Malaysia 2014 fiscal position to come within target of 3.5% of nominal GDP

Tax revenue collection could also be bolstered.

The fiscal position of Malaysia for 2014 is expected to come within the target of 3.5% of nominal GDP, and while expenditure is likely to remain high, the stronger than expected GDP growth will bolster tax revenue collection.

According to a research note from DBS, more importantly, this will also imply that the government is on track to achieve its longer term objective of fostering fiscal sustainability and to bring fiscal deficit to below 3% of GDP by 2015.

There are three key areas of focus in this budget. Firstly, further details on the Good and Services Tax are expected, which will be introduced in April next year.

The GST rate will be set at 6% and covers most items but basic food and essential services will be exempted.

It will effectively replace the existing Sales Tax (5-10%) and the Service Tax (6%). More specific details pertaining to its introduction and coverage will be announced.

Here’s more from DBS:

Secondly, following the most recent fuel subsidy cuts and given the impact on cost of living, there could be a more robust offset package to be announced in the budget to alleviate the pressure on the low and middle income households.

Among the financial aids that may be dished out will include an increase in the Bantuan Rakyat 1 Malaysia (BR1M) cash handouts and other temporary assistance schemes to low-income households and possibly a one-off tax relief for the middle income families.

Last but not least, more property market cooling measures may be on the cards. The Real Property Gain Tax (RPGT) and the minimum property purchase price for foreigners were raised in last year’s budget.

Given an unhealthy household debt to GDP ratio of 86.8% and the fact that Bank Negara did not tighten monetary policy further in the last policy meeting, one would suspect that more macroprudential measures may be in the pipeline to cool the booming property market and to prevent further increase in leverage ratio in the banking system.

Apart from the above, the budget will also focus on accelerating investment; promoting growth in the services sector, enhancing human capital development; intensifying rural-urban development as well as alleviating the well-being of the people.

While measures to enforce fiscal consolidation (e.g., GST) may not go down well with the public, ensuring fiscal and debt sustainability are just as crucial towards achieving longer term economic stability and growth.