Unveiling new forecasts in the mid-term review of the five-year development plan, the government that was voted into power in May said it would cut development spending and rely more on the private sector to spur growth.
The announcement could have an impact on Malaysia’s sovereign credit ratings, which rating agencies have warned could take a hit if the government is unable to narrow its budget deficit. The revised forecasts also set the stage for an austere 2019 budget, due to be announced on Nov 2.
“During the transition period, the fiscal deficit is expected to temporarily be beyond the target set during the last budget before reverting to the fiscal consolidation path,” the government said in its review of the 11th Malaysia Plan.
The previous government of Najib Razak had forecast the deficit to narrow to 2.8% of gross domestic product this year from 3.0% in 2017.
The new government is now targeting the deficit to be 3% by the plan’s end in 2020. Originally, the plan predicted a balanced budget that year.
For economic growth, Malaysia now projects 4.5-5.5% a year for 2018-2020.
The plan Najib tabled in 2015 aimed for 5-6% per annum over the five years.
The revised report said fiscal targets will be “flexible during the transition period of the new administration to shore up growth”.
While in power, Najib halved the fiscal deficit from 6.7% in 2009. He also introduced an unpopular goods and services tax (GST) amid a decline in oil prices that cut a key revenue source for the government.
This placated ratings firms, which maintained Malaysia’s ratings within the A band even as the country grappled with weak global demand for commodities, and as the former prime minister faced graft allegations linked to state fund 1MDB.
But Mahathir scrapped the GST, as promised in his election campaign, soon after his coalition’s stunning May victory.
He reintroduced a sales and services tax, but that will still leave the government with a RM21 billion (US$5.05 billion) budget shortfall next year.
Mahathir has blamed Najib for taking the country into heavy debt. The new government has cancelled billions of dollars of public projects and said it may introduce new taxes and sell assets to pay off debt.
Today, the government cut its target for total development spending by about 15% in the five-year economic plan, setting a new ceiling of RM220 billion.
“Further private sector involvement in driving the economy will alleviate the impact of the reduced investment from the public sector,” it said.
The government expects private consumption to continue to prop up the economy, with its annual growth in 2016-2020 averaging 6.8% instead of the original 6.4% goal.
Exports are seen expanding an average 7.5% over the five years, from the 4.6% initial forecast. The plan now targets an RM118.3 billion trade surplus in 2020, up from the original RM57.3 billion goal.