Malaysia cuts spending in 2010 to rein in deficit

By EILEEN NG

posted: 35 DAYS 18 HOURS AGO

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KUALA LUMPUR, Malaysia -Malaysia's government cut spending in its 2010 annual budget to rein in a ballooning deficit while forecasting the economy will rebound to grow 2-3 percent after a recession this year.

Prime Minister Najib Razak announced plans Friday to revamp expensive fuel subsidies and measures to woo foreign investors including a "second wave of privatization" of state-run companies as he presented his first budget in Parliament since taking power in April. Income tax cuts were also announced.

Najib said development spending, which covers infrastructure such as roads, will fall slightly to 53.2 billion ringgit ($15.6 billion) next year with spending to taper off following the completion of some major projects.

Earlier, the finance ministry said in a report that the government's operating expenditure will be slashed by 13.7 percent to 138.3 billion ringgit ($40.8 billion) following cuts to fuel subsidies, services spending and grants to statutory bodies.

This will bring the federal government's budget to 191.5 billion ringgit ($56 billion), down 11.2 percent over 2009. With the reduced spending, Najib said the fiscal deficit is expected to narrow to 5.6 percent of gross domestic product in 2010 from 7.4 percent forecast for this year.

"This allocation reflects prudence in government spending and gives priority to value for money," Najib said. "Let us start a new chapter in our journey to become a more developed and progressive nation."

The government also narrowed its forecast for the contraction in the economy this year to 3 percent following stimulus measures totaling 67 billion ringgit ($19.7 billion). It earlier expected the economy to shrink 4 to 5 percent. For 2010, the government forecast growth of 2 to 3 percent.

Economists welcomed the moves, including the fiscal prudence plan.

The smaller budget is not expected to hamper growth as development spending remained significant and previously announced stimulus spending stretches into 2010. The cut in government operating expenditure is welcomed to plug wastages and corruption.

"Malaysia has been the ugly ducking in the region. This will help the economy and give investors less skepticism," said Philip McNichols, an economist with research firm IdeaGlobal in Singapore.

Foreign investors have been wary after Malaysia's ruling coalition suffered heavy losses in general elections last year, losing its traditional two-thirds majority in Parliament to a resurgent opposition.

Najib has relaxed a host of restrictions on foreign investment in the financial services sector as part of his first major policy reforms soon after taking power early April. But widespread corruption continues to be a worry for foreign investors.

In his speech, Najib announced plans to restructure the fuel subsidy next year so that it benefits only targeted groups. He didn't give details, but it appears that owners of luxury vehicles and foreigners may not be able to use the subsidies.

The Finance Ministry report said subsidies for fuel, food and education are expected to plunge 30 percent this year to 24.5 billion ($7.2 billion) and expected to shrink another 15 percent to around $21 billion ($9 billion) in 2010.

Najib also reduced the maximum personal income tax rate from 27 percent to 26 percent from 2010. The tax rate was slashed to 15 percent for skilled workers in a new industrial zone in the southern Johor state bordering Singaopre.

As part of further economic liberalization, Najib said 100 percent foreign equity ownership will be allowed in corporate finance and financial planning companies. New tax incentives would be given to the Islamic finance sector until 2015.

Opposition leader Anwar Ibrahim expressed doubts that the government could contain corruption.

"Action speaks louder. There is no strong emphasis and commitment on good governance," he said.

2009-10-23 07:28:07