MIER believes Budget 2017 will be mildly expansionary

Posted on 19 October 2016

Source: The Sun Daily

The Malaysian Institute of Economic Research (MIER) expects the government to announce a mildly expansionary budget on Friday to boost domestic demand, a key driver for the economy.

This is despite the government having to stick to its fiscal deficit reduction path.

Speaking at a media briefing here yesterday, MIER executive director Dr Zakariah Abdul Rashid said the external environment is still uncertain, and Malaysia has to depend on domestic demand to sustain its growth momentum, with a focus on private consumption and private investment.

“The government needs to put energy into domestic demand as the external environment is not forthcoming to push the economy forward,” he explained.

MIER has revised upwards domestic demand growth for the year from 4.5% to 4.6% in anticipation of positive response to Bank Negara Malaysia’s monetary policy easing in July.

Private consumption and private investment are projected to expand by 5.4% and 5.5% respectively in 2016 compared with 6% and 6.4% in 2015.

To boost domestic demand, Zakariah noted that BR1M handouts are needed to increase disposable income of the B40 (bottom 40% household income group) group.However, he stressed that BR1M should be a short-term measure only and should not be extended to the M40 (middle 40% household income group).

“Direct income transfers should be implemented on a selected basis, more for welfare reasons rather than for expanding private consumption,” he said.

Zakariah also expects the government to announce some tax measures, such as reduction of income tax.

To encourage private investment, he suggests more incentives be given to lure more producers to invest in Malaysia.

“The government can also give preferential financing rate to SMEs (small and medium enterprises) and help them in the form of technology and production.”

Zakariah foresees high impact infrastructure projects to continue next year to improve short-term demand and production capacity of the economy in the longer run.

Meanwhile, Zakariah said he is confident Malaysia will be able to achieve its fiscal deficit target of 3.1% of gross domestic product this year despite RAM Ratings expressing its concern over the shortfall in government coffers.

“We’ve no doubt at all. In the past years, the government has been serious about this (fiscal deficit). They’ve shown a good track record in adhering to that target,” he said.
RAM Ratings expects this year’s fiscal deficit will be higher at 3.3%.

While acknowledging its commitment to stick to the fiscal deficit target, Zakariah said the government has no choice but to spend in a bid to mitigate the sluggish external demand. “This is an art of balancing, the government has to balance well between spending and cutting the deficit.” 

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