Dr. Mohd Afzanizam Abdul Rashid Chief Economist 03-2088 8075 afzanizam@bankislam.com.my Budget 2018 Preview government can spend more Opening remarks The tabling of national Budget 2018 is just around the corner (27 th October). The theme this year will be Shaping the Future. As in the past, the chatter prior to the budget announcement would be revolving on what s in it for the rakyat. This is especially true in the context of rising cost of living and affordable houses which persistently plaguing the man on the street irrespective of income level. Interestingly enough though, the budget this year will be the last for the current administration before the nation go to the ballot box to cast their vote for the 14 th General Election (GE14). This comes as the mandate will expire in June next year. Therefore, one cannot help it but to think that the populist measures are likely to emerge. But at the same time, the fiscal consolidation mantra is vital to long term growth and building investors confidence at a time when the currency markets are very fragile. Not to mention the threat of automation on to the low-and semi-skill workers that warrants for a long-term view. So the delicate balancing act is undoubtedly intriguing. Government finances is improving While there has been skeptic on the current state of the economy relative to the high frequencies statistics churned so far, the fact is, the macro economy is indeed improving. The GDP growth has gone beyond the trend level during the first half of this year, consumer spending is growing despite weak sentiments and the external demand has been forthcoming with exports continue to post double digit growth in the past nine months. Such performance has allowed the government to collect higher revenue between January and June this year. Chart 1: GDP growth 6.5% 6.0% 6.0% 5.7% 5.5% 5.0% 5.0% 4.5% 4.2% 4.0% 3.5% 3.0% Source: CEIC 2014 1H2017 For Internal Circulation Page 1
For instance, collection from personal income taxes rose to RM15.4 billion between January and June this year from RM13.2 billion in the same period last year, representing an increase of 16.2%. Income from Export Duties also shot up by 74% y-o-y in the 1H2017 to RM672.2 million as exports recorded an average growth of 22.4% in 8M2017 (8M: 1.2%). Most of all is the collection from the Goods and Services Tax (GST) which grew by 12% in the 1H2017 to RM19.3 billion. Last year, total collection from GST amounted to RM41.2 billion which surpasses RM38.5 billion targets set by the government. Against such a backdrop, the government coffer has improved, providing them leeway to craft spending allocation in the upcoming budget. We are projecting government fiscal deficits to improve further from the estimated 3% of GDP in 2017 to 2.8% in 2018. Chart 2: GST collection and private consumption in RM billion 185.0 180.0 175.0 170.0 165.0 160.0 155.0 150.0 145.0 140.0 135.0 Source: CEIC Private Consumption GST (RHS) 3Q 4Q 1Q 3Q 4Q 1Q 2017 2017 14.0 12.0 10.0 8.0 6.0 4.0 2.0 - Table 1: Fiscal position RM Mllion 2014 2017E 2018F Revenue 220,626 219,089 212,421 217,450 221,799 %chg 3.4% -0.7% -3.0% 2.4% 2.0% Operating expenditure 219,589 216,998 210,173 212,190 214,311 %chg 3.9% -1.2% -3.1% 1.0% 1.0% Current balance 1,037 2,091 2,248 5,260 7,487 Gross development expenditure 39,503 40,768 41,995 46,505 47,900 %chg -6.4% 3.2% 3.0% 10.7% 3.0% Less: Loan recoveries 1,052 1,483 1,347 1,300 1,350 Net development expenditure 38,451 39,285 40,648 45,205 46,550 %chg -5.5% 2.2% 3.5% 11.2% 3.0% Overall balance -37,415-37,194-38,400-39,945-39,063 Overall balance % of GDP -3.4% -3.2% -3.1% -3.0% -2.8% Sources: CEIC & Strategic Management, Bank Islam For Internal Circulation Page 2
Possible measures to be announced 1.0 Measures for SMEs We would like to see measures to be directed to build the Small and Medium Enterprises (SMEs) capacity by cutting down further the tax rate from the current 18% to say 17%. Apart from that, the government should extend the Automation Capital Allowance (ACA) in order to promote modernisation in SMEs production process. The ACA is for a period between and 2017 which was announced during the Budget. More tax incentives should also be granted for SMEs who leverage on the Digital Free Trade Zone (DFTZ). In addition, the government should spend more on awareness program as there are currently large number of financing program offered by various government agencies and development banks. Table 2: Financing program for SMEs Scheme Example Organisation Loan (105 schemes) Business Improvement Loan Scheme, Vendor Financing Scheme MARA, EXIM Bank, PUNB, PNS, MTDC, MIDF, Malaysia Debt Ventures, SME Bank, SME Corp, TEKUN, Grant (13 schemes) Venture Capital (11 schemes) Guarantee Scheme (16 schemes) Source: SME Corp Modernisation of Automotive Workshop, Skim Belia Niaga Halal Technology Development Fund, Axiata Digital Innovation Fund Credit Enhancer Scheme 2.0 Personal income tax cut or more reliefs Bank Kerjasama Rakyat, Cradle Fund Sdn Bhd, MTDC, MOSTI, PNS MTDC, MAVCAP, PNS, MOF, Kumpulan Modal Sdn Bhd. CGC, EXIM, MARA, Prokhas, SJPP Since GST has gradually become the main income driver for government, perhaps it is time to give something back to the Malaysian citizens. Raising the chargeable income from RM5,000 to RM10,000 to quality for zero percent income tax rate should help the middle income earners. The last time it was raised was in Budget when such band was adjusted from RM0 RM2,500 to RM0 RM5,000. Apart from that, raising the tax relief should also help to alleviate the financial burden for the tax-paying citizens. These may include raising the individual tax relief (currently at RM9,000) as well as relief for Private Retirement Scheme (PRS) and Deferred Annuity (currently at RM3,000). In Budget 2014, the government announced 1% to 3% personal income tax cut to make way for the introduction of GST. Perhaps, another 1% cut could be expected but this can be a tall order since the government remains mindful of their deficits reduction plan. For Internal Circulation Page 3
