Economists say Pakatan govt can achieve fiscal deficit target
But economists say it may be a tough road ahead for Pakatan government
PETALING JAYA: With the pressure mounting to narrow the country’s fiscal deficit to below the projected 3% of the gross domestic product (GDP) level for this year, some economists are optimistic the Pakatan Harapan government will be able to attain the forecast figure although it may not be smooth sailing.
Economists told StarBiz that pending more clarity, several measures to boost revenue and control expenditure may bring the fiscal deficit below the 3% mark although it could be tough. The country has been running a deficit since 1998.
Since, 2010, the fiscal deficit shortfall has been narrowed from 5.4% of GDP to 3.0% in 2017.
The previous Barisan Nasional government had projected the deficit to be in the region of 2.8% for this year. Economists shared some of the measures that could bring the deficit to the projected level.
Sunway University Business School professor of economics Yeah Kim Leng said there would likely be a combination of revenue enhancement and expenditure-based measures being instituted to keep the fiscal deficit to less than RM40bil or below 3% of the projected GDP in 2018.
“The sales and services tax (SST) will have to kick in simultaneously to partially offset the estimated RM26bil reduction in revenue this year when the goods and services tax (GST) is zero-rated on June 1.
For the present government to maintain the budget deficit at about RM40bil or 2.8% of GDP, he said the loss in GST revenue could be partially offset by higher petroleum revenue should the current high world oil price continue to prevail or by an increase in non-tax revenue sources such as dividends from Petronas and other GLCs as well as sale or privatisation of government assets.
“Another fiscal strategy to reduce the budget deficit to below last year’s 3.0% is to cut the discretionary items in the RM234bil operating budget under the previous government.
“There will be substantial savings in reducing the number of ministries, streamlining overlapping functions and cutting unnecessary spending and leakages that will help to offset the expected revenue shortfall,” he noted.
Given the aggressive approach shown by the new government so far, Yeah said spending efficiency gains and savings from a reduction in wastages and leakages could surprise on the upside.
Last Wednesday, the Finance Ministry announced that the GST would be zero-rated from June 1. Capital Economics in a research note said although the move to scrap the GST was expected to give the economy a fiscal boost, it would likely cause a 1% increase to the government’s budget deficit. Moody’s Investors Service said the abolition of the GST would increase the government’s reliance on oil-related revenues and would also narrow the tax base. If GST was abol- ished “without adjusting measures,” that would be a credit negative for the country, it noted.
Maybank Investment Bank Research said there could be RM25.6bil tax shortfall in 2018 with the GST being zero-rated, adding that the government had targeted to collect RM43.8bil worth of GST revenue this year under Budget 2018.
AmBank Group chief economist Anthony Dass, however, felt the a fiscal deficit of 2.8% for this year was within reach. The move to review some mega projects and abolish the GST would help improve the wastages and in turn will be able to maintain the 2.8% fiscal deficit for the year.
“While there will be some shortfall in revenue which I estimate around RM16bil by moving from GST to SST, the shortfall will be softened with higher oil revenue which we estimate a net additional increase of around RM9bil to RM11bil.
The introduction of subsidy for electricity which could come up to around RM2bil plus oil subsidy of about RM2.3bil to RM4.6bil can be offset with better management by reducing the wastage, financial prudence and transparency.
“From our estimates, around 5% savings in operating expenditure post removal of GST plus subsidies will allow the fiscal deficit to remain around 2.8% of GDP with no change to our real GDP forecast at 5.5%,’’ Dass noted.
He added that if it was to assume an environment where there is weaker transparency, financial prudence, reduction in wastages and corruption, and better public service, the deficit is expected to swell up to RM51bil, which translates into a fiscal deficit of 3.5% of GDP.
“However, based on the success stories of Penang and Selangor under the PH, if we factor in a 5% reduction in operating expenditure, the deficit will be around RM39bil to RM40bil, translating into a fiscal deficit of 2.7% or 2.8% of GDP,’’ Dass said.
Apart from short terms measures, Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias said longer term initiatives were needed to keep the medium term fiscal consolidation effort on track.
“This would mean new initiatives needed to generate alternative revenue sources in the medium-to-long term. It should be noted that Malaysia’s average revenue to GDP has declined to 19% between 20102017, compared to 23% in the 1990s. This is in contrast with an average of more than 30% of GDP among single-A rated countries. As such, greater clarity with regards to the medium term revenue-generating measures is clearly needed,” he said.
He reiterated that the gap between the amount of SST to be collected in the near future – should it be re-introduced – and the abolished GST would not be as large as generally expected as the size of tax payers was now larger after the latter was introduced in 2015.
Price stickiness, he said could be a challenge in achieving the ultimate objective of removing the GST i.e. to lower the general price level. Even after the removal of GST, Zahidi noted that consumer prices could remain high due to its “sticky” nature.
“Businesses may be reluctant to reduce prices due to profiteering motive and a general belief that most businesses will not reduce prices.
“As such, alternative mechanisms are needed to ensure consumer prices will decline post GST removal. This include aggressive measures to counter profiteering activities etc,’’ he said.