Published October 24, 2009

M'sia to slash spending, bring back real property gains tax

Fuel subsidies may be re-examined, too, as Najib tries to cut budget deficit

By PAULINE NG
IN KUALA LUMPUR

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MALAYSIAN Prime Minister Najib Razak unveiled yesterday an ambitious budget designed to aggressively rein the highest fiscal deficit in two decades. His more eye-catching measures include bringing back the real property gains tax and relooking fuel subsidies.

MR NAJIB He says that Malaysia is at a 'critical juncture' and he has to make decisions to 'advance to a high-income economy'

Mr Najib, who is also finance minister said that growth for 2010 is projected at 2 to 3 per cent from a contraction of 3 per cent this year. 'Major indicators suggest the economy is on track to recovery,' said Mr Najib.

He told parliament the proposed budget allocation for 2010 of RM191.5 billion (S$78.9 billion) was 11 per cent lower than 2009's revised allocation of RM215.7 billion, the reduction exacted from the operating expenditure which was allocated RM138.3 billion or 72 per cent of the total. Most of the cuts are proposed to come from lower government spending which should trim the deficit to 5.6 per cent of gross domestic product (GDP) next year from 7.4 per cent currently.

This, however, was greeted with some degree of incredulity.

'It is good that we see now the government seems serious to address the budget deficit issue,' said Azrul Anwar Ahmad Tajudin, senior economist at Bank Islam.

'But the problem is whether we can achieve it or not. It's too huge a reduction.'

The incentives for Iskandar Malaysia were the stand-out in the 2010 budget, Mr Najib's administration attempting to kick-start the South Johor economic corridor by offering to tax the income of those residing or working in specified sectors at a rate of 15 per cent only - some 9 per cent lower than the maximum rate.

Mr Najib said that Malaysia is at a 'critical juncture' and had to make decisions to 'advance to a high-income economy'.

He also acknowledged government spending would need to be more focused for greater value-for-money, and the tax base significantly expanded. He hinted a goods and services tax - previously planned for implementation in 2007 before it was scrapped - was under serious consideration and inevitable.

He also addressed some hot button issues that are bound to be unpopular and cause some backlash among the populace in the coming weeks.

Fuel subsidies, for one, will be re-examined. It accounted for an inordinate RM9 billion out of a total RM23 billion last year, but critical numerical details were left hazy.

A 'second wave of privatisation' - mainly companies under the Finance Ministry and other viable government agencies - would also take place, though again, details were not provided. The country will also allow equity ownership in local projects in order to facilitate the return of foreign direct investment.

To attract talent, skilled foreigners would be granted permanent resident status, as would those married to Malaysian women. Foreigners would also be allowed full equity in corporate finance and financial planning firms.

Reacting to public pressure that the controversial approved permit (AP) scheme for the import of foreign cars should benefit the national coffers more, he proposed a RM10,000 fee to be levied for each open AP, a portion to be channelled to a bumiputra fund.

What is sure to disappoint property players is the reinstitution next year of the real property gains tax - suspended indefinitely in 2007 - at a rate of 5 per cent. There were some tax breaks for the man-in-the-street, with income tax reduced one per cent to 26 per cent and personal relief increased by RM1,000 to RM9,000. The fixed tax rate for non-residents was reduced to 26 per cent.

In an attempt to win back the non-Malay communities which feel side-lined by the ruling coalition Barisan Nasional, Mr Najib added more bite to his 1Malaysia initiative by the announcement that 30 national scholarships to study at world famous universities would be awarded on merit.

The Green initiative was another that received attention, a RM1.5 billion green technology fund to be established, and the federal administrative city of Putrajaya and IT hub of Cyberjaya developed as 'pioneer technology townships'.

The budget, continuing the general trend of economic liberalisation, was generally greeted with optimism.

'The budget signals the government's intention to reduce its direct involvement in the economy and encourage a greater role for the private sector,' said Robert Prior-Wandesforde, a Singapore-based senior economist at HSBC Holdings Plc. 'The new prime minister is at least trying to take the economy in a different direction.'