KUCHING: As the federal government will spend more than what it collects in terms of revenue, this will exert a less expansionary impact on the economy, but still contributing to growth in 2011, albeit by a smaller magnitude compared with 2010, says an analyst firm.
IMPACT ON ECONOMY: RHB Research believes the government is committed to reduce its budget deficit, albeit gradually, to ensure that fiscal policy remains supportive of economic growth.
Although the government will continue to reduce its budget deficit in 2011, it was not as sharp as expected earlier, given that the projected budget deficit came in higher than the guidance provided under the 10th Malaysia Plan (10MP).
As a result, the federal government’s budget deficit was projected to only narrow slightly to 5.4 per cent of gross domestic product (GDP) in 2011, from 5.6 per cent of GDP estimated for this year and compared with the guidance of 4.2 per cent provided under the 10MP.
“We view it as a prudent move given rising risk of a sharper than expected slowdown in the global economy, which will in turn hurt the country’s exports,” said stockbroking firm RHB Research Institute Sdn Bhd (RHB Research).
Furthermore, the government intended to spend more in the initial period of introducing the New Economic Model (NEM), particularly to facilitate the implementation of various initiatives under the model.
“This, together with measures announced in the Budget 2011, is also aimed at convincing the general public and, investors in particular, that the government is serious in transforming the economy by taking the lead and putting the money where its mouth is, in order to instill confidence,” it added.
The research firm believed that the government’s initiatives announced in the budget to reinvigorating private investment would help to sustain the sector’s growth, albeit at a more moderate pace.
These measures included an allocation to encourage electrical and electronics industry to invest in high value-added activities, an extension of tax incentives for another five years to 2015 to encourage companies to undertake food production activities, a cut in import duties to boost tourism and incentives to develop green technology.
Infrastructure and property developments were expected to drive private investment in 2011 as well.
As it stands, the government had allocated RM1.0 billion for the facilitation fund to drive the public-private partnership (PPP) projects, targeting construction of highways, power plant and healthcare related projects.
It also indicated that the Mass Rapid Transit (MRT) which cost about RM40 billion will be implemented in 2011.
The government-linked investment corporations such as the 1Malaysia Development Bhd, the Employees Provident Fund and Permodalan National Bhd, had also been earmarked to undertake some huge development projects.
As a whole, the research firm expected private investment to moderate to 7.8 per cent in 2011, from plus 8.6 per cent estimated for this year.
RHB Research further said that although consumer spending would be affected somewhat by the reinstatement of employees’ contribution to the Employee Provident Fund back to 11 per cent in 2011, it believed the one per cent increase in services tax to six per cent, was unlikely to impact consumer spending significantly.
The one per cent increase was estimated to bring in additional tax revenue of RM0.7 billion for the government.
In addition, the abolishment of five to 30 per cent import duties of approximately 300 goods preferred by tourists and locals and the RM500 Special Financial Assistance money provided for civil servants would help to sustain consumer spending. “As a result, we expect consumer spending to remain resilient, underpinned by rising consumerism and high savings in the country,” added RHB Research.
As a whole, it believed the government was committed to reduce its budget deficit, albeit gradually, to ensure that fiscal policy remained supportive of economic growth.
On the other hand, RHB Research also highlighted that the consolidated public sector’s fiscal spending, which includes the state governments, statutory authorities, local governments and non-financial public
enterprises (NFPEs), would also be less expansionary in 2011.
This was reflected in a smaller deficit projected for the consolidated public sector, which was envisaged to narrow slightly to 7.6 per cent of GDP or RM63.5 billion in 2011, from a deficit of 7.8 per cent of GDP or RM60.1 billion estimated for 2010.
This was on account of a smaller deficit of 5.1 per cent projected at the general government level for 2011, compared with a deficit of 5.2 per cent of GDP estimated for 2010, on the back of a reduction in development expenditure.
Similarly, the NFPEs development expenditure was projected to slow down and its deficit was projected to record a smaller deficit of 2.4 per cent in 2011, compared with a deficit of 2.5 per cent estimated for 2010.