The recent Budget 2008 announcement shows that the government is committed to consolidating its financial status. While giving due consideration to the country’s longer-term development needs, the government is targeting to reduce its budget deficit to 3.1 per cent of GDP in 2008, from 3.2 per cent in 2007. After announcing measures to boost the property sector in April 2007, and again raising the salaries of public servants in July, it is fair to expect the budget to have fewer things to offer. Nonetheless, the budget is not short of benefits to the poor and the less fortunate, and some business sectors are given more incentives. The Budget also considers the uncertainty in the global economy owing to the US sub-prime turmoil.

The anticipated personal income tax reduction did not happen, even for the purpose of aligning personal tax rate with the corporate rate. To promote investment and ensure that Malaysia remains attractive to foreign investors, the corporate tax will be reduced by 1.0 percentage point per year from 27 per cent in 2007 to 25 per cent in 2009. However, this is still high when compared with 18 per cent in Singapore and 17.5 per cent in Hong Kong. The gradual reduction in corporate taxes would mean a potential loss in government revenue. To top up revenue and reduce the deficit, the goods and services tax (GST) becomes more relevant in future years. The foundations for the GST have to be laid down first to ensure proper functioning. At present, the high oil price has been a gain to government revenue, making up about one-third of total revenue.

There is also good news for businesses. To transform Malaysia to become a global Islamic financial centre, foreigners are allowed to wholly own Islamic fund management companies. Tax exemptions are given up to year 2016 and EPF is to mobilise RM7.0 billion into these companies. In the property market, to make house buying more affordable, a 50 per cent stamp duty exemption is given for the purchase of houses below RM250,000.

Housing for the people is given high priority. A RM50 million fund will be set up to provide guarantees to banks so that farmers and small traders who do not have regular income can purchase houses, backed with proper safeguards to prevent a sub-prime crisis. To partly offset the rise in the cost of living and boost consumption , EPF contributors can withdraw their savings to pay-off their housing loans, releasing RM9.6 billion into the economy. Fears have been raised that this move could reduce savings intended for old age, but then again, re-investing part of EPF money on a house is not totally a bad idea. There is a need to ensure there is sufficient EPF savings for old age especially when living costs are rising, and that the money is to be spent wisely. Insufficient attention to the welfare of the elderly could lead to serious social problems.

Steps to raise the quality of human capital continue to be one of the highlights of the Budget. Investment in human capital may not be as noticeable as building a bridge but its longer-term impact on the economy is extensive. The number of scholarships to university students has been doubled to 10,000, from 5,000 previously. Free textbook to all school children will reduce some financial burden of parents. Tax relief of RM5,000 on fees has been given to all post-graduate students.

On the whole, Budget 2008 is a realistic and practical budget, though it may not please everyone. The government has to make hard choices of balancing between funding for growth and development, while at the same time reducing the deficit gradually. In light of the recent Auditor General’s Report, it is important that money be spent efficiently, avoiding wastage at all cost and that projects should benefit a large segment of society. A prudent budget would leave some room for the nation to fall back on in the event the external environment is not condusive to Malaysia.

Encik Azidin W.A.Kadir
Senior Research Fellow
Malaysian Institute of Economic Research
25 September 2007