Fiscal responsibility is the key in Budget 2025

 

Budget 2025 has a hard act to follow from last year when Prime Minister Anwar Ibrahim, who is also the finance minister, presented one of the best budgets in two decades.

The fundamental principles of moderate increases in spending, higher revenues from economic growth and higher savings from better management and subsidy rationalisation must be continued to create space for government spending without excessive borrowing.

It is likely that Budget 2025 will be larger because of wholly justified commitments already announced including higher civil service salaries which will add at least RM10 billion. Pensions, higher allocations to Sabah and Sarawak and new policies including the New Industrial Master Plan 2030 (NIMP), the National Energy Transition Roadmap (NETR) and the progressive wage model also point to extra spending.

At the same time there should be savings from subsidy rationalisation and cutting wastage, leakages and corruption, in addition to extra revenue from economic growth and high oil prices which support oil royalties.

So, on the operating expenditures side we expect slightly higher spending in line with inflation, and higher revenues and savings to pay for it. This should ease the deficit but the percentage of deficit and debt to gross domestic product (GDP) will be lower, at around 3.5% and 64% respectively, mostly because growth is higher.

In absolute terms, debt and debt financing remains a huge burden and must be contained. It was RM49.8 billion or 16.4% of the budget last year.

There is a strong case for lower development expenditures (DE) to reduce the need for higher debt.

First, the Madani Ekonomi target of RM415 billion for 2021-25 was set in the Mid-term Review of the 12th Malaysia Plan. By mid-2024 around RM266 billion had been used with RM56 billion for the remainder of this year. This leaves RM93 billion for 2025 which is more than is necessary, allowing space to cut DE below the RM90 billion allocated for last year.

Second, the PPP Master Plan 2030 (Pikas 2030) opens up new approaches to public-private partnerships (PPP) which can make them quicker and cheaper.

Third, the rise in foreign direct investment, domestic private investment and the refocus of government investment leveraging the RM120 billion GEAR-up programme from the six main GLICs should ease the need for extra government development spending.

All of this is in line with a responsible fiscal policy under the Fiscal Responsibility Act and the Medium-Term Fiscal Framework but we will also be interested to see if there are further announcements on the Government Procurement Act and responsible privatisation following the reviews of the statutory bodies and the audits of 2,000 GLCs.

In addition, we will be looking for clear commitments on subsidy rationalisation and the savings from that, as well as the new minimum wage and the scope of the progressive wage policy to raise incomes and address the cost of living.

These have been identified as key priorities by the Prime Minister in the run-up to Budget 2025 and must be at the centre of his speech.

A central concern about the Malaysian fiscal position is the ratio of committed and non-committed spending. In Budget 2024 committed expenditures on civil service pay and pensions, subsidies and social assistance and debt service charges took up 76% of spending before the remaining 24% could be allocated to other priorities.

With pay, pensions and debt costs likely to rise, the scope for other spending priorities will be more limited this year unless significant subsidy savings and extra revenue can be found. This will be the real challenge for Budget 2025 and requires skill and fiscal discipline to handle effectively.

If he can do this, Anwar will deliver the best budget of possibly any finance minister before him. - FMT

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.