Caring budget increases deficit

Nov / Dec 2008

In August, Malaysia unveiled a 'people-friendly' budget from a caring government that aims to soften the burden of inflation mostly stemming from sharp hikes in the prices of fuel and food, but will also sharply increase the budget deficit. The 2008 budget deficit is projected to reach 4.8% of GDP, beyond the 3.1% forecast earlier, and should be reduced to 3.6% by 2009. GDP growth is expected to remain stable at about 5.7% for 2008.

Highlights include reducing Income tax by a percentage point for middle and high-income earners, making certain prerequisites and benefits-in-kind tax-deductible for employees, and increasing tax rebates to eliminate about 100,000 taxpayers from the tax net. The government also expanded the scope of the social safety net, increasing the number of households eligible for welfare from 54,000 to 110,000 and the number of eligible senior citizens from 14,000 to 40,000, and allocating half a billion ringgit for this purpose.

To remedy the budget deficit, many tax experts polled in media said that Malaysia needs to broaden its tax base to cut its traditional dependence on petroleum revenues and taxes. Currently, about 40-50% of the government's revenue is derived from petroleum, which might not be sustainable once the country becomes a net oil importer, unless new sources are discovered. Perhaps it would be timely to relook at the goods and services tax (GST) which was scheduled to take effect in January 2007 but was shelved in 2006 due to political and inflationary factors.