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Malaysia in transition

Malaysia budget heads for parliament with Muhyiddin's job on line

COVID recovery plan hinges on lawmakers heeding king's call to cooperate

A worker sprays disinfectant outside a shop in Kuala Lumpur as Malaysia grapples with a new wave of coronavirus infections in late October.   © Reuters

KUALA LUMPUR -- Embattled Malaysian Prime Minister Muhyiddin Yassin's government is poised to submit its 2021 budget to parliament on Friday -- a step toward shoring up an economy ravaged by COVID-19, but one that will also put the premier in a vulnerable position.

Finance Minister Zafrul Aziz is to table the budget in the legislature by Friday evening, setting it up for a vote on Nov. 23. This comes as the country battles a third wave of coronavirus infections that has sent daily cases into the high triple digits, further straining the economy after a monthslong near-shutdown earlier this year.

At the same time, the budget follows weeks of political turmoil, with opposition leader Anwar Ibrahim claiming to have enough parliamentary support to unseat Muhyiddin. Since a vote against a government's budget is akin to a no-confidence vote under Malaysian law, this could set up a dramatic showdown -- except that the king, in an unusual step, openly urged lawmakers to cooperate and pass the budget for the sake of the nation.

Whether the country's fractious politicians heed that call remains to be seen.

The budget, which Zafrul has called the "most important" in history, is expected to strike a balance between securing government revenue and supporting Malaysians, especially those affected by pandemic-induced retrenchments and pay cuts.

The fiscal pressure is already building. Muhyiddin's predecessor, Mahathir Mohamad, set this year's budget at $57.6 billion, which was estimated to bring the deficit to 3.2% of gross domestic product by the year-end. But the pandemic prompted the current administration to pull together $71 billion worth of stimulus measures, including more than $11 billion coming directly from the government.

This is projected to double the deficit to about 6%, with current government debt and contingent liabilities standing at around $288.6 billion.

Nevertheless, former Finance Minister Johari Abdul Ghani told Nikkei Asia that Muhyiddin's government cannot escape from "spending big" next year. He said significant outlays are needed to support the economy, minimize job losses and help all industries affected by the crisis.

Malaysia's economy contracted 17.1% in the second quarter, and the third-quarter result due Nov. 13 is expected to remain in the negative. The unemployment rate is also projected to hit 5.5% -- the equivalent of 860,000 people -- by year-end.

Johari, who was finance minister from 2016 to 2018, said the focus needs to be on the banking, travel and tourism-related industries. "A major part of the country's services sector comes from the contribution of tourism-related industries, namely hotels, retail, transportation and food services," he said.

Malaysian Prime Minister Muhyiddin Yassin in parliament in July: Passing the 2021 budget poses a big test for his government.   © Reuters

Given the heavy obligations of mitigating COVID-19's impact and procuring vaccines when they are ready, the budget may not feature the more ambitious infrastructure projects and other large investments seen in previous years. But Johari said he expects the government to continue the tradition of allocating over 20%, equivalent to approximately 50 billion ringgit, to development expenditure.

"Anything additional from that amount will have to come from government-linked companies, off-balance-sheet borrowings, private financing or public-private-partnership projects," he said.

Oh Ei Sun, senior fellow at the Singapore Institute of International Affairs, listed the government's absolute priorities: ensure adequate resources to combat the pandemic, and extend support for poor Malaysians as well as micro, small and midsize enterprises.

"Services sectors, specifically tourism and hospitality, would need assistance," he said, echoing Johari.

On the tax front, the budget may offer relief to cushion the costs of avoiding infection, predicted SM Thanneermalai, the managing director of a local firm, Thannees Tax Consulting Services.

Besides increased allocations for the health ministry and special payments to front-liners, he told Nikkei that "there is a possibility the tax rate for small and medium enterprises will be reduced from 17% for the first 500,000 ringgit of taxable income to a lower rate of 14% to 15%."

He added that tax relief could also be granted to individuals to cover COVID-19 tests and protective supplies, and agreed that the primary focus will be containing the pandemic while avoiding a deep recession.

At the same time, he stressed the government will need to find ways to increase revenue, though it is unlikely to introduce new inheritance or capital gains taxes. He sees greater enforcement of existing tax laws as the likely avenue.

"The government could initiate infrastructure projects to pump money into the economy" -- and significantly step up "the level of audit activity by the tax authorities" to fund the endeavors, Thanneermalai suggested. "The other main source of funds will be to raise money from domestic sources through the issuing government bonds."

Looming over all of this is the political battle that has kept Muhyiddin on the defensive since he took office in March.

With Anwar gunning for his job and rumblings of dissent in the coalition party he relies on -- the United Malays National Organization -- the prime minister apparently hoped to avoid the budget debate altogether. Late last month, Muhyiddin asked King Sultan Abdullah Ri'ayatuddin to declare a state of emergency, which would have frozen parliament and allowed the premier to push through his spending plans unimpeded.

The king rejected the request but, later, made it clear he wanted no political shenanigans. A statement released by the palace urged parliamentarians to "stop all political disputes and instead prioritize the welfare of the people and the well-being of the country so that the 2021 budget is approved without any interruption."

Soon, the ball will be in lawmakers' court.

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