Analysts expect an austere fiscal budget for 2019, with major changes expected especially on the government’s expenditure given the gap in revenue from the replacement of the GST with the SST. — Bernama photo
KUCHING: Analysts expect an austere fiscal budget for 2019, with major changes expected especially on the government’s expenditure given the gap in revenue from the replacement of the goods and services tax (GST) with the sales and services tax (SST).
RHB Research Sdn Bhd (RHB Research) in its ‘Economic Outlook’ report, said: “We expect major changes for the 2019 budget especially on expenditure as the government experiences a shortfall in revenue from the replacement of GST with SST (about RM21 billion or 1.4 per cent of GDP) as well as allowing companies to offset income tax returns owed in previous years against taxes payable in coming years, which will result in lower tax collection in the coming years.”
As it stands, according to reports by Bernama, the government has reported a total of RM19.2 billion delayed GST refunds while reports by the Edge said that the government reported another RM16.05 billion in excess income tax and real property gains tax which were not refunded to 1.65 million taxpayers over the last six years.
“The government has subsequently allowed taxpayers who have been owed tax refunds to apply to offset this against income tax that is payable for the current year,” it noted.
On the GST refunds, the Federal government said it is commited to returning the GST refunds beginning next year.
“This could mean another gap that needs (RM35.3 billion of 2.5 per cent of GDP) to be plugged by the government.
“Although it did not indicate whether the refunds would all be paid out in a single year, we think it will happen gradually over a few years,” RHB Research said.
However, even if the payback period is stretched out to three to five years, the research team warned that the annual payment of GST and income tax refunds would still be substantial at RM7.1 billion to RM11.8 billion (about 0.5 to 0.8 per cent of GDP).
“Given such challenges faced by the government and under the scrutiny of international rating agencies, we think the government will find reducing the budget deficit from the current 2.8 per cent of GDP rather difficult.
“As such, we think the Government may not have a choice but to tighten its expenditure further,” RHB Research opined.
On possible methods of reducing the government’s expenditure, RHB Research believed that the government’s move to start using the zero-based budgeting method for its ministries and departments must be justified for each new period of tenders as it ensures that every function within the government is analysed in terms of needs and costs.
“This method would see ministries and departments within the government design budgets that start from scratch, as opposed to the incremental budget method used previously, which followed the budget allocated for the previous year.
“This is a method of budgeting in which all expenses by governmental ministries and its agencies must be justified for each new period of tenders. It also ensures that every function within the government is analysed in terms of needs and costs,” the research team explained.
Development expenditure, which accounts for 16.4 per cent of total expenditure, is another area to be reduced as indicated by recent government actions, it noted.
“The government has cancelled/deferred infrastructure projects that could see allocations for transport development (RM10.5 billion or 3.7 per cent of expenditure), energy & public utilities (one per cent of expenditure) cut substantially.
“The rationalisation of the Prime Minister’s department budget had also seen a 60 per cent cut in its development expenditure to RM4.9 billion from RM12.2 billion for 2018, though the government only managed to reduce RM0.1 billion or two per cent of its total RM5.2 billion operating budget for 2018,” RHB Research added.
Aside from that, it noted that other areas of the budget that could see reductions include civil servants’ salaries/emoluments (RM79.2 billion or 28.2 per cent of expenditure) after the government has terminated contracts of 17,000 political appointees and ministers have volunteered to cut their pay by 10 per cent.
“However, overall, the cut in headcount would likely be limited to less than five per cent and this would be fully mitigated by the annual salary increment. As a result, we expect emoluments to stay at the same level of 2018,” it said.
RHB Research also believed that subsidies (RM26.5 billion or 9.5 per cent of expenditure) could likely see moderate reductions (circa three to five per cent) as the government had indicated that fuel subsidies would be targeted to cars with engine capacity below 1,300cc and motorcycles below 125cc.
The government is also reportedly phasing out the BR1M payments, which amounted to RM6.8 billion or 2.4 per cent of the government’s expenditure in 2018. While there is still a possibility that the government could put in place another type of financial aid in lieu of the BR1M payments, the reduction of the BR1M payments should bring down its overall subsidy burden.
“All things considered, we expect the government to maintain its budget deficit of 2.8 per cent for 2019 but with revenues likely to shrink by 5.5 per cent year-on-year (y-o-y) compared to Budget 2018, a reduction in spending of 3.8 per cent would ensue – with the bulk of the cuts focused on development expenditure (down 17.4 per cent) while opex reduction (only 1.2 per cent cut) remains a challenge.
“The overall deficit is expected to grow by 5.8 per cent y-o-y to RM42.1 billion, compared to Budget 2018 but would be maintained at 2.8 per cent of GDP,” RHB Research commented.
Of note, the Budget 2019 is expected to be tabled in November.