THE long queues at
petrol stations on Monday night was a precursor of things to come.
Motorists waited patiently for their turn to fill their petrol tanks
just before the price of RON 95 and diesel jumped 20 sen a litre at
midnight.
It was a scene played out a number of times over the
years when petrol prices at the pump were increased as energy subsidies
were cut.
This time around, the decision to trim the fuel subsidy was just part of a greater scheme.
It was the first salvo in the Government’s effort to bring down the
fiscal deficit and eyes are now squarely on just what more needs to be
done to whittle the deficit to 3% by 2015 and a balanced budget by 2020.
On the cards is the continued rationalisation of subsidies and the
sequencing of big ticket projects to lessen the import bill that has
squeezed the current account surplus in the second quarter.
Moody’s Investors Service, in its assessment of the move to hike the
price of fuel, says it represents a credit positive step in the
Government’s larger fiscal consolidation plan but it is waiting for
details of which are to be unveiled in the October budget speech.
The cut in petrol subsidies will result in savings of RM1.1bil and
RM3.3bil for 2014. Analysts are divided whether that will be enough for
the Government to meet its deficit target of 4% this year as there are
still large expenditure transfers. “We currently forecast the deficit at
more than 4% of gross domestic product (GDP) and the lack of additional
reforms would place the Government’s fiscal targets increasingly out of
reach,” says Moody’s.
The need to maintain such transfers such as the
1Malaysia
People’s Aid is to ease the burden on the low-income and vulnerable
groups as subsidies get rationalised. The continuation of such
expenditures also allows for targeted subsidies to low-income
households.
The Government is also looking at a comprehensive
social safety net and further fiscal measures would also be introduced.
It is expected that more fiscal tightening measures will be introduced
during the budget.
There was, however, a knee-jerk reaction to
the cut in fuel subsidies. The ringgit bounced back from its slide
against the US dollar but analysts say any sustainable climb will depend
on what the market sees from further fiscal reform measures.
More than reducing subsidies
The timing of announcing the outline of its fiscal reform measures and
the first cut in fuel subsidies was in response to worries by the rating
agencies of the fiscal debt situation in Malaysia.
“Faced with
the risk of a sovereign ratings downgrade and investors’ focus on the
domestic and external sectors’ vulnerabilities at a time of a
retrenchment of foreign capital, it is crucial that Malaysia fine tunes
its macroeconomic policy mix for growth and financial stability over the
medium term,” says CIMB Research chief economist Lee Heng Guie.
He feels that a fundamental review is also required to weed out the
country’s non-developmental, low priority and unproductive expenditure,
while focusing on growth-oriented spending.
“The problem of
overlapping spending schemes has to be avoided. More cost-saving
initiatives, including a critical review and reform of the procurement
system to combat wastages and leakages must be implemented.
“A
fiscal consolidation strategy should be accompanied by better fiscal and
financial control over public-private partnerships and state-owned
enterprises, aimed at putting the gross public debt-to-GDP ratio as well
as contingent liabilities (loans guaranteed by the federal government)
on a firm downward trajectory in the medium-term,” he says.
GST and RPGT
It is widely expected that a schedule for implementing a Goods and
Services tax will be revealed when the budget is announced in October.
Citi research, in a note, thinks there is a high probability that GST
implementation will be announced in the budget. “We doubt the Government
will tempt the wrath of ratings agencies after raising hopes last week
with such talk,” it said.
Reports have quoted Tan Sri
Irwan Serigar Abdullah, the secretary general of the
Finance Ministry,
as saying that if the GST is announced during the upcoming budget for
implementation in 2015, the rate will likely be between 4% and 4.5%.
For one, the GST itself will mean more taxes as the Government is
expected to generate more revenue from its introduction. One economist
also adds that a lot of businesses are also in favour of a GST because
of the billions of ringgit it stands to gain from an imput tax rebate.
He says that analysis has shown expenditure will also rise because of
GST and therefore, targeted social welfare programmes for the low-income
earners will be needed once GST is implemented.
The other tax
that will likely see a hike is the real property gains tax (RPGT). A
higher RPGT, together with possibility higher stamp duty charges for
higher priced properties, should increase government revenue. But one
big motive behind hiking the RPGT, and possible raising the floor price
on properties eligible for purchase by foreigners, is to cool down the
property sector and stem the rapid rise in property prices.
Property prices are generally considered to be unaffordable for a growing segment of the population.
Impact on the economy
Fiscal reforms will mean cutting down expenditure and some economists
are expecting economy to feel the impact from slower government
expenses.
“We cut our 2013 GDP growth forecast to 4.4% from 5%
earlier and 2014 estimate to 5% from 5.2% earlier – both of these
numbers are now below the consensus expectations,” says
Credit Suisse in a report.
“This downgrade reflects headwinds against private consumption from
higher fuel prices and likely delays of some infrastructure projects
hitting investment.” With the budget projected to be less expansionary,
some are suggesting that the Government will look at ways to boost
exports and drive investments as a means to compensate for slower
spending.
“It is left to be seen if there will be a cut in
corporate taxes and whether that will be enough to drive investments. As
it stands, a lot of companies have a lot of cash in their balance sheet
and it will have to be a big cut to get them to start putting that
money to work,” says an economist.
“If that done, then there will be a big gap between corporate and personal income taxes.”
- Contributed by By JAGDEV SINGH SIDHU jagdev@thestar.com.my
Lee said the Federal Government should look into controlling price,
other than cement, of essential building materials, as the rising price
of raw materials was a reason for soaring property prices.
