SINGAPORE – After nearly two years under Covid-19 movement restrictions that have stifled the economy and shuttered thousands of small businesses, Malaysian Prime Minister Ismail Sabri Yaakob’s government is betting that the largest budget in the country’s history will ease unemployment and spur a robust post-pandemic recovery.
The ambitious 332.1 billion ringgit (US$80.2 billion) spending plan is Ismail’s first since taking the reins as the nation’s ninth prime minister in August. The 2022 budget includes increased developmental spending, support for businesses, subsidies and cash aid, and a dedicated fund for combating Covid-19 and boosting public health care capacity.
Having signed an unprecedented political ceasefire with the opposition shortly after taking power, Ismail’s budget will likely win approval when Parliament votes on the plan in mid-November, analysts say. Ismail’s predecessor, Muhyiddin Yassin, only narrowly passed the 2021 budget amid speculation at the time that his government would fall.
The expansionary spending plan and its various support measures for low-income earners set the stage for an early general election that analysts suggest could be called as early as the middle of next year. Malaysia’s next polls must be held by 2023.
Finance Minister Tengku Zafrul Abdul Aziz announced the budget on October 29, saying that the government foresees gross domestic product (GDP) expanding between 5.5% and 6.5% in 2022, up from an expected rate of 3% to 4% this year, driven by the normalization of economic activities, a resumption of stalled infrastructure projects and rising external demand.
“However, this performance also depends on other factors, such as the success of pandemic control, the effectiveness of the implementation of vaccination programs as well as the strength of the world’s economic and trade prospects,” said Tengku Zafrul, a former banking executive who also served as finance minister under Muhyiddin’s administration.
In August, Malaysia’s central bank downgraded the country’s full-year GDP growth forecast to 3% to 4% from an initial range of 6% to 7.5%, a reflection of the severe Covid-19 outbreak that authorities have combatted with extended lockdowns, border closures, a ban on interstate travel and strict curbs on economic activity that have been in place for most of 2021.
After suffering 2.4 million infections and nearly 29,000 deaths out of a population of 32.7 million, the worst seems to have passed with the country now reporting 5,801 new infections on average each day from a daily infection peak of over 24,000 in August. Nearly 75% of the total population has been fully vaccinated under one of Southeast Asia’s fastest inoculation programs.
The government has since allowed interstate travel to resume and the full-capacity reopening of various sectors in a shift to treating Covid-19 as a manageable endemic disease. Authorities remain cautious about reopening borders, with the first quarantine-free travel bubble for the tourist island of Langkawi launching in mid-November.
Ismail’s administration has allocated 23 billion ringgit ($5.5 billion) for its Covid-19 fund and 32.4 billion ringgit ($7.8 billion) to the health ministry. Budget 2022 includes a 21.9% year-on-year rise in development expenditure to 75.6 billion ringgit ($18.2 billion) and a 6.3% increase in operational expenditure to 233.5 billion ringgit ($56.3 billion).
Total spending tops the 320.6 billion ringgit ($77.3 billion) budget for 2021 by 3.6%, and authorities have warned that fiscal consolidation is expected to be more gradual than expected amid higher pandemic-era outlays. Tengku Zafrul said the fiscal deficit is expected to climb to 6.5% this year, but is expected to moderate to 6% in 2022.
Total revenue for 2021 stands at 221 billion ringgit ($53.2 billion), 6.7% short of initial estimates and comparable to what the government raised in 2017. Total revenue is expected to rise by 5.9% to 234 billion ringgit ($56.4 billion) next year, which still won’t be enough to fund all the measures set out in the expansionary budget proposal.
To ease the deficit, a one-off “prosperity tax” for high-income companies with annual earnings above 100 million ringgit ($24 million) will increase the corporate tax rate from 24% to 33% for 2022. The tax hike will partly fund a 4.8 billion ringgit ($1.1 billion) allocation aimed at reducing Malaysia’s unemployment rate, which stood at 4.6% in August.
With global prices for liquefied natural gas (LNG) surging, analysts don’t rule out higher dividend contributions from state-owned companies such as national oil firm Petronas, which increased its 2021 dividends to the government to 25 billion ringgit ($6 billion) – the same amount it pledged for 2022 – from an initial target of 18 billion ringgit ($4.3 billion).
In October, Parliament approved an increase to the statutory debt limit to 65% of GDP, up from 60% previously, which Tengku Zafrul said would give authorities more wiggle room to borrow and increase funding for Covid-19 support measures. To date, Malaysia has rolled out 530 billion ringgit ($127.7 billion) worth of stimulus to soften the pandemic’s blow.
The government has on many occasions pledged its commitment to fiscal consolidation despite raising the debt ceiling for the second time in as many years. In a television interview last week, Tengku Zafrul said “pulling the brakes too fast” on an expansionary fiscal policy would inhibit the pace of Malaysia’s economic recovery.
“The slow pace of fiscal consolidation set out in the budget reflects the government’s concerns about the fragility of the recovery as well as a desire to keep the spending taps fully open ahead of the next elections, delaying any unpopular cuts/tax hikes,” said Peter Mumford, a Southeast Asia analyst with the Eurasia Group consultancy.
“Ismail is keeping his options open and could go to the polls late next year rather than wait until mid-2023, as many observers expect. The election timing will depend on the strength/pace of the economic recovery and dynamics within Ismail’s United Malays National Organization (UMNO) party and broader ruling coalition,” Mumford added.
Criticism of the budget from the Pakatan Harapan (PH) opposition coalition has been muted, with Tony Pua, PH’s economic committee chairman, remarking soon after Tengku Zafrul’s budget speech that the minister “must be commended for agreeing to adopt a series of critical measures” proposed by the opposition bloc.
In an online commentary, Pua praised the “extensive engagement” between the government and opposition on budgetary measures to improve social security and boost employment, but said the spending plan “falls short of highlighting any measures or strategies to evade an impending budget crisis in the near future.”
According to opposition leader and PH chairman Anwar Ibrahim, the opposition participated in “no fewer than 13 consultations” on the budget with the finance ministry. Under the deal struck with Anwar’s coalition in September, Ismail’s government must undertake a consultation process with the opposition on every new law it proposes.
In exchange for the government agreeing to enact a slew of welfare policies and institutional reforms sought by the opposition, PH has agreed not to obstruct the government on critical votes in Parliament that could have implications for its survival, including budgetary matters.
“PH’s key demands for the 2022 budget were mostly unspecific, making it easier for its members to back the bill (or abstain) while looking like they have secured what they want,” said Mumford. “While some measures may be tweaked during the parliamentary process, the overall size/shape of the budget is unlikely to change significantly.”