Higher fiscal deficit of 3% next year forecast

KUALA LUMPUR: While this year’s fiscal deficit of gross domestic product (GDP) is expected to meet the 2.8% goal, a higher deficit of 3% could be seen next year despite efforts to cut expenditure along with the cancellation of major infrastructure projects.
Alliance Bank Malaysia Bhd chief economist Manokaran Mottain said for the upcoming Budget 2019, the government is likely to reduce the amount of allocation as part of operating expenditure cuts and streamlining of administrative processes. It is estimated that around RM8 billion to RM10 billion in operating expenditure could be saved annually.
He expects 2019 government’s revenue and total expenditure to register at about RM228 billion and RM273 billion respectively, resulting in 2019 fiscal deficit to increase to 3% of total GDP.
“With all these trimming down of expenses, you still can’t get off from registering a (larger) deficit of 3% (in 2019) and this is mind-boggling. The impact of all these project cancellation and expenditure trimming on the GDP is that the 2019 GDP will likely be slower at 4.5%,” Manokaran said at the Malaysian Economic Summit 2018 yesterday, which was organised by the Kingsley Advisory & Strategic Initiatives Institute, a new independent private sector think tank.
He estimated that total expenditure will be lower by RM10 billion for 2019, including lowering development expenditure to be in the range of RM40 billion from RM45.4 billion estimated for 2018, but noted that operating expenditure will be difficult to trim, estimating that on a conservative basis, the government can save some RM5 billion.
He said the government should not rush into correcting its debt issue and trim down development expenditure heavily, as development expenditure can contribute to future GDP.
Malaysian Rating Corp Bhd associate director of research and chief economist Nor Zahidi Alias concurred, saying that there should not be a drastic cut in development expenditure.
“We cannot put brakes on development expenditure drastically to the point that we suffer in terms of headline growth. We care about sovereign rating but not to the point where we squeeze the economy to the brink of recession.”
Nonetheless, he said anything that affects sovereign rating, especially for emerging markets like Malaysia, will have an implication on capital flows, currency and business sentiment.

“Austerity is not the solution. What’s more critical is the debt-to-GDP ratio. Cutting expenditure can be done in the first and second year, but going forward it’s more difficult to cut expenditure so I’d look for new sources of revenue,” said Zahidi.
Meanwhile, University of Nottingham Malaysia school of economics head Dr Teo Wing Leong is of the view that spending cuts should start from operating expenditure, followed by reducing wastage and increasing efficiency.
Asset disposals by government-linked companies can also be an option.