SINGAPORE, Sept. 9 (UPI) -- Prime Minister Mahathir Mohamad has ruled Malaysia for 22 years and as he gets ready to deliver his last budget Friday before going on retirement at the end of October the desire to hand out sweets must be strong. But most economists believe he will act more frugally than the market expects. Although this will be a people-friendly, election-biased budget, it will not be a free-for-all last supper as he keeps an eye on his promise to balance the budget by 2005-2006.
"Contrary to the suggestions of some market observers, we don't think Mahathir will splurge on an over-priced supper that leaves big holes in the next government's pockets. The new budget will have enough goodies to keep everyone happy, with businesses likely to enjoy a bigger serving than consumers," said Wong Chee Seng, economist at DBS
Standard Chartered economist Joseph Tan adds: "while it must be tempting for Mahathir to go out with a bang and give out gifts to the electorate, we believe that the budget is likely to be balanced and, for a pre-election, handover budget, prudent."
Malaysia has been running a budget deficit for six straight years and this year it is officially projected at 4.0-4.5 percent of gross domestic product, slightly down from last year's deficit of 5.6 percent of GDP.
"Given the political timing, ahead of the changeover in October and the parliamentary election next year, an overly austere budget is unlikely. As such, we expect the goal of balancing the budget by 2005 to be postponed," Tan said, forecasting the 2004 budget deficit at around 4 percent of GDP.
Aileen Wong, economist at Deutsche Bank, also pointed that with the 2.2 percent of GDP supplementary stimulus package announced in May, Malaysia is actually likely to run a deficit of 5.5 percent of GDP this year. "Although this is a pre-election budget, we think it will be a less expansionary one than many people are expecting," she said, pointing that private consumption has picked up since the supplementary budget, while a global recovery will spur exports.
"The government's debt has been rising rapidly over the past six years and the government is struggling against a budget constraint...It is most unlikely for the government to achieve a balanced budget on schedule in 2005. Even with an effort to reduce development expenditures, the deficit will likely reach 4-5 percent of GDP next year," Wong added.
The government debt has been growing in recent years and now stands at 48 percent of GDP.
DBS' Wong believes the 2004 budget calls for "a great balancing act," given the upcoming general elections on one hand, and the need to pacify market concern on fiscal sustainability on the other. "We believe the budget can balance both objectives with selective goodies, while moving ahead with fiscal consolidation, predicated on improvement in global conditions and upturn in private capital expenditures," he added.
"Our take is that 2004 will be a year of carrot for business, to lay the foundation for greater private sector-led growth and to achieve greater balance between domestic-external sources of growth, hence a more competitive and diversified economic structure. Households will get their fair shares, but are unlikely to be the prime beneficiaries this year."
Most economists agree the budget will be people-friendly, with sectors like education and healthcare seen benefiting most. Business friendly measures, like tax incentives to direct foreign investors in certain industries such as info-technology and biotechnology are also likely in the cards. But as the pro-business off-budget package announced in May saw an employee provident fund (EPF) contribution reduction for workers from 11 percent to 9 percent, the likelihood of further cuts is lessened, they said.
But economists do disagree on tax reductions, with some saying the government has already ruled them out when pointing that cutting corporate taxes would mean raising them somewhere else, a no-no ahead of an election, while others believe there is room, especially if sin taxes (alcohol, cigarettes) are raised to make up for the shortfall in tax revenues.
"We have long argued that tax competitiveness with Singapore, whose corporate tax rate is currently 600 basis points lower is an issue for Malaysia. We think a reduction in the corporate tax rate (at 28 percent now) will demonstrate the government's willingness to stay competitive and would also be a more effective use of government resources as it directly cuts the cost of running a business in Malaysia," said Wong. The Malaysian Institute of Economic Research (MIER) estimated that a 100 basis points cut in the corporate tax rate will cost about $263 million.
But Tan disagreed pointing that the corporate tax rate was not really an issue for doing business in Malaysia. "While Singapore is pricing itself out, with high land costs and labor costs, Malaysia still has a fairly low labor cost and land price is not an issue. The cost of doing business in Malaysia is still fairly low and businessmen tend to mainly complain about efficiency, like corruption and red tape," Tan said.
