Monday, October 13, 2014

Malaysian Budget 2015

1. The first question is whether the overall Budget 2015 is going to be expansionary or contractionary on the economy? Is the government sucking money out of the economy or is it putting money into the system? The answer is obvious since this is widely acclaimed in the local newspapers that Budget 2015 is good because the government is going to cut its overall deficit from RM37.3 billion in 2014 to RM35.7 billion in 2015, a reduction of RM1.6 billion. We can say that Budget 2015 will be contractionary on the overall economy by this amount of RM1.6 billion.

The government will be taking out from the general public RM10.1 billion in tax revenue while increasing its spending on operating expenditure by RM2.3 billion and development expenditure by RM6.2 billion.

2. Where is the critical assumption in the whole calculations in Budget 2015? The trick is in the GDP deflator. The government expects the headline inflation (the CPI) is expected to be 3.4% in 2014 and about 4% to 5% in 2015, because of the 6% GST and the cut in fuel subsidy. The GDP deflator is assumed at 4.2% in 2014 and 4% in 2015. With an economy that is expected to grow by 5% to 6% in real terms, it is not surprising that nominal GDP will grow by 10.2% in 2014 and 9.4% in 2015. All these inflationary effects are very good in lowering ratios of nominal debts in nominal GDP terms.

3. There is clearly a shift in direction from direct to indirect taxes. The attempt at avoiding the entrapment of average salary earners in obsolete income tax brackets is to be applauded, principally because salaries have been unable to keep up with rising costs of living and the escalation of property prices. Personal income taxes are reduced by 1% to 3% points to take into account contemporary income levels.

4. Corporate income tax is also reduced by 1% to 2% points. This may not have been necessary. Corporates are among the richest entities and foreign ones do not even have to pay tax.

5. Bumi Agenda. It is heartening to see the government's relentless pursuit of the bumi agenda. It is good to see help to the needy. But it is also strange for a government that is concerned with inclusiveness and private sector growth to neglect any section of society which may also be in want of assistance in entrepreneurs. The Budget even has encouragement for foreign start-ups in Malaysia with one year work pass. I hope I am wrong, but there seems to be a serious gap in economic thinking.

6. In general, I do not have much other complaints. There are lots of little smatterings of everything all over the place. In economics, these are considered marginal adjustments. The big item is the GST. Let's see whether that will bring the economy up to speed.