THIS year is arguably the worst time to be Malaysia’s minister of finance. Crafting Budget 2020 to be presented to the Dewan Rakyat on Oct 11 will be particularly challenging for several reasons.
For a start, expectations of bigger handouts in Budget 2020 are likely to outpace federal government revenue. Poorer tax collection is probable next year due to lower export earnings, particularly from oil, palm oil and electronic products, coupled with less robust business activity.
A bellwether of the region’s electronics industry, Singapore reported exports of electronic products tumbled by nearly 26% in August this year.
Additionally, a budget deemed stingy could aggravate Malaysians already carping about Pakatan Harapan’s sluggish implementation of multiple promises listed in its manifesto, 15 months after its unexpected victory at the general election in May last year.
Furthermore, potential global headwinds suggest Budget 2020 should err on the side of parsimony rather than profligacy.
Despite recent data underscoring the US economy’s robustness, many economists and financial chieftains in the world’s largest economy believe the possibility of a recession in 2020 has increased sharply.
A recession is defined as a country’s gross domestic product (GDP) contracting for two consecutive quarters. GDP is the total value of goods and services produced within a country during a specific period.
Duke University’s latest CFO global business survey suggests business optimism is the lowest in three years while 67% of chief financial officers in the US expect a recession will begin by the end of next year.
Additionally, a recent report by the United Nations Conference on Trade and Development says 2019 will be the weakest expansion in a decade while highlighting the risk of a slowdown next year mutating into a contraction.
Furthermore, renowned economist Nouriel Roubini singles out three negative supply shocks – stemming from political rather than economic factors – that could trigger a global recession by 2020.
First is US President Donald Trump’s ever-expanding conflict with China. Second is the “slow-brewing” technology war as Washington and Beijing vie for dominance over industries of the future, for example artificial intelligence, robotics and 5G. Third is oil supply that could be at risk if the US confrontation with Iran escalates into a military conflict.
A greater concern is the impeachment inquiry in the US House of Representatives against Trump. This suggests top-level action to resolve these supply shocks could be relegated to the backburner.
Retaliatory tariffs levelled by the US and China against each other is likely to impact manufacturers worldwide. Higher prices of intermediate goods will disrupt global supply chains, increase production costs and slim profit margins.
“In fact, with firms in the US, Europe, China and other parts of Asia having reined in capital expenditures, the global tech, manufacturing and industrial sector is already in a recession. The only reason why that hasn’t translated into a global slump is that private consumption has remained strong,” Roubini writes.
In Malaysia, the country’s narrow tax base is a major concern. Dr Veerinderjeet Singh, president of the Malaysian Institute of Certified Public Accountants, says out of a 15.6 million workforce, only two million pay taxes.
Aggravating the revenue shortfall is the newly re-introduced sales and services tax (SST).
Veerinderjeet predicts SST could generate RM22 billion this year – the first full year of implementation – sharply lower than the RM44 billion reaped by the abolished and much hated goods and services tax.
Apart from a 6% service tax on digital services effective Jan 1, 2020, Finance Minister Lim Guan Eng has said there will be no new taxes in Budget 2020.
Dividends from Petronas are an annual source of non-tax revenue. Recently, Petronas announced dividends next year will be lower.
In addition to a normal dividend of RM24 billion, the national oil company paid a one-off special dividend totalling RM30 billion this year to enable Putrajaya to settle outstanding tax refunds.
Instead of focusing on financial handouts or tax breaks, the Finance Ministry can help businesses by slashing red tape. The Global Business Complexity Index 2019 ranks Malaysia worse than Thailand and Vietnam in terms of business complexity.
For example, why is it necessary to submit 12 copies of an audited financial statement for each company?
Despite notable efforts to curb corruption, reduce federal government debt proportionately and improve transparency in procurement, Lim must ensure federal government expenditure is cost effective.
One example is purchases of military equipment. That 18 drones and seven cruise missiles – costing tens or hundreds of thousands of US dollars – disabled half of Saudi Arabia’s crude oil output on Sept 14 this year highlights the failure of the kingdom’s anti-aircraft missiles (with a US$3 million price tag each) to defend these vital oil facilities, Patrick Cockburn writes.
In preparing Budget 2020, Lim should remember a ringgit saved is a ringgit earned.
Opinions expressed in this article are the personal views of the writer and should not be attributed to any organisation she is connected with. She can be contacted at firstname.lastname@example.org