Malaysia Walks Budget Tightrope

Malaysian prime minister Najib Razak will press on with his deficit-cutting agenda in 2018 even as the general election looms.

- Hafiz Noor Shams

Healthy GDP growth and an expected rise in government revenue next year have made this possible, but policymakers will need to weigh the benefits of a balanced budget versus long-term economic growth.

Mr Najib, who is also finance minister, aims to cut the government’s fiscal deficit to 2.8 per cent of GDP in 2018 from an estimated 3 per cent this year. This agenda is part of fiscal reforms the government implemented in the early 2010s.

Progress has been slow, however. Malaysia hoped to balance its budget by 2020 but the 2014-15 energy price collapse forced the government to delay this aim by several years. We believe the new target of a 0.6 per cent deficit to GDP ratio by 2020 will be difficult to achieve unless the government spends less or raises the goods and services tax rate. Our own projection suggests Malaysia’s deficit ratio will lie between 1 and 2 per cent by 2020.

The 2020 target is a challenge because next year’s deficit ratio reduction relies on strong GDP growth — the government expects 5.4 per cent growth this year and 5.2 per cent in 2018 — rather than a cut in the absolute deficit. Total spending will rise next year.

BALANCED BUDGET A HINDRANCE OR A HELP?