Wednesday, June 24, 2015

The RM22 bil 'hole'

Budget 2016 is not too far away and Government agencies - especially Treasury and the Economic Planning unit - have begun the preparations since March. It should be tabled in Parliament in 4 months time in October.

I decided to look at some numbers and back of the envelope calculation, I found a RM22 bil 'hole' or deficit.

No, I am not even talking about the annual budget deficits at over RM30 bil.

I believe we are short of RM22 billion for 2016 just by looking at the Government's revenue which will be affected as a result of GST and crude oil prices, ceteris paribus.

And I hope the Government is aware of this. I stand corrected.

GST Revenue
  1. This year, GST revenue is expected to contribute RM23.3 billion (that's what the Government said before so many other things were exempted from GST)

  2. And with GST in place, we must not forget that the Government has agreed to forego some revenue.

  3. The abolished Sales and Services Tax gave us RM17.2 billion last year.

  4. The Government announced that individual income tax rates will be slashed by 1-3 percent. Let's just assume it is a 1% reduction, that's estimated to be a loss of revenue of RM260 million.

  5. Companies will enjoy a 1% tax reduction. That's another RM728 million gone.

  6. The net gain from GST implementation stands at no more than RM5 billion.

Petroleum Revenue

  1. The Federal Government's dependence on oil has been declining from RM64.2 bil or 40.2% of total revenue in 2008 to just RM67 bil or 29.7% of total revenue in 2014.

  2. But note that in 2014, Brent Crude oil averaged at USD100 per barrel.

  3. However in 2015, the average Brent crude oil price is expected to be at USD61 per barrel. That's a 40% drop.

  4. PETRONAS' contributions to Government is calculated based on previous year's price, ie in 2016, dividends are calculated based on 2015 crude oil price.

  5. If we assume that crude oil prices throughout 2016 and dividends are down by say 40%, that means the oil revenue to Government will also be down by 40%.

  6. That's approximately RM27 bil.

Net position
  1. The Government's tax revenue has always been enough to cover operating expenditure but never enough for development expenditure - agricultural subsidies, grants for smallholders, build schools and roads, etc.

  2. In the past 5 years, the Government's budget deficit averages at around RM36.5 bil, all due to if not mainly because of borrowings for Development Expenditure.

  3. Now with GST and lower crude oil prices, the Government stands to gain an extra RM5 bil from GST policy but face a shortfall of RM27 bil from petroleum revenue - in net terms, that's a RM22 bil hole.

  4. This hole could be bigger if GST revenue targets are not met.

  5. So where's the money going to come from?

  6. Does it mean the Government have to slash the development expenditure budget? I don't think so. This affects a lot of votes especially in rural areas or states such as Sabah and Sarawak.

  7. Can the Government afford to cover this with borrowings? I am not sure.

  8. RM22 bil is approximately 2 percent of GDP. Malaysia's 2014 debt to GDP ratio closed at 53% in 2014 and we have a debt ceiling of 55%.

Perhaps, it is time for GLCs to pay some dividends, if they are making money and not giving extra headache to the Government.

We'll see. I am looking forward to October when the Government tables the Budget 2016.

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