Fiscal thrust to boost growth and win electoral support
Fiscal thrust. The government is expected to tilt towards employing more fiscal measures to support the economy amid growing global uncertainties
Mildly expansionary. Along with the expectation of a General Election next year the Government is expected to design the 2017 Budget to be slightly expansionary while retaining its grip on consolidation.
Striking a balance. Such would require objective fiscal discipline of cutting unnecessary spending while reallocating funds towards targeted social and infrastructure development. Hence, the Government is expected to project a fiscal deficit of 3.0% of GDP in 2017 slightly better than its target of 3.1% in 2016.
Cautiously optimistic. Official growth projection is expected to be slightly higher in 2017 (4.5% -5.0%) in line with IMF prediction of growth improvement in the ASEAN region on the back of better domestic demand growth and a gradual recovery in commodity prices.
Expect big giveaways to benefit the targeted general public in order to win electoral support by addressing issues regarding high cost of living, housing affordability and reducing inequality.
A bigger allocation towards development expenditure of at least RM50.0b to be channelled towards rural development e.g. building roads, highways, bridges, schools, as well as on growth areas like public transport, logistics, ports, digital economy, value-added exports, tourism.
Consolidating Opex. Reducing emoluments, cutting discretionary spending and reallocating funds to growth areas and social welfare to be top priority to avoid risk of sovereign rating downgrade
To address the higher cost of living we expect more BR1M cash hand outs, tax relief for middle income earners, as well as affordable housing targeting the bottom 40% (B40) and middle 40% (M40) households as well as civil servants.
Corporate tax cut can wait. Unlikely as more funds needed to repair fiscal account following election year. If improvement in commodity exports continues along with steady rise in GST, a corporate tax cut of one percentage point to a standard rate of 23.0% a possibility from 2018 onwards.
Let's get fiscal. The three main objectives in the upcoming 2017 Budget under the theme of “Accelerating Growth, Ensuring Fiscal Prudence, Enhancing Well-being of Rakyat” suggests that while the budget will continue to be slightly expansionary it will still commit to fiscal prudence. As in previous years, major sections of the budget will address concerns over the cost of living, inequality and housing affordability. More importantly as central banks the world over are facing limitations to deal with the current global financial and economic issues mainly dominated by low interest rate, weak growth and low inflation environment we expect the government to give more emphasis on fiscal policy over monetary policy as a tool to deal with the current economic malaise. All in, the budget’s main focus will be regaining investor and consumer confidence while striking a balance between the need to consolidate and, if need be, raise development spending to ensure the economy becomes more resilient to face growing instability in the global economy.
Source: Kenanga Research – 18/10/16