Malaysia’s Najib Cuts Tax, Reduces Spending as Economy Recovers

Oct. 24 (Bloomberg) -- Malaysia cut income tax for a second straight year, aiming to spur consumer spending and private investment and help the economy recover from a recession.

The top personal tax rate will be reduced to 26 percent in 2010 from 27 percent, Prime Minister Najib Razak said in his budget speech in Kuala Lumpur yesterday. Southeast Asia’s third- largest economy is expected to expand 2 percent to 3 percent in 2010 after shrinking 3 percent this year, the government said.

“Private sector activity is anticipated to pick up following signs of recovery, enabling the government to consolidate its fiscal position for greater policy flexibility in times of crisis,” the Ministry of Finance said in its 2009/2010 economic report yesterday. “Emphasis will be on creating a conducive environment for businesses and entrepreneurship to thrive in a more liberalized environment.”

Najib, 56, has rolled back decades-old protectionist policies to spur investment since taking over as prime minister in April, opening up services industry to foreign investors and easing rules on ethnic-Malay ownership in companies. Najib told parliament that he wants to transform Malaysia into a “high- income economy.”

“The budget signals the government’s intention to reduce its direct involvement in the economy and encourage a greater role for the private sector,” said Robert Prior-Wandesforde, a Singapore-based senior economist at HSBC Holdings Plc. “The new prime minister is at least trying to take the economy in a different direction.”

Foreign Investment

Malaysia will review rules that may be barriers to investment and plans to attract foreign investors to take up stakes in local companies, the finance ministry said.

State-owned companies will be privatized, procedures for registering a business will be expedited and tax relief will be provided for a national broadband project, Najib told parliament yesterday. Tax incentives for Islamic finance products will be extended until 2015 and more funds will be allocated to promote tourism, he added.

The budget will help open up the Malaysian economy further and address a policy adopted in 1971 that gives advantages to the ethnic-Malay majority in business, housing and government contracts, Second Finance Minister Ahmad Husni Hanadzlah told reporters in Putrajaya on Oct. 22.

‘Paradigm Shift’

“We have to do things differently now,” Najib said in the economic report. “There has to be a paradigm shift and a change in mindset” as Malaysia is “committed” to enhance its competitiveness through market-driven policies, he said.

The budget shortfall is expected to narrow to 5.6 percent of gross domestic product next year from a 22-year high of 7.4 percent in 2009, according to yesterday’s finance ministry report. Spending in 2010 is expected to be 191.5 billion ringgit ($56 billion), 11.2 percent smaller than this year’s outlay.

“The government wants to manage its finances better to make sure that the deficit is not exorbitant,” said Pankaj Kumar, who manages about $540 million of assets as chief investment officer at Kurnia Insurans Bhd. in Kuala Lumpur. “For the first time in my memory, I’m seeing a budget that is lower than in previous years.”

Next year’s 5.6 percent deficit target was “realistic,” Deputy Prime Minister Muhyiddin Yassin told reporters in Kuala Lumpur yesterday. Malaysia aims to balance the budget in the next three to six years and the 2011 shortfall will be “much lower” than next year’s, Husni said in an interview with Bloomberg News last night.

Property Tax

Malaysia plans a 5 percent capital gains tax on property from January to help broaden the tax base and bolster government finances, Najib said. A study on the introduction of a goods and services tax is in its final stages, Najib said.

The government will review its fuel and other subsidies to ensure they benefit “target” groups and remain “lean,” the ministry said. Competitive bidding for government procurement will help reduce costs, it said.

The government will spend less on supplies and services as well as grants to state agencies next year, even as outlays for pensions, salaries and debt servicing increase.

Malaysians will be allowed to use more of their retirement funds for home purchases and personal tax relief for pension contributions and life insurance premiums will be increased, Najib said yesterday. Workers will be able to contribute 11 percent of their monthly salary to the state-run Employees Provident Fund, up from as little as 8 percent previously.

Stimulus Measures

Malaysia, which has unveiled 67 billion ringgit of stimulus initiatives under two packages in the past year, has spent 8.2 billion ringgit from the total as at the end of September, the finance ministry said. The impact from the stimulus will be felt more in the second half of 2009 and spill over into next year, it said.

Major construction projects expected by the government to boost growth next year include a light rail project in and around the capital Kuala Lumpur, a water transfer project and a new low-cost carrier terminal at the country’s main airport.

Total taxes are forecast to shrink 2.8 percent as a 28.3 percent plunge in oil income as well as lower investment, licensing and sales tax revenue counter rising collection from excise duties, company and individual taxes, the ministry said. Income taxes will be bolstered by a recovering economy, the government said.

Inflation will “rise modestly” in 2010 as global commodity prices gain, the ministry said. Malaysia’s monetary policy will “remain supportive of growth,” it said.

To contact the reporters on this story: Stephanie Phang in Singapore at sphang@bloomberg.netSoraya Permatasari in Kuala Lumpur at soraya@bloomberg.net
Last Updated: October 23, 2