Malaysia Budget 2024: Deficit declines on higher tax proceeds, subsidies rationalisation

• Operating expenditures to increase by 1.2% despite reduction in subsidies
• Tax revenues projected to jump by 6.4% driven by both indirect and direct taxes
• Government expect budget deficit to average 3.5% of GDP over 2024-2026
• Tax revenue growth remains conservative compared to previous years
• Drop in development spending to occur thanks to base effects after 1MDB debt payment in 2023

Budget 2024 tabled by the government will reduce the budget deficit to 4.3% of GDP in 2024 from 5.0% of GDP in 2023 thanks to a combination of higher tax proceeds, rationalisation of subsidies and lower development spending, documents released by the finance ministry showed. The government continues on path of fiscal consolidation with Budget 2024, which is projected to accelerate in the coming years. According to the government's Medium-Term Fiscal Framework 2024-2026, the budget deficit is projected to average 3.5% of GDP over 2024-2026 after averaging 5.8% in the 2020-2023 period. The government confirmed its objective to reach a deficit-to-GDP ratio of 3% eventually as laid out in the recently-tabled Fiscal Responsibility Act.

The highlight of the budget is the rationalisation of subsidies that have been much-needed to stabilize expenditures. The government will implement targeted diesel subsidies in phases in 2024 and it will remove the price caps on chicken and eggs. However, subsidies for RON95 petrol will remain in place. The rationalisation of subsidies will allow the government to slightly ramp up social spending as the allocation for the STR cash aid will be increased by 25% to MYR 10bn.

On the revenue side, the government will increase some taxes such as the Service Tax from 6% to 8% and it will implement new taxes such as the luxury tax and capital gains tax on unlisted shares. However, the government abstained from high-impact measures on the revenue side such as a potential re-introduction of the Goods and Services Tax (GST). The government remains elusive whether it will eventually bring back the GST, which is one of the easiest options to reduce the deficit to 3% of GDP.

INCOME

The government expects to collect MYR 307.6bn in revenues in 2024, up by 1.5% compared to 2023. Total tax revenues are projected to increase by 6.4%, whereas non-tax revenues are projected to fall by 13.8% to MYR 63.98bn due to a reduction in the Petronas dividend to MYR 32bn from MYR 40bnb.

The hike in the Service Tax to 8% from 6% should have minimal impact on overall revenues as the Service Tax amounted to 5.5% of revenues in 2023 and is projected to increase to only 5.7% of revenues in 2024. Better economic prospects, improved tax compliance and higher wages and corporate profitability are expected to drive tax revenue growth. It should be noted that tax revenues increased even more robustly by 9.7% in 2023 and 20.2% in 2022, so the growth target in 2024 remains relatively conservative compared to previous years.

Operating expenditures is projected to increase by 1.2% to MYR 303.8bn, slowing down from 2.5% growth in 2023 mainly due to the projected reduction in subsidies and social spending by 17.9% to MYR 52.8bn in 2024. At the same time, emoluments will rise by 4.8% and spending on supplies and services will rise by 11.8% due to the impact of inflation on government spending. Debt service charges are expected to rise by 8.0% to MYR 49.8bn, lower than the increase in 2023 by 11.7%.

Development spending is projected to fall by 7.2% to MYR 90.0bn in 2024, which is partially driven by the fact that 22.6% of total development spending in 2023, or MYR 21.9bn, was related to the repayment of 1MDB debt. Thus, development spending should increase strongly in 2024 when accounted for the fact that the government does not need to repay any principal on 1MDB debt in 2024.

DEBT

The government estimates federal government debt at 64% of GDP at end-2024 compared to 62% of GDP as of end-August 2023 and 63% of GDP projection for end-2023. Gross borrowing needs are projected at around 10% of GDP or MYR 197.4bn in 2024 compared to MYR 12.4% of GDP or MYR 228.5bn in 2023. Thus, the supply of debt will declines slightly in 2024 driven by the lower deficit target and lower debt redemptions. The former has been also aided by the lengthening of the average maturity of debt to 9.5 years in 2023 from 9.0 years in 2022.

GROWTH

Government projects growth in the range of 4.0% to 5.0% in 2024 that will be mainly led by domestic demand which will rise by 5.3%, according to the government. Thus, the government expects mildly better economy after the expected 4.0% growth in 2023. The government makes a fairly conservative prediction for an export recovery in 2024 as exports are predicted to grow by 4.1% after a 6.2% decline in 2023. On the supply side, manufacturing value added is projected to strengthen to 4.2% growth from 1.4% in 2023, while services value added is projected to increase by 5.6% compared to 5.5% in 2023.

CONCLUSION

Overall, the government has delivered a realistic budget deficit target as both the reduction in spending and the increase in revenues seem well within reach. In addition, the growth forecast remains in line with most other forecasts. The biggest risk factor remains the oil price which may exacerbate drastically subsidies spending as the government has committed to preserve RON95 fuel subsidies. In such case the government will likely have to balance the budget with an additional dividend payment from Petronas.

To reach its 3% of GDP medium-term target, the government needs to implement additional painful measures such as GST reintroduction or further cut in fuel subsidies. This will be politically challenging as the government remains under heavy pressure from the opposition Perikatan Nasional bloc. However, PM and FinMin Anwar has proven he can deliver realistic fiscal targets with the revised Budget 2023 and Budget 2024 and we are cautiously optimistic that the government will able to continue on a gradual path of fiscal consolation going forward.