Malaysia Slashes Spending In 2010 Budget

AFP - 10/23/2009

Malaysia slashes spending in 2010 budget

Malaysia slashed government spending in the 2010 budget, moving to rein in a fiscal deficit swollen by stimulus measures aimed at pushing the economy out of recession.

Prime Minister Najib Razak said an extensive fuel subsidy system, extremely popular with the public but a drain on national coffers, would be revamped next year but did not give details of the cuts.

He said the economy would shrink by 3.0 percent this year, less than a 4.0-5.0 percent contraction tipped earlier, but that it could bounce back and post modest growth of 2.0-3.0 percent in 2010.

"Major indicators suggest the economy is on track to recovery," said Najib, who is also finance minister, adding that "Malaysia's economic fundamentals remain resilient, despite the more challenging environment in 2009."

But he said the downturn, which hit Malaysia's export-dependent economy hard, showed it needed to address its long-term competitiveness and shift to a new model "based on innovation, creativity and value-added activities".

"We are now at a critical juncture, either to remain trapped in a middle-income group or advance to a high-income economy," he said.

Najib said Malaysia needed to strengthen domestic demand, lose its reliance on cheap imported labour, and introduce liberalisation measures to enhance competitiveness.

The 2010 budget allocation totalled 191.5 billion ringgit (56.6 billion dollars), 11.2 percent lower than the revised allocation of 215.7 billion ringgit for 2009.

"This allocation reflects prudence in government spending and gives priority to value-for-money," said Najib, adding that the cuts would not harm public sector delivery.

Operating expenditure will be slashed by 13.7 percent to 138.3 billion ringgit in an unprecedentedly large cut, helping reduce the fiscal deficit from 7.4 percent this year to 5.6 percent next year -- much lower than expected.

Wan Suhaimi Saidie, an economist with Kenanga Investment Bank, was cautious about the ambitious move to rein in spending.

"It's a big surprise for me because, in spite of the economic recovery, the government is already consolidating its fiscal deficit by substantially cutting down the operating expenditure as well as reducing development spending."

"My view is that (the cut) will affect the efficiency of the government machinery. My view is that the maximum you can cut is 5.0 percent," he told AFP.

Opposition leader Anwar Ibrahim applauded the move to cut costs but said he doubted whether it would be achieved, and that the budget did not address rampant corruption which was one of the causes of overspending.

"I have no qualms about the stated pronouncement on the attempt to ensure Malaysia becomes more competitive and reduces waste, but actions speak louder," he told AFP.

Najib said the government, which was hit with severe criticism over past cuts to petrol subsidies, would implement a "fuel subsidy management system" in early 2010 but gave no further details.

He also said the government is "at the final stage" of a study into implementing a long-considered goods and services tax (GST) to replace the current tax and services tax.

"The purpose of this study is to ensure that if the GST needs to be implemented to stabilise government finances, it will not burden the people," he said.

Average consumer price inflation is predicted at 1.0 percent this year, slower than the forecast of 1.5-2.0 percent by the central bank in March.

Exports are expected to shrink 19.2 percent in 2009, but could rebound to record 5.1 percent growth in 2010, it said.

Malaysia has announced two stimulus packages, the most recent in March billed as containing some 60 billion ringgit (17.7 billion dollars) in measures to pump-prime the economy.