Published August 19, 2009

M'sia vows to cut its budget deficit in 2010

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(PUTRAJAYA, Malaysia) Malaysia pledged on Tuesday to cut its budget deficit next year after years of poor fiscal control and a surge in spending in 2009 pushed it to its highest level in 22 years.

However, Second Finance Minister Ahmad Husni Hanadzlah, the top official in charge of the day-to-day running of the ministry, gave few clues as to how the deficit would be cut in a year when oil revenues would be weak.

Mr Husni told reporters that operating expenses would be cut by 15 per cent next year after the government projected the budget deficit would hit 7.6 per cent of gross domestic product (GDP) in 2009, its highest level since 1987.

He also said the government was looking at means testing for fuel subsidies, which together with food subsidies cost the government RM30 billion (S$12.3 billion) annually, according to Mr Husni. Last year, subsidies accounted for over a fifth of total budget spending.

'At this stage, (the deficit) next year will be lower than this year's deficit,' Mr Husni told a news conference, adding that operational spending would be cut by 15 per cent in 2010.

Malaysia is drafting its 2010 budget after a year in which the government says the economy will shrink by 5 per cent, its first major recession since the 1998 Asian financial crisis, while the government tries to rally support after record losses in state and national elections in 2008.



Mr Husni said planned savings included selling or leasing government assets such as land and buildings, cutting down on overseas trips and scrapping direct tenders for government procurement for non-sensitive industries where open and selective tenders would result in greater efficiency.

However, wages for the more than 1.1 million civil servants, at 26.7 per cent the largest component of operating expenditure in 2008, would not be included in the cost-cutting drive.

'Since it would obviously be politically difficult, if not impossible, to cut wages or reduce civil service headcount, the most obvious candidates would be cutting subsidies - especially fuel,' said Citibank economist, Kit Wei Zheng.

The International Monetary Fund last week urged the government to introduce a goods-and-services tax to boost revenues and the IMF forecast the deficit would hit 7.7 per cent of GDP this year and only ease to 7.1 per cent of GDP in 2010.

'We are looking at it (GST) seriously but the government does not want to cause any pain to the people,' Mr Husni explained.

Mr Kit said raising corporate and personal income taxes would erode Malaysia's competitiveness, but that it was not politically expedient to implement GST now. 'Given that it was politically difficult to implement GST even during the good years, it remains to be seen if GST implementation will be feasible in a post-crisis world of arguably slower growth,' he noted.

Malaysia shelved plans to implement GST in 2007 but has recently put it back on the drawing board due to declining oil revenues.

Malaysia's budget deficit excluding oil revenues will be 11 per cent of GDP in 2008, according to the IMF, and with lower oil prices in 2009 than in 2008, the income from oil will shrink in 2010 as it is based on 2009 prices. -- Reuters