All you need to know about Malaysia's 'bold' fiscal budget for 2014

Government expects a deficit of 4% of GDP.

According to DBS, Malaysia announced its fiscal budget for 2014 last Friday. Bold measures were announced to instil fiscal prudence and to achieve longer term fiscal sustainability.

Here's more from DBS:

The government expect overall fiscal position for FY2013 to record a deficit of 4.0% of nominal GDP, in line with its target. GDP growth is projected to register 4.5-5.0% (DBSf: 4.3%) for 2013 and 5.0-5.5% (DBSf: 5.2%) in 2014.

For 2014, the official fiscal deficit target has been lowered to 3.5%, which essentially will reaffirm the government’s commitment to lower fiscal deficit to 3.0% of GDP by 2015.

The government has also reiterated its commitment to keep total government debt below 55% of GDP.

The much anticipated GST has finally been announced and will be implemented on 1 April 2015. The GST rate will be set at 6%, higher than what most had predicted but basic food items and essential services will be exempted. It will effectively replace the existing Sales Tax (5-10%) and the Service Tax (6%).

In addition, sugar subsidy has also been abolished with immediate effect. This follows the earlier fuel subsidy cuts and in line with the longer term goal of rationalising subsidies.

And to help the mid and lower income households cope with higher cost burden of the GST and the cuts in subsidies, the government has announced more cash handouts on top of the earlier BR1M handouts, with lower income earners getting more.

In addition, middle income families will receive a special tax relief of MYR 2,000 to help them cope with the higher cost of living.

To complement the introduction of the GST and to steer the tax regime towards indirect taxation instead of direct taxation, the personal income tax and corporate tax rates will be lowered.

Personal income tax rate will be reduced by 1-3%- pts following the GST implementation with the top individual tax rate to be reduced to 24% by 2015 from the current 26%.

The chargeable income level will also be adjusted to make the income tax regime more progressive. Separately,
corporate income tax rate will be reduced by 1%-pt to 24% and SME corporate income tax rate will also be lowered to 19%, from 20% by 2016.

Beyond tax restructuring, the Real Property Gain Tax (RPGT) will be raised further to cool the buoyant property market. The RPGT will be raised to 30% for sale within 3 years, up from previously 15% for disposal less than 2 years.

In addition, the RPGT will be set at 20% for sale on the 4th year and 15% for the 5th year. For foreigners, the RPGT will be 30% for sale within 5 years of purchase and 5% thereafter.

To further distinguish between local and foreign property buyers, and to ensure properties remain affordable to the general public, the minimum property purchase price for foreigners will be doubled to MYR 1 mn, from MYR 500,000 previously.

Apart from the focus on fiscal consolidation and cooling the property market, the budget also focuses on accelerating investment; promoting growth in the services sector, enhancing human capital development; intensifying rural-urban development as well as enhancing the well-being of the people.

Budget 2014 has struck the right note in the sense that the government has been more forceful in tackling the key challenges of the fiscal deficit and the federal debt.

This is a well-balanced and prudent budget, although there are measures that may not go down well with the public. It clearly shows that the government is committed to ensuring fiscal and debt sustainability so as to safeguard the long term economic stability despite potential political backlash.