Budget 2019: Balancing Fiscal Responsibilities and Economic Growth

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The 2019 Budget, the first budget under the new government, was tabled by Finance Minister Lim Guan Eng on November 2, 2018 in Parliament.

With the theme “A Resurgent Malaysia, A Dynamic Economy, A Prosperous Society”, the 2019 Budget allocates a total of RM314.6bil in expenditure – about 12.2% more than the previous year. RM259.9bil (82.6%) is allocated for operating expenditure (OE) while RM54.7bil1 (17.4%) is set aside as development expenditure (DE).

The larger expenditure for 2019 indicates that the monetary sector is stable and the government is willing to spend smartly to grow the economy as well as the well-being of Malaysians – in spite of the one trillion ringgit debt and liability bill left behind by the previous government.

In formulating the 2019 Budget, the government has undertaken the zero-based budgeting method2 to improve spending efficiency and strengthen fiscal administration. This approach would help reduce wastage and unnecessary spending. Hence, the government would save a lot from cancelling and postponing programmes and projects that have less urgency and non-critical expenditures, which in turn would improve transparency and contingent liabilities.

In 2019 OE is set to be 10.4% higher than in 2018 where the main beneficiary will be emoluments, followed by debt service charges (Figure 1). The budgeted DE in 2019 is also remarkably higher than in the previous year at about 18%3 , mainly due to a reclassification of some development-related items from OE to DE, with the economic sector (51.5% of total DE) being the largest recipient. This is the highest absolute amount of DE in federal budgets since independence.

An increase in DE, coupled with the introduction and expansion of different welfare programmes as well as revenue limitations, should see the fiscal deficit widen to 3.7% of GDP in 2018 – about 0.9 percentage point more than the 2018 deficit target – and decline to 3.4% in 2019.

Furthermore, the size of the budget deficit will also depend on revenue from the Sales and Services Tax (SST), the size of refunds for GST, income tax, leveraging on government assets, and oil-related revenues.

In the 2019 Budget the government has addressed the implementation of institutional reforms that promote transparent fiscal discipline, as well as the Fiscal Responsibility Act and a new Government Procurement Act to ensure transparency and accountability. This, in turn, will improve competitiveness and investors’ confidence, therefore enhancing the investment rate and the stability of the country’s economic growth. These, in fact, indicate the government’s commitment to regain fiscal consolidation momentum.

The 2019 Budget is expected to see a bigger revenue collection of RM261.8bil – an increase of 10.7% from RM236.5bil in 2018. It includes a one-off special dividend of RM30bil from Petronas, which is benefiting from higher global oil prices, for the repayment of income tax as well as GST refunds.

Despite challenging domestic and external headwinds, the economy is expected to grow by 4.8% and 4.9% in 2018 and 2019 respectively, driven by both domestic and external demand. This is also supported by government commitment to narrow the fiscal deficit of the country, mostly through new revenue sources, as well as tighten cost control. In addition, the return of RM35.4bil tax refunds (RM19.4bil GST refunds and RM16bil income tax refunds) to businesses and people will enhance private consumption and therefore the economy of the country.

The 2018 Budget addresses the basic needs of the people amid rising costs of living.

An Inclusive Growth

The budget promises inclusive growth that benefits all aspects of society, especially the Bottom 40 (B40) and Middle 40 (M40) groups, while being fiscally responsible. It addresses the basic needs of the people amid rising costs of living. This includes increasing minimum wage, living cost allowance, petrol and electricity subsidy, initiatives in education and housing, B40 National Health Protection Fund, and improving public healthcare.

Different incentives and policies for senior citizens, women in the workforce, disabled people and ex-convicts indicate sensitivity towards promoting equality and social inclusion. In fact, to become a high-income nation, Malaysia needs to ensure that economic gains are equally distributed across society, including the B40 households. This, in turn, will boost economic growth and raise the potential for higher levels of social well-being.

The 2019 Budget also focuses on education, skills and entrepreneurship. A high productivity nation needs an educated workforce that possesses the knowledge, skills and talents needed to attract investments. Skills and entrepreneurship development are indeed essential for the economic growth of the country, especially for embracing the digital economy. About 19% of the total government expenditure was allocated to the Ministry of Education, which makes it the single largest recipient of budget allocation for 2019 – with the highest percentage going to aid students from low-income families.

Taxation is another positive aspect of the 2019 Budget. Among the notable points is the tax on sugar-sweetened beverages, which have both fiscal and health benefits. As the lowest socio-economic group is more responsive to price increases, it is expected that this group will receive the greatest health benefits. In the long term, the sugar tax will reduce the cost of healthcare and improve people’s well-being.

Imposing a tax on imported services is another positive step to support local service providers and to ensure equal treatment for services supplied by both foreign and local service providers. The increase in government revenue through various tax reforms, and the imposition of new taxes as well as fees and licences, are seen as positive efforts that will boost the country’s revenue in the long term.

Overall, the 2019 Budget is a step in the right direction, with the government focusing on managing the country’s fiscal position and maintaining economic growth while simultaneously ensuring everyone benefits from economic gains. Indeed, careful budgeting and a good fiscal policy are important for achieving a sustainable economy.

1 This does not take into consideration the Contingency Fund of RM2bil.
2 Refers to a budget system that assumes a zero base at the beginning of the budget cycle.
3 This is including the Contingency Fund of RM2bil.



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