Published August 30, 2008

Malaysia sees FY09 budget deficit of 3.6% FY08 forecast hiked to 4.8% on extra spending to keep GDP rise above 5% By PAULINE NG IN KUALA LUMPUR Email this article Print article Feedback MALAYSIA expects a budget deficit of 3.6 per cent for the fiscal year 2008-09, a drop from the revised forecast of 4.8 per cent for FY08 but well above 3.2 per cent for FY07. Bearer of good news: Mr Abdullah says that the government would help cushion soaring prices but warns that if there is a global slowdown, there is only so much that the government can do The revised figure follows extra spending on top of what was budgeted a year ago, to keep economic growth above 5 per cent. Growth is expected to ease to 5.4 per cent next year from an estimated 5.7 per cent this year, according to the treasury's 2008-09 economic report released yesterday with this year's Budget. Despite last year's record budget of RM176.9 billion (S$73.8 billion), the government had to spend more, mainly because of rising prices, taking the FY08 total to RM196.9 billion. In the latest budget, spending goes up a further 5.1 per cent, to RM207.9 billion. On the income side, higher commodity prices are expected to boost revenue by 9 per cent to RM176.2 billion, from a projected RM161.6 billion in the current year. The growing gap between revenue and spending is worrying economists. The latest budget estimates operating expenditure at RM154.2 billion or three-quarters of total spending. Salaries are estimated to account for a quarter of operating expenditure and supply and services, 17 per cent. Although fuel subsidies have been slashed, total subsidies are estimated at RM33.8 billion or almost 22 per cent of operating expenditure. Development expenditure will rise 12 per cent to RM53.7 billion. In all, operating expenditure will rise more than a quarter. A larger deficit cannot be avoided if growth is to be supported, but analysts take issue with 'lax' spending. The civil service headcount has continued to grow over the years despite generous spending on new technology to improve productivity, they note. The civil service has 1.1 million staff, serving a population of 27 million. Because of soaring inflation, wages have to rise, but the size of the civil service should be slashed, an analyst said. The problem is, the civil service workforce is Malay-centric and 'something the government is very defensive about'. On the development side, the choice of projects is seen by many as having little multiplier effect. And the ramifications in tougher years ahead are clear. 'They will have a lot of constraints because bullets will be in short supply, having been fired in previous years,' said the analyst. The government initially aimed to contain the budget deficit at 3.1 per cent this year. Most economists had not foreseen it exceeding 4 per cent and expected only slight spending increases. CIMB chief economist Lee Heng Guie, for example, had pegged spending at RM192.5 billion - RM15.4 billion less than has been provided. Despite initial curbs on so-called mega projects, which led to the deficit narrowing to 3.2 per cent before the latest measures, Prime Minister Abdullah Ahmad Badawi's government has not made the most of better oil revenue in the past few years, choosing instead to spend on grand projects that many contend are to appease government supporters. Besides the political pummelling he has received since faring badly in the March general election, Mr Abdullah has had to grapple with economic problems, including inflation that hit a 27-year high of 8.5 per cent last month. Mr Abdullah, who is also Finance Minister, said yesterday that the government would help cushion soaring prices but warned the public and private sectors to be prepared if there is a global slowdown, as 'there is so much the government alone can do'. A larger deficit could have implications for Malaysia's credit rating. Although the latest deficit is below the 2000 peak of 5.5 per cent, volatile oil prices could make paring the deficit difficult next year, which in turn could lead to a review of the ratings.