The 2011 Budget, which will be tabled to Parliament on October 15 will likely gear towards achieving the goals set under the 10th Malaysia Plan (10MP) and New Economic Model (NEM).

The government unveiled the NEM in March this year, aimed at transforming the country into a high-income nation by 2020. This will be achieved partly through an Economic Transformation Programme (ETP) with the help of the eight Strategic Reform Initiatives (SRIs).

azlan In line with one of the SRIs to re-energise the private sector, the 10MP aimed to push the private sector to be the locomotive in driving the economy.

It targeted to grow private investment by an average of 12.8 percent a year for the next five years, a sharp uptake from an average of plus two percent estimated for the 9MP and plus 1.2 percent in the 8MP.

According to research firm RHB Research Institute Sdn Bhd (RHB Research), the performance of the private investment has been lacklustre since the onset of the Asian currency crisis in 1997-1998 due to various reasons, including keen competition for foreign direct investment (FDI), the lack of skilled manpower, government policies and its delivery system.

The poor performance of the private investment over the last 15 years had contributed to a downshift in the country's real gross domestic product (GDP) growth, which expanded at an average rate of 3.8 percent a year in 2006-09. Although the government had put in a lot of efforts to encourage private investment, the results were still disappointing.

"Despite the challenges and difficulties faced by the country in drawing in FDI and encouraging local investors to invest, we believe the government will continue its efforts in encouraging private investment, as it is important to rejuvenate the country's economy in order to prevent it from sliding further," said the research firm.

Enhancing the delivery system

It expected the government to undertake the following measures in the forthcoming budget, namely to realign some of the tax incentives and to custom make some of it to cater to the needs of specific industries under the 12 National Key Economic Areas (NKEAs) identified under the 10MP as well as to enhance its delivery system and ensuring that the Government Transformation Programme (GTP) is cascaded down to state and local government levels.

"We believe the government will also be looking at how to provide the right funding, which includes access to private equity and venture capital, for businesses to venture into new activities, as part of its move to accelerate private investment in the country," said RHB Research.

While cutting corporate income tax would help in encouraging private investment, it was not expected to happen in the forthcoming budget due to the budget constraints.

azlan Furthermore, the government had delayed the second reading of the Goods & Services Tax (GST) in Parliament indefinitely. Without an implementation of the GST, it would be difficult for the government to do a more meaningful corporate tax reduction, given the narrow tax based structured where oil revenue contributes nearly 40 percent to the government's coffers and only about 10 percent of the working population pay income tax.

Consumers' role more prominent

While private investment has taken a back-seat in driving the country's economy, consumers' role in the economy had become more prominent in the last few years. As a result, consumer spending's share of GDP has risen to a high of 53.7 percent in 2009, from 43.8 percent in 2000.

Among the most significant measures undertaken by the government was the cut in employees' contribution to the Employees Provident Fund (EPF) by three percentage points on a voluntary basis to eight percent of employee's income effective Jan 1, 2009 and for two years when it announced the first economic stimulus package in Nov 2008.

In the 2010 budget, the government also reduced the maximum personal income tax rate by one percentage point to 26 percent for income earned starting 2010 and raised the personal relief from RM8,000 to RM9,000.

RHB Research further added, "Although the EPF contribution will be reversed to 11 percent, we do not expect the government to announce a further reduction in personal income tax rate in the 2011 Budget to encourage consumer spending since it has just been cut last year. Also, the Government will unlikely introduce new measures to encourage consumer spending given that the economy has emerged from the recession in 2009."

The reduction of withholding tax has always been included in the proposals by MREIT players for the government's consideration during the last few annual budgets.

Therefore, there was a possibility that the withholding tax rate might be reduced from the current level of 10 percent or removed completely, in comparison to zero percent in Singapore and Hong Kong.

Budget deficit

The budget deficit has reached a high of seven percent of GDP in 2009, the highest in 22 years, partly on account of the implementation of the economic stimulus packages to cushion the economy from the severe global recession.

azlan The government, however, has begun to consolidate its fiscal position in 2010 with the aim of reducing its deficit to 5.3 percent of GDP in 2010.

It was expected that the government would likely cut its gross development expenditure by about 19 percent in 2011. This would bring the total development expenditure to RM43.8 billion compared with an estimate of RM54.2 billion in 2010.

Furthermore, the government intends to shift its expenditure from ‘physical hardware' to build ‘soft infrastructure' where the latter's share would be raised to 40 percent of its total development spending in the 10MP, from 22 percent in the 9MP.

"This implies that construction companies, particular small- and medium-sized contractors that are involved in building construction and utilities works, are likely to be affected, in our view. On the other hand, we expect companies that provide training and upgrading of skills to benefit in the budget," said the research firm.

Although the government might introduce new ‘green' taxes that were environmental friendly, to encourage industries to cut down pollution, the impact on its bottom line was unlikely to be significant.

On the other hand, there was a likelihood that the government might dish out incentives to encourage activities in renewable energy, energy saving industries and ‘green' technology.

This article first appeared in The Borneo Post .