Economists say Malaysia on track to achieve 3% fiscal deficit target

PETALING JAYA: Economists are of the view that the government is on track to achieve its fiscal deficit target of 3% to gross domestic product (GDP) for the current year as government spending is offset by revenue from tax collections, royalties and dividends from several government agencies.
According to their calculations, the fiscal deficit for the first half of the year stood at 5.2% to GDP, amounting to RM34 billion.
Peck Boon Soon, head of RHB Economic Research, said the fiscal deficit for the period under review is better than the 5.6% deficit for the corresponding period in 2016.
“Given the improvement in the budget deficit, we believe the government is able to achieve its 3% budget deficit target this year. Furthermore, they have shown a good track record in achieving its budget deficit set in the last few years. In the event if revenue fell short of the government’s second half (2H17) expectations, they may have to establish the necessary interventions, which may include reduction in spending,” he added.
Peck said economic growth may slow down to around 5% in the second half from the 5.7% in the first half due to slowdown in exports.
Malaysia, according to him, is expected to achieve full-year growth of 5.3% in 2017.
Lee Heng Guie, executive director of Socio-Economic Research Centre, said as per the trends of past years there is usually a surplus to offset the deficit from the first half, in turn keeping the deficit within target.
Adding on, he said the rise in oil prices is expected to contribute higher revenue to the government. This will be coupled with the collection from the Goods and Services Tax (GST).
However, Lee said assuming the second half revenue is not forthcoming, the government might fine tune its expenditure.
Echoing the same sentiments, Sunway University Business School Professor of Economics Dr Yeah Kim Leng said the government has reasonable grounds, such as crude oil revenue, GST collection and income tax collection, for it to achieve its fiscal deficit target.
“At this juncture, pending the Budget this October, I think there is reasonable grounds to expect the government to achieve the 3% target although a slight shortfall may be possible given that the government may increase their spending towards the second half, especially if the election is around the corner,” Yeah said.
Maybank Group chief economist Suhaimi Alias said the crude oil price, which is expected to increase by US$10 (RM42.80) per barrel, could benefit the government in terms of revenue.

“For example the better than expected crude oil price average of over US$50/bbl so far this year vs Budget 2017’s US$45/bbl assumption. We estimated every US$10/bbl increase in annual average crude oil price raises government oil-related revenues (excluding Petronas’ dividend) by RM4.1 billion. The pickup in economic growth so far this year after the slowdown last two years points to prospect of better than expected income for the government. Furthermore, Inland Revenue and Royal Customs are undertaking tax audit and enforcement to boost tax compliance and collection,” he added.
Suhaimi said fiscal spending has also been on a quarterly decline from RM20.2 billion in the first quarter to RM13.8 billion in the second quarter.
According to him, it is unlikely for the government to slash its spending as the budget deficit can be reduced not only by expenditure cuts alone, but by an increase in revenue as well.
Suhaimi has a higher forecast for the entire year’s growth, which he expects to be between 5.1% and 5.5%.
“Economic growth is driven by many factors, and is not dictated by fiscal policy and budget consolidation alone. Global economic growth pickup, rebound in world trade and firmer commodity prices are boosting Malaysia’s exports.”
On the domestic front, growth is expected to be underpinned by consumer spending and major infrastructure investments.