Expansionary 2009 Budget to be presented by PM today

Prime Minister Datuk Seri Abdullah Ahmad Badawi is expected to present an expansionary budget for 2009 today which could push the budget deficit of the federal government to above 4.5 per cent of gross domestic product, making it the highest deficit since 2003.

Abdullah, who is also finance minister, will table the Bill under the watchful gaze of newly sworn-in opposition leader and former finance minister Datuk Seri Anwar Ibrahim who has criticised Abdullah's administration for financial mismanagement.

But Abdullah probably has no choice in the matter. Inflation hit a 27-year high in July, touching 8.5 per cent and sparking massive protests across the country. Meanwhile, the cost of construction materials has soared, which will make pump priming projects more expensive. Thus, economists believe that Abdullah could present a total spending package of almost RM200 billion, which would be a record.

Although the increased deficit is likely to annoy the international rating agencies, they are unlikely to downgrade Malaysia's sovereign rating anytime soon. That's because Malaysia's total public debt as a proportion of GDP is 42 per cent, considerably lower than the international “stress” level of 60 per cent.

Abdullah's budget is likely to be populist with pump-priming projects and tax cuts for the lower income group. Analysts also think that some of the spending is likely to be aimed at improving the public transport system now more widely used because of higher fuel prices. Indeed, last year, the government said that an extra RM10 billion would be allocated to extend the light rail transit system in Kuala Lumpur.

Chee Wei Loong of CLSA in Kuala Lumpur thinks that employee contributions to the Employees Provident Fund, the country's largest private pension plan, could be “temporarily” eased to increase cash in hand and help boost consumption spending. The tactic had been used by former premier Tun Dr Mahathir Mohamad in 2002 with some success.

Meanwhile, to boost revenue, the government is widely expected to raise “sin” taxes. Duties on cigarettes are widely expected to be raised although the tax on beer is less likely as Malaysian beer, on a relative basis, is already considered extremely expensive.

Analysts are divided on the possibility of the government raising gaming taxes. It would be a populist move where ethnic Malays, who form 64 per cent of the population, are concerned; Islam, the religion of the Malays, forbids gambling. But industry studies have consistently shown that raising gaming taxes drives more gamblers into the illegal market which would translate ultimately to lower government revenues.

For political reasons, Abdullah is also likely to throw more money at Sabah and Sarawak with development projects such as the upgrading of the Trans-Borneo highway and flood mitigation schemes.

The goods and services tax (GST) which was scheduled to be implemented in 2007 is almost definitely off the table. Abdullah is unlikely to impose such a tax for two reasons. One, it could be political suicide and two, it would almost certainly crimp consumption spending which has become a key driver of the Malaysian economy in recent years. — Business Times Singapore