An Analysis of the 2009 Malaysian Budget: Impacts on the Middle-Class and Economic Growth

1. Budget 2009 A Policy Perspective Budget Allocation Budget Deficit & Growth Rates Revenue Streams Impacts on the Middle-Class Malaysian Businesses Enhanced? It’s the Economy, Stupid

2. 1. Budget Allocation Total = RM176.9 b Total = RM207.9 b (4.4% increase)

3. “Blink” • Expansionary Budget • Low-income groups • East Malaysia • Civil service & Retirees • Budgeted spending: • 3.9% increase in 2008 • 22.1% increase in 2009 • Huge jump in subsidy bill (food & fuel) • 2007: RM10.5 bn (8.5% of op. ex.) • 2008: RM34.1 bn (225% increase, 22.6% of op. ex.; Fuel subsidies form 18.1 bn) • 2009: RM33.9 bn (Fuel subsidies form 21 bn)

4. Increase of operational expenditure by almost 200% in 8 years • Rental • Maintenance • Stationery supplies • General supplies • Emoluments • Compensation to toll concessionaires • Civil service wages • Services • Administration expenses Source: Tony Pua, PJU MP

5. 2. Budget Deficit • 2009: 12th year running in deficit (since 1997 Asian financial crisis) • Attempt to move to a lower deficit for 2009 • Lower revenue growth forecast of 9.1% (15.5% in 2008) • Unhealthy fiscal management • “Obsessed with growth; pump-priming the economy” • Inflation being fuelled (8.5% in July), lessening the “bang for the buck”

7. 3. Revenue Streams • Revenue Inflows: RM139.9 bn (2006) to RM176.2 bn (2009) • Revenue from oil & gas industry • 2008: estimated 37% • 2009: estimated 46.4% (due to oil price increase) • Net oil importer in several years • 40% of oil & gas revenues from investments abroad – sustainable? (not to mention the countries we invest in: Sudan, Burma etc.) • Petronas generated RM60 bn profit, 2007 (9% of GDP)  “Off-Budget” • Increasing Tax Base • GST?

8. 4. Impacts on the Middle-class Malaysian • Low-wage earners-those earning a taxable income of RM35,000 per year or less-can claim RM400 rebate (vs. RM350 previously). • RM35k – RM50k p.a.: 1% reduction in marginal tax rate (13 to 12%) • RM230k p.a.: 28% to 27% reduction in tax rate • Tax exemption medical benefits provided by employer extended to maternity expenses, traditional medicine (acupuncture, ayurvedic)

9. Impacts… • Cigarette prices: 60 sen more per 20-pack. • Free electricity from October 1st 2008 until end-2009 will be provided to those using < RM20 a month. • Reduced import duties on various consumer durables (rice cookers, electric kettles, blenders) and full import duty exemption from selected food items (biscuits, vermicelli, fruit juices, canned sweet corn). • Purchase of medium-cost houses up to RM250k – 50% reduction in stamp duty on transfer document & loan agreement. • Safety: Police receive RM5.4 b increased allocation • New equipment for crime prevention • New police stations with facilities • Education • RM14.1 b for institutes of higher learning

10. … for employees • Travel allowance for commuting to work provided by employers be given full tax deduction, while the employees receiving such allowance tax exemption up to RM2.4k p.a. • Tax exemption given to employees on: • Interest subsidies on housing, motor vehicles & education loans. (up to RM300K) • Mobile phones, telephone & internet bills paid by employer • Childcare allowance (up to RM2.4K p.a.)

11. Public Transportation (2009-14): RM35 bn • LRT lines extended in KJ and Ampang, Kota Damansara – Cheras • Upgrading KTMB • Contractors • Cars • Road tax rates for diesel cars = petrol cars • Abolishing 100% import duty & 50% excise duty for hybrid cars = definition very narrow (only Civic Hybrid & Prius; franchise holders) “encourage local assembly”

12. 5. Businesses Enhanced? • Firms can claim working capital allowance for upgrading staff skills • Corporate responsibility: companies contributing to charitable institutions, increased tax deduction (10% of agg. Income) • Recruitment costs (payments to employment agencies) & participation in job fairs – tax deductible. • Venture capitalists: 5-yr tax exemption • SME assets acquired in 09 & 2010 Accelerated Capital Allowance • No substantive initiatives to encourage businesses • No significant plans to increase investment confidence

13. 6. It’s the Economy, Stupid • Rakyat-centric Budget but little to grow the economy itself; welfare state can only be sustainable with growth • GDP growth • 2008: 5.7% (estimated) • 2009: 5.4% (estimated) • UNCTAD’s latest figures in World Investment Report 2008 • Malaysia INFLOW OUTFLOW • 2004 4,624 2,061 • 2005 3,967 2,971 • 2006 6,048 6,041 • 2007 8,403 10,989 (for the first time) • 2008: Net inflow RM21b (Q1); Net outflow RM24b (Q2) • International reserves RM388 bn • But June-September, more than RM20 bn erased from reserves • Current account surplus up 56% in Q2 • Manufacturing sector shrinking • Services sector “engine of growth” – to liberalise sector • Inflation rate 8.5%, a 27-year high (overall of 4.8% in 2008)

14. Fuel prices reduced by 10 sen today, to RM2.45 • Public subsidy of 33 sen per litre on gasoline Source: Malaysiakini

15. US economy and its effects on Malaysia • Malaysia is US’ 17th largest trading partner • Impacts of Paulson Plan; crisis deepening into global crisis • Malaysia must contain growth of development and operating expenditure • Public spending must be efficiently spent • Liberalisation of economy • Removal of import duty & sales tax exemptions on broadband • Stimulating investment • Removing FIC requirements; transparent Bumi policies • Public tenders • Institutional reform • Money allocated upfront for judiciary etc. • Accountability in implementing budget

16. Rapid, changing environment • Budget is important but environment changes daily • Need to consider policy decisions on daily basis • Stop focus on hard infrastructure but reforming of soft skills, human capital, channel ideas and not instruments • Need for quick, rapid response to the changing economy.