Wednesday, November 1, 2017

Thoughts on Budget 2018

I missed most of the Budget speech this year, having just landed from an overseas trip. That and jet lag meant I’m late in catching up on things, and today’s the first day I’m comfortable enough with the numbers and the anmouncements to actually comment on them. I’ll have something more to say about the opposition’s alternative budget(s) later.

First up, on the economic forecasts (2017: 5.2%-5.7%; 2018: 5.0%-5.5%). They’re eminently achievable, especially with the high frequency data coming in. The numbers continue to surprise on the upside, though some of that is coming from the low base we had last year. Even if we see just trend growth for the rest of 2017 and into 2018, the forecasts should bear out.

I’ll note in passing that MOF sees lower trade growth but stronger consumption growth for 2018, which is more or less what I also think will happen. Next year’s corporate earnings reports should feed into higher salaries and bonuses for workers, which should sustain economic growth in 2018, even if global economic expansion slows.

That means the revenue growth targets are also well within reach, especially given how aggresive IRB have been in the past couple of years (RM millions; log annual changes):



Revenue and operating expenditure growth will be running at about 6.2%-6.3% in log terms, which will actually be lower than the overall rate of economic growth. As a result, both revenue and opex will drop relative to GDP (% GDP):


So despite this being an “election” budget, fiscal consolidation is still very much in focus. That makes this coming general election and the previous one real oddities in Malaysian history – in both cases, expenditure growth dropped in precentage terms as well as relative to GDP. Not exactly opening the purse strings to buy electoral success.

Based on the forecast numbers, debt to GDP should also continue to drop, to just over 50%:


There’s some uncertainty over the % GDP estimates of course, since MOF has traditionally been conservative with their revenue forecasts, while some portion of development expenditure will be financed out of revenue instead of borrowing. Also, there’s always some uncertainty over NGDP, especially since I think we’ll see a rebasing to 2015 prices next year, and rebasing exercises tend to boost the size of NGDP (relative to previous base years). So there’s a risk that the debt to GDP ratio might actually fall below 50% for the first time since 2010.

This year, I took the trouble to tabulate expenditure on a ministry level. The bulk of the increase in expenditure (opex + development) comes from just 6 ministries/depts, with over two thirds of the difference between this year and next year: Education, Health, Higher Education, Treasury, the PM’s Dept and JPA (in that order). Three ministries saw outright cuts: Housing and Local Development, Works, and Science and Technology. I don’t know if too much can be read into this – for example, the biggest year on year increase in opex is for the Election Commission (+662.2%), for obvious reasons. One-offs, projects and the like can cause unusual spikes in budget allocations.

Now, for the individual measures, or at least those that were announced. It’s a smorgasbord of pretty much something for every part of society, as befits an election year. I’m not about to go into a line-by-line commentary on the lot, one because there are far too many and two, because just being announced doesn’t mean its a new initiative.

So I’m only going to comment on those that caught my eye:

  1. ADAM50 – I like this because its cheap, its reasonably effective, and its not just financial. There’s the whole national identity, citizenship rights angle.
  2. 2% income tax cut for income between RM20k to RM70k – I’m not in favour of this, even though it does boost disposable income, for a number of reasons. First, it applies to every taxpayer, not just those in the specific income tax bands. Second, although it increases the progressivity of personal income tax, it comes at the expense of narrowing an already perilously narrow tax base (261k people drop out of the tax net). Third, it increases the likelihood of a larger GST hike down the road.
  3. Changes to GST – most of the changes here are minor, and streamline administration, which is good. The relief for “big-ticket” items, not so much.

And that’s pretty much it. If there’s anything else you’d like me to comment on, sound off in the comments section.


  1. Hi Hishamh,

    Does fiscal consolidation reflecting our current sectoral balance condition?

    1. @Group 8

      Not really, since a big portion of government investment is off-budget. Sectoral flows should still be showing a substantial public deficit, even if the budget shows the gap closing.

  2. There was something about Voluntary Insurance Scheme, what is it about?

  3. "since MOF has traditionally been conservative with their revenue forecasts"

    Is it so? I recall last year's tax revenue forecast was quite ambitious, like 8%-ish growth in income tax if I'm not mistaken. Not sure how well they fared so far. Though their oil price assumption was indeed quite conservative.

    1. @Fung

      2014-2016 were the exceptions to prove the rule. Since 1998, the underestimate averages 3.8%. The biggest miss was in 1998 (21.8%), and they also had a double digit underestimate in 2011-2012. If oil stays where it is today, I think there's a bigger risk of an upside surprise to revenue.