Malaysia’s Record Spending Bill Seeks to Fuel Recovery Ahead of Elections

Recent Features

ASEAN Beat | Politics | Southeast Asia

Malaysia’s Record Spending Bill Seeks to Fuel Recovery Ahead of Elections

The country keeps spending in preparation for a post-pandemic economy, but there are big risks ahead.

Malaysia’s Record Spending Bill Seeks to Fuel Recovery Ahead of Elections
Credit: Depositphotos

Malaysia’s top finance official unveiled another big-spending budget on October 29, intended both to support the nation’s economic recovery from the COVID-19 pandemic and reassure voters of the government’s “no one left behind” policy ahead of an upcoming state election.

The 332.1 billion ringgit ($80 billion) budget bill, the largest in the country’s history, includes billions in cash aid, funding for locally-listed companies, and tax relief for upskilling programs. In a move seen as a bid to court traditional and new voters, one-off payments to civil servants and discounts on student loans were also announced.

Federal elections are not due until 2023, but the outcomes of the November 20 state polls in Melaka and an impending ballot in Sarawak will serve as precursors to the general election, especially with more young voters getting on the electoral roll.

The government forecasts a budget deficit of 6 percent of GDP in 2022, a decline from this year’s fiscal deficit estimate of 6.5 percent to 7 percent, with revenue expected to increase by 5.9 percent to 234 billion ringgit backed by better dividends and a windfall tax on companies.

Finance Minister Tengku Zafrul Aziz outlined a broader scope of taxes for 2022 that includes a one-off tax increase on corporate income of more than 100 million ringgit to 33 percent from 24 percent. Other additions include a tax on foreign income received in Malaysia by local tax residents and an expansion of digital sales and service taxes.

However, economic experts view the broader tax base as a stopgap measure compared to the more effective, yet controversial, Goods and Services Tax (GST) that was partly responsible for ending Barisan Nasional’s (BN) 60 years in power.

The government has long been criticized for not doing enough to reduce the size of the civil service to improve spending, with emoluments or employee compensation alone making up over a third of the budget’s operating expenses (opex).

“If you look at emolument, debt servicing, and pensions, that takes up over 40 percent of opex, unless you’re willing to take some political [risks]. But you have to put in place how you’re going to address that going forward,” economist Dr Nungsari Ahmad Radhi told business radio station BFM in a pre-budget interview.

“You can’t have half of your revenue going towards emolument, pensions, and debt servicing. So, what’s left in the opex is just supplies, maybe at 10 percent or 30 billion ringgit. That’s why the budget is becoming a blunt instrument.”

Malaysia’s GDP is projected to grow around 5.5 percent to 6.5 percent next year after its growth forecast was cut twice, to 3-4 percent this year. Nonetheless, a range of risks, including the hard-to-predict dynamics of COVID-19 variants, could throw projections off course again.

The country’s coronavirus cases and deaths continued on a slow but steady decline in the past week, after state borders were reopened to fully vaccinated people last month.

Malaysia is currently administering COVID-19 vaccine jabs for adolescents aged 12-17 and voluntary booster shots for high-risk groups and frontline workers. The government previously announced plans to shift into a COVID-19 endemic phase around the end of October, but has yet to declare the coronavirus as endemic officially.

Apart from COVID-19 risks and revenue shortfalls, concerns have also been raised about the government’s numerous debt obligations, including 39 billion ringgit in total outstanding debt for state fund 1Malaysia Development Berhad (1MDB). The fund was the subject of a messy corruption scandal that helped unseat BN and then-Prime Minister Najib Razak in the 2018 general elections.

Opposition MP Tony Pua, who has been critical of the government’s 1MDB dealings, warned of an “impending budget crisis” within the next three to five years.

Pua said higher “fixed” expenses, in the form of emoluments, pensions, and debt service charges, as well as lower revenue, will mean that the government will have fewer funds to spend, invest, and influence the economic direction of the country.

“In essence, the reckless off-budget expenditure for megaprojects and scandals under Najib Razak’s BN administration is coming home to roost as the government commences payments for these debts,” he said in a statement issued shortly after the tabling of the federal budget.

Prime Minister Ismail Sabri Yaakob’s leadership will be put to the test when the draft budget for 2022 is put to the vote on November 18. His predecessor Muhyiddin Yassin barely survived last year’s budget vote, narrowly winning it by a three-vote majority.

Unlike Muhyiddin, it is quite unlikely that Ismail will face the same level of objection, at least from opposition MPs, given his cooperation agreement with the latter. Despite the risks, the 2022 budget will likely be something that the opposition can live with.