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Tough issues Anwar needs to tackle in 2025 budget

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Cutting the fiscal deficit, government subsidies, wastages and leakages are key challenges to be addressed in the budget.

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Anwar Ibrahim
Finance minister Anwar Ibrahim will be tabling his third straight national budget this afternoon. (Bernama pic)

PETALING JAYA:
As Prime Minister cum finance minister Anwar Ibrahim tables his third national budget this afternoon, he will arguably find himself in a rather comfortable position.

The economy appears to be chugging along fine, the ringgit has outperformed, growth is robust, and inflation under control.

Crucially, there has been political stability over the past year, contributing to a rise in investor confidence in the country’s economy and unity government.

Nevertheless, economists said Anwar still has to make some fundamentally tough decisions in the 2025 budget to put Malaysia on a sustainable growth path moving forward.

Topping the list of concerns is the matter of the fiscal deficit, which arises whenever a government spends more money than it brings in during the fiscal year.

With the national debt at RM1.22 trillion as of April, they say the government needs to stay the course in narrowing the fiscal deficit. The government targeted the 2024 deficit to come in at 4.3%, but analysts think there is some risk of an overshoot.

OCBC Global Market Research said Malaysia’s fiscal deficit stood at RM55.2 billion as of end August versus a deficit target of RM85.4 billion for the year.

To reduce the deficit, the government will need to carry out deeper reforms, enhance revenue, spur investment, and expand the economic base, said UOB economists Julia Goh and Loke Siew Ting in a note.

While expecting a narrowed deficit, they said the 2025 budget will remain expansionary to support measures aimed at improving citizens’ quality of life.

Strengthening the fiscal buffer

Yeah Kim Leng
Yeah Kim Leng.

Sunway University economics professor Yeah Kim Leng said the key imperative for the government is to strengthen its fiscal buffer.

“This is done by reducing the fiscal deficit and debt levels during good times and spending the ‘fiscal bullets’ when the economy is confronted with unexpected shocks,” he told FMT.

He said the main obstacle especially to achieving fiscal sustainability – reducing the deficit and holding down the debt level – is a slowdown in the economy.

“Slower growth will translate into lower government revenue and reduced spending, constraining its efforts to address key issues as poverty reduction and inadequate social protection, healthcare, education, transport and rural infrastructure,” he said.

Aside from lowering the fiscal deficit, he said, another major budget challenge centres on spreading economic prosperity to all and holding down cost of living while expanding assistance for low-income households, vulnerable groups, and micro, small and medium-sized enterprises (MSMEs).

For Yeah, the foremost challenge for the government is to build on the growth momentum this year while shielding the economy from potential global risks such as a possible downturn in the US, China or Europe.

Other external threats that could derail Malaysia’s growth trajectory include an escalation in the Israel-Gaza or Russia-Ukraine conflicts, global financial market disruptions, and climate change-related environmental disasters.

“There is less threat coming from within given the smoother functioning of the unity government and consensus in sustaining the structural and institutional reforms,” said Yeah, who is also the president of the Malaysian Economic Association.

Unwinding the crippling subsidies

Anwar’s biggest challenge may well be mustering the political will to slash subsidies on fuel and cooking oil, estimated to have cost the government a massive RM81 billion last year.

A promise to replace broad subsidies with targeted assistance is key to his pledge to narrow the 2024 budget deficit to 4.3% of gross domestic product from 5% last year.

However, the government has yet to specify a timeline for the RON95 petrol subsidy cut after hiking diesel prices in June.

To his credit, Anwar has given an assurance the government is committed to such reforms even if they “spell disaster for politicians”.

The World Bank said Malaysia will have to unwind blanket state support for its most widely used petrol (RON95) by this year to meet its own subsidy spending target.

Malaysia’s fiscal position is further weighed down by its limited revenue, the World Bank’s lead economist for Malaysia Apurva Sanghi said in a recent briefing.

At some point, he opined the government will have to contend with reintroducing the goods and services tax (GST) to tackle this.

Meanwhile, economist Geoffrey Williams said initiatives to “cut wastage, leakages and corruption”, and saving money through subsidy rationalisation must continue.

“Cutting unnecessary programmes before they began, improving government procurement, and effective enforcement of anti-corruption laws are vital,” he told FMT.

According to the Malaysian Anti-Corruption Commission, 70% of the complaints it received as of July this year were related to public procurement.

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