Budget 2017: Pikom anticipates a focus on SMEs, moves to spur domestic demand

• Initiatives to spur domestic demand from a business investment perspective are needed
• SMEs, which contribute about 36% to GDP, must continue to receive support

 

THE landscape of our country is influenced by social, economic and political factors that are both domestic and global.

Falling commodity prices, the weak ringgit, negative news on Malaysia, growing instability on the political front and slow GDP growth are affecting the nation and her economy.

In view of all these factors and the upcoming Budget 2017, Pikom feels that the government needs to address several pressing issues.

Current economic landscape
Some of the factors that are impacting Malaysia country include declining crude oil prices, the upcoming US elections and the Federal Reserve’s interest rate decisions along with the continuing conflict in Syria and the weakening ringgit against the US dollar.

On the home front, negative news about Malaysia in particular with regards to 1MDB and growing instability in the local political scene along with rumours of an early election in 2017 are contributing to a general fear of an unfavourable economic climate.

Malaysia’s economic growth (GDP) is at its slowest, averaging about 4% in the first half of 2016. If this continues, there is a possibility of growth remaining at 4% or falling even further by the end of the year.

What to expect in Budget 2017?
According to the Pikom ICT Job Market Outlook in Malaysia 2016, one of the main driving forces for the local economy is ensuring sustainable strong private sector-driven domestic demand, in the hope that this will cushion the economy from negative external impacts.

This will however, not be enough as Malaysia is an export oriented economy and will continue to depend on a healthy global economy.

The budget will also have to take into account the people’s wellbeing given that the implementation of GST in 2014 attracted lots of criticism. To instil confidence in global investors, we must reduce our budget deficit year-on-year.

In the light of all this, Pikom feels that the budget must at least address four key areas:

• Spur domestic demand from a business investment perspective;
• Cushion the people from further inflationary impact,
• Continue to grow the SME market, and
• Maintain a year-on-year decline in the budget deficit.

Some of the immediate initiatives to spur domestic demand for businesses will be a reduction of corporate tax, perhaps by 1%. This will make us more competitive compared to other economies in the region but would mean a loss of tax revenue to the government.

Increasing the threshold of the first tranche of tax rate for personal tax will also help in easing the burden of the lower income tax payer. However, Pikom is are not convinced that this will greatly ease the burden of lower income earners as the net effect may be very minimal; hence we believe that this will not be in the budget.

Increasing cash handouts (or BR1M) to lower income earners may be another way of encouraging domestic consumption but this is a short-term remedy that can be counter-productive to the economy as a whole in the long run.

With an impending election next year, this may ‘kill two birds with a stone’ i.e. a ‘sweetener’ while ‘pumping’ additional money into the system via consumption. There is a likelihood that this will be announced in the budget.

Capital investment, construction and infrastructure projects will still be ongoing if not increased which can put further strain on capital expenditure but it may be inevitable if the aim is to continue economic growth and spur domestic consumption.

To promote continuing growth, the deficit for this budget will not decline year-on-year but will perhaps remain the same as last year.  This may pose a risk to our sovereignty rating if maintained beyond 2017.  Again the government may not have a choice here.

Effective and efficient collection of GST will also ensure that collection targets are met. In 2016 GST collection fell short during the first quarter but we do not anticipate this continuing as the Customs are intensifying their audit activities which are supplemented by a better understanding of input and output taxes by the business community.

The GST rate of 6% will remain and will not be increased nor decreased despite calls for abolition and reductions.

Another silver lining on the horizon will hopefully be a gradual increase in the price of crude oil along with the strengthening of the ringgit against major trading currencies. 

SMEs are also expected to benefit from incentives announced in the budget. Given that SMEs are the future backbone of the economy, contributing about 36% to GDP in 2015, continued support of this sector is utmost critical.

Other crucial areas which can potentially alleviate the hardship of the people includes affordable housing, continuous funding for education at all levels and public health. We will see incentives and programmes for these areas announced in the budget.

As can be seen from the above analysis, that this year’s budget is going to be a ‘balancing act’ and must be executed with utmost care, as there is a risk of either incurring the wrath of overseas investors which would impact Malaysia’s sovereign rating or domestic businesses and Malaysians.
 
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