Malaysia's new government sets bigger budget, cuts fiscal targets

By Joseph Sipalan and Rozanna Latiff

KUALA LUMPUR (Reuters) - Malaysia on Friday unveiled an expanded budget and set a higher fiscal deficit target for 2019 as the new Mahathir Mohamad-led government faced challenges of a slowing economy, shrinking revenue and a debt pile left by the previous administration.

The Mahathir government's first budget since coming to power in a stunning election victory in May also included plans for widespread public spending cuts, sales of non-strategic assets and a one-off dividend of 30 billion ringgit ($7.20 billion) by state energy firm Petronas to help boost revenue.

Analysts had widely predicted cuts to public spending, especially after Mahathir in October announced plans to reduce development spending and blamed the previous administration of Najib Razak for saddling the country with debt of more than 1 trillion ringgit.

Revenue collection had also taken a hit after the new government scrapped a six percent consumption tax and reintroduced fuel subsidies earlier this year.

Tabling the 2019 budget in parliament, Finance Minister Lim Guan Eng said total revenue is projected to rise to 261.8 billion ringgit next year, up from 236.5 billion ringgit from 2018, thanks largely to the Petronas dividend.

Government expenditure in 2019 has been budgeted at 314.6 billion ringgit ($75.53 billion), up 8.3 percent from this year's revised budget of 290.4 billion ringgit, according to a fiscal outlook report released alongside the budget.

The government is resetting "its fiscal consolidation path starting from 2019 to account for narrow revenue base, additional provision for off-budget items and tax refunds," it said in the report.

It abandoned an earlier target of 2.8 percent of GDP for this year's fiscal deficit, saying it will widen to 3.7 percent.

"For the next three years, the government will abide by fiscal consolidation target from 3.4 pct in 2019 to 3.0 in 2020 and 2.8 pct in 2021," Lim said in parliament.

He said the government will introduce a fiscal responsibility act in 2021 to avoid "uncontrolled spending and large debt."

To boost revenue, the government will leverage state assets, review existing tax systems and incentives offered to companies, Lim said. It is also reviewing several projects awarded by the previous administration of Najib Razak.

The minister also said the government has decided to settle outstanding tax refunds of around 37 billion ringgit, much of which will be funded by the special dividend of 30 billion ringgit from state energy firm Petronas.

The oil and gas company will also pay a regular annual dividend of 24 billion ringgit, according to the fiscal report.

In an economic report released on Friday, Malaysia said it will cut public spending sharply despite foreseeing the economy growing more slowly.

($1 = 4.1640 ringgit)

(Additional reporting by Liz Lee and Emily Chow; Writing by A. Ananthalakshmi; Editing by Simon Cameron-Moore)