscal deficit to 3.5 per cent in 2014, and 3 per cent in 2015.
“Malaysia’s slow fiscal consolidation to date stems from an inability to reduce high subsidies and its relatively weak revenue structure,” said YeeFarn Phua, associate director of sovereign and international public finance ratings at Standard & Poor’s. “Though the 2014 budget does not address fully all these issues, it is nevertheless a step in the right direction for Malaysia.”
Mr Najib predicted revenues this year would grow by 1.8 per cent to Rm224bn ($71bn), although there was no prediction for subsequent years.
“This clearly indicates the government’s commitment towards fiscal consolidation to further strengthen the financial position of the nation,” Mr Najib said.
The budget would also allocate a total of Rm264bn [$83.5bn] to implement programmes and projects “for the wellbeing of the rakyat [people] and national development”.
The Pakatan Rakyat (people’s alliance) opposition coalition led by Anwar Ibrahim opposes the GST, saying it imposes too high a burden on lower income families.
Pakatan members of parliament waved orange budget booklets that the opposition had prepared, by coincidence the same colour as the traditional “baju Melayu” dress Mr Najib chose to wear for his budget appearance.
However, Mr Najib said the sales tax would not be imposed on essential food items such as rice and salted fish. Individual income tax rates would also be reduced by between 1 to 3 per cent for all taxpayers, with the effect that 300,000 people on lower incomes would no longer pay tax, Mr Najib said.
He also predicted that the economy would grow at 5-5.5 per cent next year, compared with official projections of 4.5-5 this year.
Copyright The Financial Times Limited 2013
(c) 2013 The Financial Times Ltd. All rights reserved. Please do not cut and paste FT articles and redistribute by email or post to the web.