Malaysia's 2015 budget aimed at spurring growth, raising standard of living

Fiscal discipline will also be maintained.

Malaysia Prime Minister Najib Razak will table the Budget 2015 on 10 October, and according to PM Najib, Budget 2015 is aimed at “stimulating growth, improving the fiscal position and raising the people's living standard”.

According to a research note from Bank of America Merrill Lynch, it expects the government to maintain fiscal discipline: targeting a 3% deficit for 2015, unveiling details on the GST scheme (scheduled for 1 April), and continuing with subsidy rationalization.

The government is on track to achieve its deficit target of 3.5% of GDP in 2014, improving from the 3.9% in 2013. For the first half of 2014, the deficit came in at 3.7% of GDP in 1H14, largely on a cutback in development expenditure (-12.6%).

Revenue has been strong (+6.8%) in the first half, driven largely by non-tax revenue (+19.2%). Operating expenditure however rose at a faster pace (+7.9%), driven by a jump in civil servant salaries (+15.8%).

The ballooning bureaucracy size remains a concern. Subsidies rose at a more modest pace (+2.1%), as fuel prices are adjusted closer to market rates.

The fiscal deficit tends to be smaller in 2H, as revenue is typically stronger. Announced fuel subsidy cuts should save another 0.1% of GDP for 4Q, while the recent drop in global oil prices will also cut subsidies, reducing the gap between global and subsidized domestic fuel prices.

Meanwhile, revised RON95/diesel prices at RM2.30/liter and RM2.20/liter are only about a 15% discount from market prices.

Here’s more from Bank of America Merrill Lynch:

Focus will be on the 6% goods & services tax (GST), slated from 1 April 2015. Details on the zero rated items are expected, which will impact revenue and inflation.

Water & basic foodstuff will be GST-exempt, while electricity will be partially GST-exempt. About one-third of the 944 items within the CPI basket may be zero-rated.

We expect broader exemptions and lower net revenue than previous guidance. The indication was that the 6% GST would raise RM22bn, which will be partly negated by revenue loss of RM16bn from the abolishment of the existing sales tax.

Net revenue impact was estimated at about +RM6bn for the first year, which may be lowered because of broader exemptions.

There will be a mitigation or GST-offset package for lower-income households and civil servants, to soften the impact.

An allocation of about RM150mn has been provided to help SMES to move to the GST system and another RM100mn for GST training programs.

Note that GST may result in lower prices on certain items such as cars, where the 6% GST will replace the current 10% sales tax.

Telcos will also see the services tax replaced by GST. Budget 2015 will continue with subsidy rationalization and unveil details on a fuel rationing scheme or mechanism, which will target subsidies for lower income individuals (rather than current blanket subsidy).

This may be implemented in the first half of 2015. There may also be details on a Fuel Cost Pass-Through (FCPT) system for electricity tariffs, which will peg tariffs to the international gas price.

Budget 2015 will also increase handouts – 1Malaysia People's Aid (BR1M) – to the lower- and middle-income households, to help them cope with the rising costs of living. Over the past year, fuel prices have been hiked twice, sugar subsidies removed, and electricity tariffs increased. Headline inflation averaged 3.2% in the past 12 months (Sep 2013 - Aug 2014) vs 1.6% in the preceding 12 months.

The government has already committed to cutting corporate (by 1%) and individual income taxes (by 1-3%) effective 2015. Further income tax cuts are unlikely.

We do not expect more property cooling measures as property price increases are already moderating, while transactions and mortgage applications are falling. There are risks of higher sin taxes, particularly on tobacco and gaming.

Overall, Budget 2015 will likely ensure that fiscal discipline is maintained. The fiscal deficit has been cut by almost half from about 7% of GDP in 2009. With the GST, the government will diversify its revenue base and depend less on volatile petroleum and income taxes.

The GST will allow the government to cut corporate and income tax rates, closing the gap with Singapore and ensuring tax competitiveness.

More remains to be done to contain the quasi-public debt and government guarantees, but the fiscal targets so far appear to be on track.