Malaysia's fiscal budget may narrow to 3.0% of GDP in 2015

As part of 2020 budget targets.

Malaysia's budget for 2015 was recently announced by Prime Minister Najib, with the budget marking another key milestone towards further fiscal consolidation and longer term debt sustainability.

According to a research note from DBS, focus has been on the reform in tax regime, with the introduction of the Goods and Services tax (GST) and the reiteration of the previously announced reductions in personal and corporate tax rates.

Meanwhile, the report noted that the fiscal deficit is expected to narrow to 3.0% of GDP in 2015, from 3.5% this year.

This is in line with the government’s long term goal of achieving a balanced budget by 2020, the report said.

Here's more from DBS:

And in the release of the 2014/15 economic report earlier in the day, the government revised its GDP growth forecast for this year to 5.5-6.0%, and expects growth to register 5.0-6.0% in 2015. Inflation is expected to average 3.3% in 2014 before accelerating to 4-5% in 2015 against the backdrop of the GST hike.

Buffering the impact on costs of living for the low and middle income households has been the key focus of the budget announcement.

While emphasizing the strong need to reduce debt level and to minimize the transfer of such liability to the next generation, PM Najib has provided more clarity on the expanded exemption list of the GST.

The government expects 56% of goods and services in the CPI basket to experience a price reduction of up to 4.1% while around 38% will experience a price increase of less than 5.8%. It is believed that this will help to reduce the burden of the GST hike on the masses.

In addition, the BR1M cash assistance for households has been increased and additional bonuses for civil servants declared to help households cope with the tax change.

To complement the introduction of the GST and to steer the tax regime towards indirect taxation instead of direct taxation, the personal income tax and corporate tax rates will be lowered as previously announced.

Personal income tax rate will be reduced by 1-3%-pts following the GST implementation with the top individual tax rate to be reduced to 24% by 2015 from the current 26%.

The chargeable income level will also be adjusted to make the income tax regime more progressive. Separately, corporate income tax rate will be reduced by 1%-pt to 24% and SME corporate income tax rate will also be lowered to 19%, from 20% by 2016.