Analysing the numbers behind Najib’s Budget 2018

Photo: Firdaus Latif/CC BY 2.0

Prime Minister Najib called Budget 2018 the “mother of all budgets”. What is the economic impact of his financial plan for the country?

By John Pennington

Malaysian Prime Minister Najib Razak will not produce another budget before next year’s general election. Unsurprisingly, he presented last week’s RM280.3 billion (US$66.2 billion) budget as a positive one for the country.

In some respects, he got what he wanted. Reporters focused on tax breaks for many workers. Others highlighted the rosy picture he painted of the Malaysian economy. However, at the same time, he faced criticism from those who did not get what they wanted or felt cheated by his plans.

Najib’s economic outlook was remarkably positive

Thanks to high growth and rising oil prices, Malaysia’s economy is in a stable position. Exports are growing. Revenues are projected to increase. The outlook is for growth to continue at the current rate. As a result, the government can spend more and reduce the fiscal deficit.

However, while that short-term outlook is positive, taking a broader view might dampen Najib’s optimism. Gross domestic product (GDP) is still down from 2014 levels when Malaysia’s GDP was US$338.1 billion. Malaysia’s economy is growing, but it remains in recovery mode. In fact, growth is forecast to drop next year, according to 2018 projections.

The government committed to cutting the deficit. Najib set a target of reducing it to 2.8% of GDP. Current projections place the 2018 figure at precisely 2.8%. Similar to the growth pattern, the deficit has returned to the level it was nearly ten years ago – in 2007, the deficit was 3.2%. Similar to the growth pattern, the deficit has returned to the level it was nearly ten years ago. While the government has lowered the deficit year-on-year, the rate at which it is doing so has slowed. It will be hard for Najib to make more significant inroads without making cuts elsewhere.

Sources: Bloomberg, Trading Economics, World Bank

Source: Bloomberg

In economic terms, there is no clear consensus over who benefits most

In the immediate aftermath of Najib’s budget speech, analysts offered different views over who were the economic winners and losers. Many expect investor confidence to grow. They argue the headline 2% tax cut for middle-income families may make little difference to the economy. Income tax revenues will still grow from RM30.1 billion (US$7.1 billion) to RM32.2 billion (US$7.6 billion).

“The expansionary budget is likely to boost investors’ confidence as it cleared some uncertainties ahead of general election, which will be the next theme for the stock market,” assessed Danny Wong Teck Meng, Areca Capital CEO. “The personal tax cut will be neutral for the consumer sector, as 2% cut to the middle-income group is not significant enough to help spending,” he added.

Analysts praised efforts to control and reduce the deficit. “The government’s maintenance of its 2017 fiscal deficit target is also consistent with our view of a sharp fiscal tightening in 2H 2017, with the strong export sector boosting growth and offsetting the fiscal drag. We expect a similar pattern in 2018,” said Euben Paracuelles, senior economist at Nomura. Najib deserves some credit for taking hard decisions about spending in some areas to meet the deficit target. For example, he froze BR1M funding at RM6.8 billion (US$1.6 billion).

Sources: Free Malaysia Today, New Straits Times, The Malay Mail, The Sun Daily

Source: Bloomberg

Najib is budgeting for a digital economy

One of the thrusts to Najib’s 2018 budget was the push to make Malaysia into a digital economy by 2020. He wants to create a digital free trade zone (DFTZ) in Aeropolis. He pledged RM83.5 million (US$19.7 million) for its construction. He claims it will attract RM700 million (US$165.3 million) of investment and create 2,500 jobs. If that sounds like a game-changer, remember Najib has launched and overseen similar ventures that have struggled or failed.

In the wake of Bandar Malaysia, Iskandar Malaysia and Cyberjaya, it would be wise to attach a note of extreme caution to those projections. The government plunged billions into launching Cyberjaya. In this budget, Najib committed to further investment to upgrade the Futurise Centre in Cyberjaya. It looks like he is throwing more money at Cyberjaya in the hope that eventually something will come of it.

Nevertheless, get the DFTZ right, and Malaysia will be on track to achieve its digital economy targets ahead of schedule. “Malaysia’s digital sector is at the brink of accelerated growth, and we believe the investments announced at Budget 2018 would be a key catalyst to maximise the full potential of the futuristic economy,” forecast Matteo Sutto, an iPrice Group Vice President.

The budget included incentives for small and medium enterprises (SMEs) amounting to RM9.3 billion (US$2.2 billion). They must play a crucial part in driving the digital economy. If they do not take advantage, then the DFTZ gamble may fail. Malaysia cannot afford another digital disaster.

Najib faces accusations that his spending is overambitious

Many Malaysians will view the budget as positive. However, Najib faces criticism from some quarters and claims that his spending plans are overambitious.

“A national budget that rains money and gifts without any justification or that fails to state long-lasting and long-term economic policies that will bring wealth to the country is reckless and irresponsible,” said lawyer and activist Azhar Harun.

The government has increased taxes – including the goods and service tax – at a higher rate than the economy is growing. Rather than streamlining services or cutting out waste, tax increases are funding the spending increases. As a result, some businesses face big tax hikes and are unhappy.

Najib expects demand for Malaysian products and exports to remain high. What happens if he is wrong? While he positions himself to deliver the next budget, doing so may put himself in an awkward position. If he continues to increase spending, he threatens to overstretch Malaysia.