This article first appeared in The Edge Malaysia Weekly on June 13, 2022 - June 19, 2022

UNLIKE last year, the Ministry of Finance (MoF) did not revise expenditure numbers in Budget 2022 when releasing its second annual pre-budget statement on June 3. This is despite its admission that “there will be potentially a RM30 billion increase in subsidies expenditure” this year — assuming that commodity prices remain elevated and the government maintains current subsidised prices — and that the “increase in revenue from commodity-related taxes is insufficient to finance the increase in subsidies”.

The RM30 billion is 9% of the record-sized RM332.1 billion Budget 2022 that was tabled on Oct 29, 2021, and about 1.8% of gross domestic product (GDP), a back-of-the-envelope calculation shows.

At the same time, the government said its fiscal deficit would be kept “on track at 6% of GDP” with the risk of fiscal slippage being mitigated through “better revenue performance, coupled with rigorous expenditure management and sustained growth trajectory”.

If the deficit for Budget 2022 remains at RM97.5 billion, despite the extra subsidies, Malaysia should meet its 6% fiscal deficit target for 2022 — if the economy can grow 6%, our back-of-the-envelope calculations show.

It remains to be seen whether the government, which “is currently planning to enhance subsidies through a more targeted approach to enhance spending efficiency and minimise leakages while ensuring subsidies reach target groups and achieve intended objectives”, can execute plans well and in a timely manner.

Going by how the pre-budget statement is worded, however, it would seem that targeted subsidies are on the cards. “It is estimated that more than half of subsidies provided by the government have benefited the higher income or the T20 household income group. Therefore, the government will engage with various stakeholders to explore ways to implement more targeted assistance in Budget 2023,” the pre-budget statement read.

Budget 2023 “will also focus on ensuring the security of essential foods at reasonable prices”, the pre-budget statement read, noting that the government “will continue to intervene where necessary to mitigate sharp rises in the price of essential goods while ensuring the government’s resources are spent on those who truly need it through targeted subsidies”.

It is worth noting that the word “targeted” was mentioned 16 times in the 33-page statement, 12 of which were in relation to subsidies and assistance to vulnerable groups.

The expected adjustment in the subsidy mechanism is “perhaps the biggest message that the pre-budget statement brings forth”, CGS-CIMB Research economist Nazmi Idrus said in a June 7 note.

“We are positive on a more efficient subsidy but remain sceptical about the implementation of such a mechanism. Past governments have toyed with this idea with little success, for instance, the last Pakatan Harapan proposal for a petrol card back in 2018 never saw the light of day. Nevertheless, a successful implementation would be positive for government finances,” added Nazmi, who reckons that a 6% fiscal deficit for 2022 “could only be achieved through higher dividend payouts by GLCs, particularly Petroliam Nasional Bhd (Petronas)”.

“In August 2021, Petronas declared an additional RM7 billion dividend payment to the government amid rising oil prices, on top of the initial target of RM18 billion. We believe Petronas would be able to surpass its initial commitment of RM25 billion dividend payment in 2022 as well as the government expects an additional RM30 billion in subsidy spending,” he said, without specifically saying how much he expects Petronas’ dividend to be this year.

Economists generally expect Petronas to pay more than the RM25 billion in dividend to the government this year and would not be surprised if development expenditure (devex) again came in below the original budgeted amount. Incidentally, RM30 billion is also the size of the special dividend that Petronas paid the government in 2019, on top of the RM24 billion it was already paying for that year.

The pre-budget statement cited prevailing projections of global oil prices averaging at US$93 per barrel this year, significantly above the US$67 per barrel used for Budget 2022, without saying how much the expected shortfall in revenue would be, given the larger subsidies bill.

The pre-budget statement made no specific mention of the Goods and Services Tax (GST). “Given the sensitivity, we do not expect the government to commit on GST, although chances are that we may see a return of the tax in one form or another,” Nazmi said, noting an annual revenue loss of some RM20 billion from the shift from GST to the sales and services tax (SST) that would make a difference to fiscal consolidation efforts. He expects the government to improve the fiscal deficit to 5% in Budget 2023 from 6% in 2022, with the pre-budget statement reiterating a 3.5% fiscal deficit target by 2025.

Additional revenue would expand fiscal flexibility, with direct fiscal government debt reaching RM1.0157 trillion or 62% of GDP as at end-April this year. The headline statutory debt figure used by the MoF — which does not include some short-term borrowings and foreign currency debt — stood at RM958.5 billion or 58.5% of GDP as at end-April, below the debt limit of 65% of GDP.

Direct federal government debt is poised to reach 65% of GDP by year end going by prevailing expenditure projections, our back-of-the-envelope calculations show. Debt directly guaranteed by the government stood at RM312.7 billion or about 19.1% of GDP as at end-March, when direct federal government debt stood at RM1.0058 trillion — breaching the RM1 trillion mark for the first time.

The pre-budget statement did not specifically say how expenditure could be rebalanced to meet the government’s fiscal deficit target.

Based on expenditure details released for the first four months of 2022 (one-third of the year), the government had already spent 37.5% or RM87.5 billion of the RM233.5 billion budgeted operating expenditure (opex) while only spending 30.7% or RM23.2 billion of the RM75.6 billion budgeted for devex.

It remains to be seen if there would be some leeway to utilise the Covid-19 Fund (that gave special permission to the government to borrow to fund opex and not just devex) to fund part of the expected increase in the subsidies bill, which Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz said is poised to reach RM71 billion this year compared with the “usual” RM30 billion.

Already the pre-budget statement said the “largest share” of the RM6.2 billion, or 27% of the RM23 billion budgeted for the Covid-19 Fund in 2022, had gone to the social sector that “encompasses the payment of Bantuan Keluarga Malaysia, which benefited around 9.6 million recipients”.

For the record, the amount allocated for subsidies and social assistance was RM17.35 billion under opex (excluding the Covid-19 Fund) in Budget 2022 and was revised to RM16.7 billion for 2021 and was RM19.8 billion in 2020. The exact tally of the annual subsidies, however, is larger given that there are other allocations, including those under the Covid-19 Fund.

Budget 2023 is slated to be tabled on Oct 28, if there is no change to the parliament calendar. Budget 2022 was tabled on Oct 29 last year and the pre-budget statement was released on Aug 31 and contained expenditure numbers until end-July 2021.

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