Budget 2016 to be slightly larger but supportive of domestic economy
KUCHING: With the announcement of Budget 2016 just days away, analysts believe that the upcoming budget will be more prudent and people centric.
Budget 2016’s expenses are also expected to be slightly larger than 2015 but supportive of the domestic economy amid weak global macro environment.
In a recent report, RHB Research Sdn Bhd (RHB Research) believed that as Malaysia enters its first year of the 11th Malaysia Plan (11MP), Budget 2016 is expected to see a smaller allocation in operating expenditure for the second straight year, as the government steps up efforts to contain its ballooning public spending bill.
“As a result, areas in the procurement (supplies & services) and transfers will likely be reduced, while subsidies are expected to increase slightly on the back of increased BR1M handouts,” it added.
“For 2016, we envisage that the government will allocate an operating expenditure budget of around RM211.9 billion that will be lower by 0.4 per cent compared to 2015.
“The spending cut will allow the operating expenditure to ease to 94.2 per cent of its total revenue in 2016, from 95.4 per cent in 2015 and 99.5 per cent in 2014.
“Although the challenges are aplenty, we think there should still be ample room to reduce expenditure in the supplies & services and grants & transfers to state governments and government bodies,” it explained.
Allocation for the cash assistance programme through BR1M will likely be increased to about RM5.6 billion in 2016, compared to the allocation of RM4.9 billion for 2015, while government spending is expected to focus on human capital development, which are education & training.
“With productivity seen as key driver for economic growth under the 11MP, we expect Budget 2016 to further incentivise the private sector to invest for improvement in productivity especially at the time when companies and businesses may well be reviewing or withholding investment in capacity under the current challenging economic and financial conditions,” it added.
For the Budget 2016 announcement, the research team also believed that the government would likely unveil broad-based initiatives and targeted actions across the public sector, industry players and individual enterprises developed and tailored for each sector with target set and monitored, as outlined under the 11MP.
In view of the rising cost of living, RHB Research pointed out that the government would likely introduce more measures to offset the impact of the GST especially on the lower-income segment of the population.
“For the medium-income group earners, instead of personal income tax cut, we expect the government to provide higher personal tax relief for individuals as well as spouse and children relief and a continuation of financial assistance in the form of book vouchers for students,” it opined.
In addition to the rising cost of living, with rising housing affordability topping the list of public concerns, the research team expects Budget 2016 to expedite the construction of affordable-housing programmes.
“Also, requirements for affordable housing may be loosened such as increasing the household income ceiling and reducing the minimum holding period from 10 years to five years,” it added.
Reflecting on the increase in BR1M cash payouts, the research team said the subsidy bill is expected to be increased slightly by RM0.4 billion to RM27.2 billion in 2016, following an estimated drop of 32.5 per cent or RM12.9 billion to RM26.8 billion in 2015, from RM39.7 billion in 2014.
“This would lift total subsidies’ share of total revenue slightly higher to 12.1 per cent in 2016 from 12 per cent of total revenue in 2015, but lower than 18 per cent in 2014 and a high of 22 per cent of total revenue in 2008,” it added.
Aside from that, RHB Research said despite facing mounting challenges, it expect the government to remain on track to consolidate its fiscal position although the pace will likely be slower than earlier expectations.
“The government indicates that it intends to bring down its budget deficit further to three per cent of gross domestic product (GDP) in 2016, which ought to be this year’s target if not for the sharp drop in oil prices pushing revenues lower, causing the government to revise its budget deficit target higher at 3.2 per cent of GDP for 2015.
“As a result, we expect the government to stick to the three per cent target to show its commitment to reduce its budget deficit gradually. We believe the Goods and Services Tax (GST), which has come into effect since April 1, 2015, will likely plug the gap caused by the sharp fall in commodity prices to allow the government to achieve this target,” the research team opined.
On the expenditure side, RHB Research said it expect a slightly higher spending in 2016 which should be reflected in a front loading of gross development expenditure (DE), as the country enters the first year of the 11MP where the government has proposed to spend RM260 billion over the next five years.
“As a result, we expect the government to allocate RM52 billion in gross development expenditure for 2016, a 7.2 per cent jump from an estimate of RM48.5 billion in 2015,” it added.
The research team further explained, “The increase in gross development expenditure will likely benefit the construction industry in general and cushion the impact from the GST implementation and slower capital expenditure by businesses under a low oil price and weak ringgit environment.
“Among infrastructure projects planned or are being implemented include the Kuala Lumpur-Singapore high speed rail project (RM34.8 billionn), Klang Valley Mass Rapid Transit and Light Rail Transit 3 (LRT3) projects (RM36 billion and RM9 billion respectively), 197km of rail tracks from Gemas to Johor Baru, four new highways in Sarawak, Sabah, Johor, Kelantan and Perak, and the planned introduction of thousands of kilometres of new roads in rural areas.”
The government will also likely unveil details for the improvement of transportation networks to enhance connectivity and mobility in regional economic corridors, it noted.
However, the research team pointed out that due to the constraints surrounding the fiscal budget, the government would probably rely on further investments and new projects by government-linked companies (GLCs) such as EPF, Khazanah Nasional Bhd, Permodalan Nasional Bhd (PNB), Lembaga Tabung Haji (LTH), Kumpulan Wang Persaraan (KWAP) that would likely be financed off-budget to spearhead spending and pump-priming the economy.
“This will be on top of the September announcement of a RM20 billion injection by Khazanah Nasional Bhd, PNB and KWAP into ValueCap Sdn Bhd, a vehicle to buy undervalued stocks listed in Bursa Malaysia starting in November 2015,” it said.
Overall, although the measures announced might not be enough to address the loss of investor confidence that is causing weakness in the currency and equity markets, it is a step in the right direction, RHB Research opined.