Saturday, August 30, 2008

Malaysian Budget 2009: Macroeconomic Views & Critics

Malaysian Budget 2009

The Prime Minister has embarked another round of ambitious spending which puts the Federal Government’s fiscal deficit to an estimated level of 4.8% this year, up 1.6% compared to 3.2% in last year. Government’s revenue in 2008 is around RM 161.6 billion but this round spending cost us about RM207.9 billion (G > T, therefore budget deficit)

Overall the government expenditure increased by 5.1% this year compared to previous

What is unveiled & how can it help Malaysian economic growth?

(1) Public transport improvement. New LRT line of 42 km will be constructed from Kota Damansara to Cheras. This is expected to be completed by 2014. Meanwhile Kelana Jaya LRT line & KTM Komuter will be upgraded with more trains to cater the increased capacity of passengers. In Sabah & Sarawak, a total amount of RM 6.3 billion will be allocated for construction of federal roads & rural roads. This increase in G will lead to an increase in AD. Through multiplier effect, this initial increase will eventually lead to a multiple increase of AD

In long run, if it is effectively implemented, road congestion will be less severe & this can help firms to reduce transportation costs. From supply side argument, AS curve will shift right & national output will further increase

(2) Schools & universities. Additional 110 primary & 181 secondary schools will be built. More funds will be given for universities to conduct R&D. This increase in G will initially lead to increase in AD & therefore enabling Malaysia to achieve higher economic growth.

In long run, AS curve will shift rightward as we will have more productive & educated workforce

(3) Costs saving for bus operators. Toll discounts & sales tax can help to boost profits of bus operators. Having more profits they will be more inclined to spend onto investment e.g. upgrading & improving existing service, increase efficiency etc. The increase in I will lead to increase in AD

However in long run, AS will shift right as productive capacity of the economy has increased e.g. more capital goods like busses

(4). Social safety net
. Eligibility for welfare assistance is raised from RM 400 to RM 720 in Peninsular, RM830 for Sarawak & RM 960 for Sabah. As a result more people will be eligible for this welfare payment. On the other hand, minimum monthly pension of RM 720 are being passed out. Also disabled people who are unable to work will receive RM 150 monthly allowance. These three will help to boost household expenditure. Increase in C will lead to an increase AD & therefore economic growth

(5) Tax rebate. Current tax rebate has been increased from RM 350 to RM 400 for people with taxable income of RM 35,000 & below. With this, it is estimated that 100, 000 workers will be tax exempted. These people will have more disposable income & as such more can be spent into the economy. AD shifts right, enabling us to attain higher economic growth

From supply side, tax rebate should be able to increase employees’ incentive to work harder. Increase in productivity will lead to more output at lower costs as costs are being spread over a larger range of output. AS curve will shift rightward


1. Most of the fiscal measures sound nice on the paper. Whether all of it will materialise is another issue. Given the heavy red tapes in government administration, some policies had been delayed for ages e.g. LRT systems to Subang-USJ & Kinrara Puchong which was talked about in somewhere in 2005 (implementation lags)

2. Bus operators claim that they will still demand for 100% fare increase. This is upon 2 bases. Not all busses will go through tolls. Most travels within the city. As for sales tax, bus operators will only benefit if they buy new buses. Nothing had been addressed about the operating costs of existing fleet

3. Welfare assistance is insufficient to compensate for the increase in cost of living. For e.g. nothing much can be spent onto with a meager allocation of RM 150 allowance to non-working disabled. Also, effect of tax rebate is likely insignificant in boosting spending as it affects only 100, 000 individuals

4. Electricity bill exemption if it is lesser than RM 20 will not affect majority households even the poorest. With an increase in tariffs, even low consumption of electricity will likely surpass RM 20

5. Nothing was mentioned regarding the reduction of corporation tax although we have one of the highest tax rates in the region. This will likely discourage investment spending

6. More financial assistance for the poor may not even change their consumption pattern. In the period of high inflation, consumer confidence remain low & as income increase, they may likely save rather than spend. This defeats the objective of spurring economic growth. Unless these welfare payments are of significant amount

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