Kuala Lumpur, 5 November 2018 – The PH government has presented its maiden budget which promises transparency and better value for tax payers money, provides adequate non tax measures to fill revenue shortfalls, and proposes a range of measures for economic growth focusing on SMEs and boosting trade, agricultural and industrial activities. The budget represents a delivery of many manifesto promises, with some creative compromises such as on tolls and PTPTN. This, combined with some unexpected extras, makes the budget good news for average households and businesses alike. This has not come cheaply however – operational spending has gone up by over 10%. This year the government is being helped by a RM 30 billion special dividend from PETRONAS but that cannot be counted on every year, so there will need to be further reductions in spending in the near future, something which this budget was light on. Ultimately, the government should move to balanced budgeting.

New taxes are also relatively modest which is good, but the details of new revisions on tax treatment of losses and capital allowances will need to be considered carefully to see who is impacted.

It is appreciable that the PH government have pledged to utilise more open tender instead of direct negotiations. This transparency element will reduce the leakage in the economy in the long run. It is encouraging to see that government has also recognized the revenue leakages such as illicit trade and has promised to recover some of these losses. It is also encouraging to see the formation of a task force to review the GLCs under MoF and to ensure that they do not compete with the private sector.

Overall, this budget was a success for the government who can now demonstrate concrete delivery of many manifesto commitments without having to introduce significant new taxes. However, the depth of structural reform is yet to be fully explained and the government still has much work to do to reduce the deficit over the next few years.

The budget does not provide any tax relief but it also does not impose any new broad tax or any increase in tax level barring some new duties such as sugar tax and an increase in duties on casino income. In this sense, the budget is pragmatic and well targeted. The Budget 2019 does not promise a revolution but presents a wide range of steps which can help sustain growth and minimize wasteful expenditures.

On consultation: The Pakatan Harapan manifesto pledged to promote engagement of the people and all stakeholders in the policymaking process by drafting Green Papers to stimulate discussions and White Papers before acts are introduced in Parliament. The budget announcement came with several measures that will affect particular industries, such as the “soda tax” and a levy on outbound flights of up to RM40, to name a couple. It is important to study thoroughly the impacts that the proposed measures will have and, if they turn out to have significant negative consequences, be open to revise the proposals.

Specific Commentary

• SME Support: The financing support of MYR 4.5 billion for SMEs will help them to grow and expand the business volume and diversify business model. This will be helped by reduction of corporate income tax rate, albeit by only 1 percent and provision of credit and insurance facilities.
• Industry 4.0: Special allocation for industrial transformation and evolution for IR 4.0 has been made through a grant of above MYR 200 million and a fund of MYR 2 billion for low interest loans. In addition, we appreciate these steps: development of better broadband infrastructure around Malaysia especially in the rural and remote areas, allocation of budget to assist SMEs to support the transition and migration to Industry 4.0, allocation of budget to enable greater collaboration between public and private sector for Industry 4.0, investment in Research and Development in new or high technology, and collaboration with Khazanah in creating world-class aerospace industry hub.
• Reform of BRIM: The government continues BRIM payment and targeted subsidies to help B40 to smoothen their consumption levels. It is encouraging to see an emphasis on reforms through targeted and needs-based subsidy. The government should also introduce conditions such as education attainment for recipients.
• Digital tax: Reasonable outcome on digital tax, expanding scope of service tax will level the playing field.
• Affordable Housing: The government is still heavily present in Affordable Housing, but its approach is realistic and market-friendly, as shown by not relaxing loans and letting REHDA decide on price reduction.
• GLCs: Welcome the new task force to review statutory bodies under MOF Inc. However important to define “strategic” sectors clearly and should expand the scope of the review to cover bodies under other ministries.
• Departure levy: Disappointed by the new departure levy which just adds friction to the system in tourism and business travel industries which are important to Malaysia. The government should have put greater focus on spending efficiencies rather than adding these new frictional costs.
• Energy / fuel subsidies: As promised in the manifesto, the government has set out details on fuel subsidies. These subsidies create tension with the government’s other objectives, such as promoting renewables, they also undermine the long term development of the energy market in Malaysia, which is important when we consider the significant role that Petronas is playing in providing fiscal revenues. The government needs to approach the energy market more holistically.
• Social Enterprises: Besides SMEs, the government is also starting to recognise the role of social enterprises and have introduced Income tax deductions for contributions from any parties to any social enterprises.