Malaysian Prime Minister Mahathir Mohamad gives a speech at Chulalongkorn University, in Bangkok, Thailand on October 25, 2018. (REUTERS File Photo)
KUALA LUMPUR, November 2 (Reuters): Malaysia unveiled an expanded budget on Friday, and set a higher fiscal deficit target for 2019, as the new Mahathir Mohamad-led government faced up to challenges boosting revenue in a slowing economy, while saddled with large debts left by its predecessor.
Delivering its first budget since winning power six months ago, the coalition government laid out plans for cuts to public investment, and increased revenue from privatising infrastructure assets and a one-off dividend of 30 billion ringgit ($7.20 billion) by state energy firm Petronas.
Mahathir had warned of cuts to spending, blaming the previous administration of Najib Razak for saddling the country with debt of more than 1 trillion ringgit.
His government also had to fill a revenue shortfall from the scrapping of an unpopular consumption tax.
But with Malaysia now forecasting this year's fiscal deficit would be the highest in five years, it will face worries over whether it can avoid a possible credit rating downgrade.
Presenting the 2019 budget in parliament, Finance Minister Lim Guan Eng said total revenue is projected to rise 10.6 percent to 261.8 billion ringgit next year, thanks largely to the Petronas dividend.
Expenditure in 2019 has been budgeted at 314.6 billion ringgit ($75.53 billion), up 8.3 percent from this year's budget as the government recognised certain items not listed in the previous 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," according to a fiscal outlook report released alongside the budget.
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 -- the highest since 2013. Najib's government had reduced fiscal deficit for eight straight years to 2017.
"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.
Andrew Wood, an analyst at S&P Global Ratings, said the higher than expected fiscal deficits for this year and next reflect the challenges of the ruling Pakatan Harapan, or Alliance of Hope, coalition.
"Risks to Malaysia's fiscal and debt profiles remain elevated as it works to manage a number of legacy issues and fund key priorities of the Pakatan Harapan government," he said.
"A heavier reliance on commodity-based revenues presents an additional risk to Malaysia's fiscal accounts in the absence of more structural revenue-raising measures."
REVENUE MEASURES
To boost revenue, the government will leverage state assets, privatise infrastructure assets, review existing tax systems and incentives offered to companies, Finance Minister Lim said. It is also reviewing several projects awarded by the previous administration.
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.
The government imposed taxes on sugary beverages, online streaming services, and an exit levy of up to 40 ringgit for local and foreign travelers passing through Malaysia.
In an economic report released on Friday, Malaysia said it will cut public spending sharply despite foreseeing the economy growing more slowly.
