Budget 2023 No Wow For Now

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Budget 2023 is not a reform budget and played-it-safe with no particular ‘wow’ factors but it does lay the foundations for the reforms people are waiting for impatiently.
(FMT) – Budget 2023 has too many civil service policy spoons and the communication of the main messages and themes leaves a great deal to be desired.
Nonetheless, it did meet many expectations I laid out beforehand with greater emphasis on a firmer basis for spending and revenue. As expected the deficit ratio is lower even if borrowing is basically unchanged.
Development spending is higher and targets better value for money. There is a clearer idea of priorities for operational spending and cutting waste and leakages.
On the revenue side, there is of course no GST but some minor tax changes signalling a full review of the tax system.
Cost of living interference still insists on subsidies which transfer money to companies rather than the rakyat. The promised alternatives to EPF withdrawals and subsidy rationalisation are simply not there.
A hidden diamond is targeted help for the B10 group of hard-core poor through a monthly cash transfer to raise incomes to RM2,500. Hopefully this is the first step towards a universal basic income model.
Forced to spend more
Many economists seem impressed by the record RM388.1 billion allocation, inflation-adjusted by 4.3% above the abandoned October 2022 budget but 19.8% higher than the original 2022 budget.
This “my budget is bigger than yours” is the stuff of adolescent schoolboys. In fact the government has been suckered into raising the ante in a game of fiscal poker.
The massive overspending in 2022 was a vulgar pre-election push bolstered by EPF withdrawals. It caused an inflationary boom, higher interest rates and sent millions into old-age poverty. Now the government has to at least match it or risk a contraction in GDP from the high base of 2022.
The deficit level is almost unchanged even if the deficit ratio is lower due to higher GDP and the subsidies bill is only smaller at RM64 billion because of the reduced oil price.
The debt level is not worrying and cannot be reduced quickly anyway. More worrying are the contingent liabilities, which includes PTPTN, which are now more unstable. The cost of debt financing remains high with few indications of how to tackle it.
The inflation forecast has been raised on the upside and with the fiscal expansion this puts pressure on BNM to raise interest rates after the pause last month.
Full tax reform needed
The need for full tax reform is clear from the ad hoc attempts to broaden the tax base. A tax on luxury goods with a market of RM8.4 billion would raise only RM420 million if the tax was 5% for example.
Higher income tax on the T20 might raise RM1.7 billion to RM3.4 billion or 0.6% to 1.2% of government revenue. This is bigger than the luxury goods tax but less than savings from cutting waste or improving tax efficiency overall.
Of course 2.4 million M40 taxpayers will welcome their tax cuts but it will not make them rich. The saving is only RM25 per month for those earning between RM35,000 and RM50,000; RM50 per month for those earning between RM50,000 and RM70,000 and RM110 per month for those earning between RM70,000 and RM100,000. So most people will hardly notice the change.
The impact will be seen when lower tax for the M40 increases spending and raises company revenue. This increases income from SST and company tax and is net positive for the economy. This key benefit of tax reform has not been communicated properly.
Pensions and social protection
We did not see any significant structural changes as an alternative to EPF withdrawals or anything to address the pensions crisis.
There is one initiative to consolidate the database for monthly welfare recipients which might signal structural reform but no significant change in welfare support for now. The social assistance allocation of RM8 billion for 8.7 million people is less than RM920 each for example.
Direct cash assistance to those with household income below RM2,500 looks like the beginning of a universal basic income or assistive basic income scheme. This is a good initiative but the food vouchers for this group should be provided in cash to allow them greater choice in how to spend it.
Help for micro, small and medium enterprises
Help for MSMEs is largely in the form of loan facilities worth RM40 billion. This raises the question of whether the 1.2 million companies with five or fewer employees will be keen to take on extra debt when cash flows have not fully recovered. Since they will have to apply and be vetted for these loans it may be slow to implement and many might simply give it a miss.
The 2% tax cut for MSMEs is welcome but worth only RM3,000 or RM250 per month for companies earning RM150,000 and most of the 78% of MSMEs with fewer than five employees do not post profits to pay tax anyway.
The idea of encouraging GLCs to invest RM1.5 billion in start-ups is also unclear. Why would GLCs do this? How will they choose the start-up? Would it not be better to offer business contracts and sales rather than own non-core micro-enterprises?
Both BN and PH manifestos promised less involvement of GLCs in the economy lest they crowd out MSMEs. It would be better for GLCs to privatise their subsidiaries and free up the market.
Implementation challenges
One major concern is that the list of initiatives is still very long and the bureaucratic design will open up more opportunities for leakages and wastage. Instead of simple cash transfers to targeted recipients there is a continuation of providing projects to specific groups with no obvious or transparent mechanisms to do it.
The assistance for MSMEs for example relies on voluntary applications and business proposals have to be vetted and approved. This will take some time to implement and many MSMEs will not bother.
So although the budget set out some clearer and firmer foundations, it is still driven too much by old-style thinking and lacks the reform agenda that people crave. This requires not just the change in government and prime minister that we now have but also a change in mindset and approach that we urgently need.

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