Malaysian Budget Aids Poor as Subsidy Cut to Contain Deficit

Prime Minister Najib Razak cut income taxes and extended handouts for the poor while pledging to reduce Malaysia’s fiscal deficit in the 2013 budget as the next general election nears. The ringgit gained.

The government plans to spend 251.6 billion ringgit ($82 billion) in 2013, Najib, who is also finance minister, said yesterday. Gross domestic product may expand 4.5 percent to 5.5 percent next year after rising as much as 5 percent in 2012, with the budget deficit forecast to narrow to 4 percent of GDP from 4.5 percent, he said.

Najib countered the spending on handouts and the tax reduction with a cut in sugar subsidies and an increase in real property gains tax as he pledged to contain a budget deficit that is one of the widest in Asia as a proportion of GDP. Standard & Poor’s and Fitch Ratings have recommended tighter public finances after the prime minister, 59, raised civil servants’ salaries, handed cash to low-income households and unveiled infrastructure projects in the past year to spur growth.

“Budget 2013 will focus on improving the quality of life for the people,” Najib said in a speech in parliament. “It will ensure sustainable economic growth, prudent spending and reduce the country’s fiscal deficit with the overall goal of focusing on the welfare of the people.”

The ringgit, which has strengthened more than 3 percent this quarter, rose 0.5 percent to 3.0620 against the dollar, the biggest gain in a week, according to data compiled by Bloomberg. The benchmark FTSE Bursa Malaysia KLCI Index climbed 0.5 percent.

Higher Pensions

Malaysia will reduce the personal income tax rate by 1 percentage point for those with a taxable income of 2,500 ringgit to 50,000 ringgit annually, Najib said. The government will also repeat a 500-ringgit handout for low-income families.

Civil servants’ minimum pensions will be raised to 820 ringgit per month, and government workers will get an additional bonus of one month’s salary, Najib said. A 50 percent stamp duty waiver for first-home buyers will be extended till December 2014.

Real property gains tax will be raised to 15 percent from 10 percent for properties disposed of less than two years after purchase, Najib said. Total government revenue in 2013 is estimated at 208.6 billion ringgit, compared to 207.2 billion ringgit in 2012.

“The budget is targeted at low income households and traditional constituencies of support,” said Rahul Bajoria, a Singapore-based economist at Barclays Plc. “Revenue assumptions appear conservative. If they are able to deliver these results, other programs to transform the economy will gain more traction.”

’Sustainable Debt’

Najib’s ruling coalition won re-election in 2008 by the smallest margin since independence in 1957 after facing a resurgent opposition led by Anwar Ibrahim. Its five-decade grip on power will again be tested in a vote due by early 2013.

Earlier, the Ministry of Finance in its annual report said Malaysia is committed to further reducing the budget shortfall to 3 percent by 2015. Total government debt, estimated to reach 502.4 billion ringgit, or 53.7 percent of GDP this year, will not exceed 55 percent of GDP, according to the report.

Malaysia’s subsidy bill may increase 17 percent to 42.4 billion ringgit in 2012, the finance ministry’s report showed. The cost to cap prices of essential goods including fuel, sugar and cooking oil, and provide for social welfare programs may decline to 37.6 billion ringgit in 2013, it said.

“The government remains steadfast in its commitment toward prudent financial management,” it said. “The debt remains sustainable while the deficit will be financed mainly through domestic sources.”

Sugar Subsidy

The government has shelved a plan to cut subsidies on the widely used RON 95 grade of petrol since December 2010. Liquefied natural gas companies will get 100 percent tax exemption for the first three years of operation, Najib said yesterday, while the sugar subsidy will be reduced.

Malaysia will spend 49.7 billion ringgit on development, including infrastructure and agriculture, Najib said. A fund of 1 billion ringgit will also be provided to encourage the growth of small and medium enterprises and industrial areas, he said.

Private and public consumption is projected to expand 4.2 percent in 2013 and remain the main driver of domestic demand, according to the finance ministry’s report. Economic growth unexpectedly accelerated to 5.4 percent last quarter, even as exports fell for the first time in three months in July as Europe’s debt crisis hurt demand.

Inflation is expected to average between 2 percent and 3 percent in 2013, the report said. Price gains held at 1.4 percent in August, the lowest rate among Southeast Asia’s major economies, prompting the central bank to keep interest rates steady for an eighth meeting this month.

Monetary policy continues to be supportive in providing a stable environment to promote growth, while managing the risk of inflationary pressures and avoiding financial imbalances,” the report said. “This policy stance will continue to be assessed against the risks and outlook for growth and inflation.”

To contact the reporter on this story: Chong Pooi Koon in Kuala Lumpur at pchong17@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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