3.0 Incentives for private scheme for Rent-to-Own (RTO) The government should promote private scheme for Rent-to-Own (RTO) as this will gives the lifelines for middle income earners which are not qualify for a bank financing. The scheme would allow the prospective house buyers to rent a house and granted the option to purchase it at some point in the future. At the moment, PR1MA house projects appear to be at the frontrunner in this initiative. The applicants who are successful in their ballot but failed to secure bank financing can participate in RTO schemes. The applicants can initially rent the PR1MA Home for up to 10 years before deciding on buying it at the end of the fifth and tenth year at pre-determined price. Another example would be the Sekretariat Komuniti Prefer Malaysia (SKPM). SKPM is a community created on the back of a private initiative to assist the government in providing residences to Malaysians. A check on their websites, the RTO scheme will be based on Musyarakah Mutanaqisah contract between the SKPM (the owner) and the renter for a period of 30 years. Therefore, incentives in the form of tax exemption and waiver on stamp duty should help promote private RTO. 4.0 Tax incentives to promote Waqf Fund At the moment, donations to approved charity organisations were given a tax deduction of 7% from the total aggregate income in order to reduce the chargeable income. However, Waqf is not deemed to be charity in this instance. Perhaps it is high time to put Waqf as the same pedestal with donations. Our back of envelope estimates showed that if 5% of total cash in circulation put aside as Waqf fund, it could result in a massive savings to the government expenditure. For example, the monthly average for cash in circulations stands at about RM91.9 billion in. Assuming Malaysian citizens put 5% of this amount into Waqf fund for every month in, the fund size could reach to RM55.2 billion. This is way above than the gross development expenditure of RM42 billion in. The way we see it The government finances are improving and therefore, they have the means to spend more. Notwithstanding that, the ideal move is to ensure that fiscal consolidation will continue and this would mean they cannot spend recklessly. In particular, the economy is in transition towards digitalisation whereby some of the existing jobs are expected to lose out to the Artificial Intelligence, Robotics and Machine Learning to name a few. The changing landscape suggests that the lower- and semi-skilled workers are likely to be worst-off as their jobs will be replaced by technology. According to research by Khazanah Research Institute (KRI), 54% of current jobs in Malaysia are likely to be replaced by automation. These jobs include who are in clerical support workers, sales workers and many semi-skill and elementary occupations in manufacturing, construction and agriculture. For Internal Circulation Page 4
As such, it is imperative to plan and manage the transition so that the digital divide and income inequality would not be too apparent. This indicates retraining for the low- and semi-skill worker is critical to ensure that the excess workforce as result of the displacement by technology would be minimised. Therefore, government expenditure should be directed to this area although the outcome is long-term in nature. Chart 3: Percent of Malaysian jobs at risk of automation Medium-risk, 30% Low-risk, 16% High-risk, 54% Low-risk High-risk Medium-risk Mainly managerial occupations across most industries and high-skill professionals (including in science and technology, health and education More than 70% of semi-skill and 80% of low-skill jobs across all major sectors-including clerical support workers, sales workers and many semiskill and elementary occupations in manufacturing, construction and agriculture Ranges from high-skill to low-skill occupations-including technicians and associate professionals(such as medical technicians, executive secretaries), personal service workers, E&E and ICT mechanics and repairers, and cleaners and helpers Sources: Khazanah Research Institute (KRI) & The Edge Weekly (23 rd Oct 29 th October) Produced and issued by BANK ISLAM MALAYSIA BERHAD (Bank Islam) for private circulation only or for distribution under circumstances permitted by applicable laws. All information, opinions and estimates contained herein have been compiled or arrived at based on sources and assumptions believed to be reliable and in good faith at the time of issue of this document. This document is for information purposes only and has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. No representation or warranty, expressed or implied is made as to its adequacy, accuracy, completeness or correctness. All opinions and the content of this document are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of Bank Islam as a result of using different assumptions and criteria. No part of this document may be used, reproduced, distributed or published in any form or for any purpose without Bank Islam s prior written permission For Internal Circulation Page 5