Better Fiscal Discipline in 2025?

Under Budget 2024, the government had proposed to spend some RM90bil, which would likely leave some RM56.1bil to be spent for the second half of 2024 (2H24), as some RM33.9bil was spent in the 1H24. Hence, for Budget 2025, leaving everything else unchanged, the government should be tabling a gross Development Expenditure (“DE”) of approximately RM92bil. 

Government revenue is projected to be much higher than the revised projection of RM312.1bil that was presented in March this year. The government’s revenue is expected to jump to RM321.5bil this year, an increase of 2.1% year-on-year (y-o-y). The increase is expected as economic growth this year is poised to hit close to 5% GDP growth. 

On the same token, expenditure (operating) too will likely be higher at about RM317.5bil, Malaysia will likely show an operating surplus of RM4bil this year. This will lead to a budget deficit of RM85bil, translating to a marginally smaller budget deficit of 4.4%. The lower deficit is also due to accelerated expansion in the nation’s nominal GDP, which is expected to increase to RM1.95 trillion in 2024, up 7% y-o-y (1H24 increase was 6.3% y-o-y).

 

With the Malaysian economy poised to meet the 4% to 5% GDP growth target set for 2024, Budget 2025 will likely forecast higher economic growth, with a potential range of between 5% and 5.5%. 

The growth will be underpinned by public and private investment. Higher private consumption will likely be driven by higher minimum wage and increase in civil service pay packages. On the flip side, there could be an added burden to consumers in the form of higher consumer price. The gradual increase in the price of RON95 fuel will have some knock-on effect. Inflation may hover between 2% to 3% given the price pressure from the removal of fuel subsidies. 

For 2025, the government’s revenue is expected to surge to RM342.5bil, up 6.5% y-o-y, on the back of higher tax collections, especially with the implementation of e-invoicing and the GMT. Expenditures are expected to rise at a slower pace of 2% to reach RM324bil, giving a surplus of RM18.1bil. 

As the government’s finances are expected to be better next year, despite a marginally higher gross DE of RM92bil, the budget deficit will drop to the targeted 3.5% in 2025 as per the 12MP. Based on these figures, Budget 2025 will increase by approximately RM21.2bil or 5.4% y-o-y to RM415bil as the total allocation for this year was at RM393.8bil. 

The statutory debt-to-GDP ratio may reflect 62.4% and a federal government debt-to-GDP ratio of 64.5%, which is marginally higher than the 62.1% and 64.3%, respectively, achieved in 2023. 

S&P Global Ratings, Moody’s Investors Services, and Fitch Ratings have presently placed Malaysia at A-, A3 and BBB+, respectively, and may upgrade Malaysia in terms of outlook to “positive”, followed by a likelihood of an upgrade in rating by a notch to A, A2 and A-, respectively. 

This will be positive for the capital markets, as investors will be more willing to invest in both the fixed-income and equity markets, allowing the ringgit to improve against major currencies even further and on its strength. 

The bottom line is that Malaysia must show fiscal discipline to win over institutional investors and international rating agencies. This can be done via pragmatic and bold measures under Budget 2025.

 

Reference:

The importance of fiscal discipline, Pankaj C. Kumar, Insight, The Star, 5 October 2024