WALKING THE TALK: Govt targets to reduce fiscal deficit to 3.5pc of GDP next year
FISCAL consolidation has been given a shot in the arm by the government, which has walked the talk by delivering a credible budget with the target of reducing the fiscal deficit to 3.5 per cent of gross domestic product (GDP) next year, from four per cent this year.
The government will also implement a goods and services tax (GST) at six per cent from April 1 2015, reduce corporate tax rate to 24 per cent from 25 per cent, effective 2015, (19 per cent from 20 per cent for small and medium companies) and reduce personal income tax by between one and three per cent.
Barclays Research said the government announced a more aggressive-than-expected reduction in the fiscal deficit.
"We think Prime Minister Datuk Seri Najib Razak delivered a fiscally responsible 2014 Budget," it said, adding that the measures would enhance Malaysia's investment appeal.
Barclays Research said in a statement the steps towards fiscal consolidation should reduce the likelihood of a ratings downgrade.
"Further reductions in corporate tax rate cannot be ruled out once the GST is in place. The GST announcement has more immediate implications for inflation."
It said the government has heeded criticism by markets and rating agencies.
"The government is aiming to reduce its subsidy bill by 15.6 per cent in 2014 to RM39.4 billion, a target we think is possible if further reductions are made in 2014," it said, adding that the increase in real property gains tax is within expectations.
Barclays Research also said the 2014 Budget provides a positive backdrop for the ringgit.
"We think the government's intention to further cut subsidies and the larger-than-expected reduction in its fiscal deficit provide a positive backdrop for the ringgit's appreciation against the US dollar.
"This more positive view should be accentuated by the introduction of GST in 2015. In our view, the market will focus more on the positive implications rather than any potential increase in inflation expectations," it said.
Based on the government's fiscal deficit target and GDP assumptions, it estimates that the gross supply of local currency government bonds next year will be RM95.7 billion, compared with RM96.2 billion this year.