Malaysian Budget 2017, which was tabled in Parliament on October 21, 2016, focused mainly on measures to address challenges arising from a weaker global and domestic economy, shrinking government revenue and rising cost of living, according to a report from MARC called ÔBudget 2017: Ensuring Unity and Economic Growth, Inclusive Prudent Spending, Well-being of the Rakyat.
In Budget 2017, the government aims to sustain its fiscal position through prudent spending practices, maintaining decent economic growth as well as providing assistance to the rakyat, especially those in the bottom 40% income (B40) group. Measures to raise home ownership in the low- and medium-income groups were also a prominent feature of the Budget. With macroeconomic headwinds emanating from the slowdown in major economies as well as anxiety arising from the expected interest rate hike in the United States (US), Budget 2017 prioritises the need to support domestic demand through measures to boost private investments and consumer spending.
In Budget 2017, the government proposed a total allocation of RM260.8 billion (excluding RM2.0 billion for contingencies), which is roughly 3.4% higher than the amount allocated in the revised estimate for 2016.ÊOf the total allocation in Budget 2017, operating expenditures (OPEX) account for roughly RM214.8 billion while RM46.0 billion is slated for gross development expenditures. Total revenue is anticipated to grow by 3.4%, a rebound from an estimated 3.0% drop in 2016 (2015: -0.7%). As a result, the government foresees budget deficits to continue trending downward to 3.0% of gross domestic product (GDP) in 2017 from an estimated 3.1% of GDP (RM38.7 billion) in 2016.
On this, MARC is of the view that the government revenue projection looks quite realistic. On the whole, however, achieving the deficit target of 3% of GDP in 2017 appears to be challenging especially at a time when nominal growth remains below trend. We think that the Ministry of Finance’s (MoF) projection of a nominal growth of 7.4% is slightly on the high side, especially when real growth remains within the range of 4%-5%. Notably, the increasing gap between nominal and real growth suggests that inflation is projected to be rising at a faster pace, something which we think will not likely to happen in the near term due to a slower pace of demand in 2017. On the expenditure side, the government will continue to keep the Budget lean through prudent spending and deferment of certain non-critical projects. While this could be the means to further consolidate the government fiscal position, we feel that such approaches could weigh on headline GDP growth in 2017, especially when lacklustre global demand is exerting downward pressure on Malaysia’s external trade performance. As such, we pencil in a GDP growth target below trend at 4% for 2017 (MoF: 4%-5%, central tendency of 4.6%).