Malaysia's Budget 23: Another Missed Opportunity
New government’s nerve fails in the face of political expediency
By: Ramesh Chander, Murray Hunter, and Lim Teck Ghee
Various excuses can be made for Malaysia’s 2023 budget – mainly status quo ante, part recovery, and part election-oriented– produced by the new government, which is kicking the can of fiscal and institutional reform further down the road.
In his budget presentation, Prime Minister Anwar Ibrahim, also the Finance Minister, asked: “the question is whether there is political will to effect change” to what he diagnosed as the challenges facing the nation: high debt levels, low quality of administration, global uncertainties, slow investment recovery, and Rakyat economic woes.
However, Anwar’s administration had fewer than 90 days after coming to office to produce the new budget. In addition, he crafted the budget with looming state elections in mind, so perhaps it is not surprising that the rhetoric of change and reform has largely remained rhetoric.
The first part of our commentary before the budget presentation (see “My Say: Case for a Reformist Budget 2023”) was to stress the need to tackle long-overdue reforms such as restructuring the economy, reforming the tax regime, and reforming the Employee Retirement Fund. However, it is clear that what has emerged is based on the original 2023 template presented by former finance minister Tengku Zafrul last October before GE15 -- mainly cosmetic reform.
As a consequence, Anwar’s first full budget since 1997 is the largest presented in Malaysia’s history. But bigger is not necessarily better, especially when it results in further bloat of the public service and little evidence of substantive institutional and governance reform.
Expenditure: Total forecast spending is RM386.14 billion (US$86.23 billion, of which RM145.5 billion is spent on salaries and operating expenses, RM 58.6 billion in subsidies, while RM97 billion is planned spending on development. The balance is on retirement charges (RM30 billion), debt service (RM45.94 billion), and payments to states (RM 8.1 billion).
Receipts: This will be financed by RM291.5 billion in revenue, made up of RM 218. 2 billion in tax revenue, and RM73.3 billion in non-tax revenue, leaving a budget deficit made up from borrowings and payments from GLCs of RM 94.60 billion.
Disappointment with more of the status quo
There are no reforms undertaken on the EPF system, only some token assistance where balances under RM10,000 will receive an RM 500 top-up. This is even though there is a retirement crisis in Malaysia. Likewise, rather than any tax reform, there will be a 2 percent decrease in tax rates for the B40 group, and an up to 2 percent tax rise in the T20 group. Taxation revenue will become a crucial issue for future governments, if reform is not undertaken.
The budget fell well short of the income safety net promised by both Pakatan Harapan and Barisan Nasional before the election. The social assistance allocation of RM8 billion to cover the needs of 8.7 million people will amount to RM920 per person per annum. What has been dismissed as “paltry, one-off handouts” by a senior trade union official as opposed to a holistic approach to rectifying the fundamental issue of low wages continues to hold back the B40 and M40 income population.
Not exciting for SMEs
Assistance to SMEs will largely be in loans, with priority on developing automation, which may run into delivery problems. Government criteria may be too tight, making many SMEs ineligible. The funds allocated for automation and digitalization may not all be taken up, due to most SMEs being only hand-to-mouth operations and unable to match grants. Tax incentives will be of little use to SMEs which have not been able to make profits and are technically insolvent. There is a risk that the Khazanah Nasional and EPF innovative and high-growth start-up companies RM 1.5 billion investment scheme will benefit only wealthy and connected companies as well as be largely expanded on consultancy services.
The state rice stabilization mechanism Bernas sharing 30 percent of net profits on rice imports, offering RM 1 billion in loans and tax incentives is not going to assist in enhancing food production. Technological grants for private investments may not be fully taken up by farming enterprises or may end up with sham politically connected companies. Little is being done to lower the cost of production, through decreasing input duties on farm inputs. There are still APs in place on many food items, which is contributing to artificially high costs.
The key forgotten reform
A special task force to reform government agencies is a small step in the right direction for enhancing the efficiency of government. This should be expanded to a full study of government, from ministries down to agencies, to determine where bloated staffing levels and inefficiencies exist and where necessary action can be taken to rightsize before the next budget.
One interesting aspect of this budget is that the finance ministry, which Anwar heads, had its allocation of RM29.87 billion raised to RM 67.24 billion, a rise of 125.1 percent. This is a massive increase, enhancing the power of the finance ministry over the government. The government has forecast RM58.6 billion in subsidy payments for 2023. Many of these subsidies, such as RM1.8 billion for rice farmers, will continue to ensure that the paddy industry remains inefficient. A RM200 payment to youths between 18-20 will just be wasted and not assist these people to empower themselves. CLGs offering 35,000 new job opportunities to youth, TVET graduates, veterans, and other vulnerable groups is just going to add to the inefficiencies of these organizations. This new laundry list of giveaways may provide short-term political gain to buy the new government time but the economic returns are largely illusive.
The prime minister had promised to share “the real facts” rather than opting for “captivating” figures to accurately present the state of the nation. The budget presentation was a missed opportunity.
Datuk Ramesh Chander is a former Chief Statistician of Malaysia and a Senior Statistical Adviser at the World Bank in Washington, DC. Lim Teck Ghee is a former senior official with the United Nations and World Bank. Murray Hunter is an independent researcher and former professor with the Prince of Songkla University and Universiti Malaysia Perlis