Bank Muamalat Malaysia chief economist Afzanizam Rashid has given the thumbs up to the administration for lowering the fiscal deficit.
The government outperformed its fiscal deficit target in 2024, achieving a reduction to 4.1% of gross domestic product (GDP) from 5% the previous year, an improvement from its initial forecast of 4.3%. The fiscal deficit was at 5.5% in 2022.
The fiscal deficit has been on a steady decline since the unity government took power in late 2022. It is projecting a deficit of 3.8% of GDP in 2025.
A fiscal deficit occurs when a government’s total expenditures exceed its income, excluding borrowings. Fiscal deficits are an essential indicator of a country’s financial health, representing the amount by which government spending surpasses revenue in a given fiscal year.
“I think it (fiscal consolidation) is well on track,” said Afzanizam, noting the government’s total revenue had risen to RM324.6 billion in 2024, which is higher compared to initial government estimates of RM322.1 billion.
“The ministry of finance has indicated the sale and services tax (SST) collection has risen to RM44.7 billion. Again, this has exceeded their expectation of RM41.3 billion,” he said.
In addition, the government has enacted a series of measures such as 10% low value goods tax, raising the services tax rates from 6% to 8%, e-invoicing as well as rationalising the diesel subsidies, he added.
“All these has translated into lower fiscal deficit of RM79.2 billion versus the government estimates of RM84.3 billion,” he said.
However, he noted the statutory debt which comprises of Malaysian Government Securities (MGS), Government Investment Issues (GII) and Malaysian Islamic Treasury Bills (MITB) is about 62.5% of GDP as of 2024, slightly higher than 61.7% in the previous year but still below the 65% limit.
“Therefore, it is critical to ensure that the fiscal consolidation momentum continues,” he added.
Staying the course
In the effort to lower the fiscal deficit to 3% as outlined in the Public Finance and Fiscal Responsibility Act 2023, the government has to stay the course.
“The next thing to watch is the RON95 subsidies rationalisation. And perhaps, bringing back the goods and services tax (GST) at some point in the future,” he said, adding this would ensure the government is able to tax effectively, especially the shadow economy which is said to be around RM300 billion.
He said the government is trying to strike the right balance and so far, it has done well. He added Bank Negara Malaysia (BNM) had also contributed to the economy’s steady development.
“They were able to normalise the overnight policy rate (OPR) from an all-time low of 1.75% to 3% between 2022 and 2023. It is a joint effort between the fiscal and monetary authorities so that Malaysia’s aggregate demand would remain intact,” he said.
Afzanizam said this improves the government’s credibility in managing the economy and was reflected by Moody’s Rating’s reaffirmation of the Malaysian government’s sovereign rating at A3 with a stable outlook.
On possible risks that may derail the government’s well-laid plans, he cited “any severe economic shock such as a recession”.
“If this happens then the government would need to switch into fiscal pump priming mode which would affect the fiscal balance. Ideally, the government should strive for balanced budget when things are normal and turn to deficit spending when negative shocks happen.”
He said having a low fiscal deficit such as below 3% of GDP was important as this will keep the government debt level in check.