Budget 2025 Breakdown – KSINSIGHTS SEP 2024
Published on 07 Oct 2024
Executive Summary
For Laypeople
- Cost of Living: The potential rationalization of the RON95 fuel subsidy could lead to higher fuel prices. This would directly impact the cost of transportation and indirectly affect the prices of goods and services. The expansion of the sugar tax could also increase the price of sugary drinks. To mitigate these potential increases, the government might enhance programs like Sumbangan Asas Rahmah and Sumbangan Tunai Rahmah, which provide financial assistance to households. The government is also considering an increase in personal tax relief, re-introducing parental care tax relief, and extending existing tax rebates. These measures could provide some financial relief, but their effectiveness in offsetting the rising cost of living remains to be seen.
- Healthcare: Rising healthcare costs will be addressed. Potential solutions proposed include establishing a Universal Healthcare Insurance Fund, capping prices for medical services, and offering medical insurance subsidies. These initiatives could improve healthcare affordability and accessibility, particularly for low- and middle-income households.
- Skills Development: Recognizing the importance of skills in the job market, the budget might include provisions for skills development, particularly in STEM and TVET fields. We suggest tax relief for individuals and parents of children enrolled in these courses. Additionally, there could be matching allowances for companies sponsoring TVET students and offering them full-time jobs upon graduation. These measures aim to encourage more Malaysians to pursue education and training in these fields, ultimately boosting their earning potential and contributing to the nation’s economic growth.
For Businesses
- Support for SMEs: The budget emphasizes supporting small and medium-sized enterprises (SMEs) through initiatives aimed at increasing their contribution to GDP and exports, boosting productivity via technology integration, and providing tax relief. Specifically, the sources mention the possibility of raising the first chargeable income that enjoys a preferential tax rate of 15% and increasing the re-investment allowance. These measures could provide much-needed relief for SMEs struggling with rising business costs and allow them to reinvest in growth.
- Global Minimum Tax: There might be an implementation of a 15% global minimum tax rate in 2025. This aligns Malaysia with international taxation standards and aims to prevent profit shifting by multinational enterprises. While this measure is in line with global trends, businesses, particularly those operating internationally, will need to adapt their tax planning strategies to comply with the new rules.
- Green Economy: Recognizing the growing importance of sustainability, Budget 2025 may introduce tax benefits for companies investing in renewable energy, electric vehicles, and other green technologies. The sources also mention the possibility of a carbon tax framework and an emissions trading scheme. These measures aim to incentivize businesses to adopt more environmentally friendly practices and contribute to the nation’s sustainability goals.
Budget 2025, which will be tabled in Parliament on October 18, marks the last budget for the 12 Malaysia Plan (2021 to 2025). The 2025 Budget is scheduled to be presented in the Dewan Rakyat on October 18, 2024. The focus of the budget is on three key short-term priorities:
Raising the Ceiling – Restructuring the economy to promote greater competitiveness and higher value added activities.
Raising the Floor – Improving quality of life and ensuring inclusiveness of opportunities.
Strengthening Governance – Enhancing public service delivery.
The budget is expected to incorporate fiscal reforms aligned with the Fiscal Responsibility Act’s medium-term objectives. It is to manage the country’s deficit and debt levels sustainably while fostering a conducive environment for private sector growth. Budget 2025 is expected to focus on private sector development, particularly small and medium-sized enterprises (SMEs). This includes increasing the SME contribution to GDP and exports and boosting productivity through technology integration. Besides, the emphasis will also be on productivity and technological adoption, in line with the goals set in the 12th Malaysia Plan Mid-Term Review. In summary, Budget 2025 is anticipated to focus on:
- Sustained fiscal consolidation, with a reduced fiscal deficit-to-GDP ratio in accordance with the Public Finance and Fiscal Responsibility Act 2023.
- Clearer tax and non-tax measures to support fiscal reforms, such as a luxury goods tax, global minimum tax, RON95 fuel subsidy rationalization, and e-invoicing
- Aligning budget allocations and incentives with existing policy frameworks, masterplans, and roadmaps like the 12th Malaysia Plan Mid-Term Review, New Industrial Master Plan (NIMP 2030), MADANI Economy, and National Energy Transition Roadmap (NETR).
Malaysia’s economy is outperforming expectations
Real gross domestic product (GDP) growth has expanded by an average growth of 5.1% per annum in the first half of 2024, driven by resilient private consumption, robust investment, and a rebound in exports.
Headline inflation has moderated but high cost-of-living pressures still prevalent. Stable labour market conditions with unemployment rate steadying at 3.3% since the fourth quarter of 2023. The FBM KLCI has been enjoying net inflow of foreign funds.
The ringgit has made impressive gains against the US dollar since end-June supported by the narrowing interest rate differentials, improved investors’ sentiment, positive growth and investment outlook, and also the government and Bank Negara’s coordinated efforts to encourage repatriation and conversion of foreign investment income by government-linked companies and government-linked investment companies.
Amid a balance of domestic and external risks to the growth outlook, we believe that the economy will stay on track for stable growth, with strong progressive policies and reforms as well as effective execution needed for ensuring sustainable economic growth.
To meet the 2024 fiscal deficit target
Through the Madani framework, the government is likely to meet the fiscal deficit/GDP target of -4.3% for 2024. It is based on the Budget 2024 GDP projection of between 4-5%. The bulk of the revenue will be supported by stronger non-petroleum tax collection and stronger economic activities.
Petroleum-related revenue could be slightly lower than the government’s projection. The Budget 2024’s projection was based on the Brent crude oil price forecast at US$85 per barrel while the year-to-date average price per barrel of Brent is US$81.
Still, the lower crude oil prices would help balance out the overall fuel subsidy cost for the government. Added with fiscal consolidation measures such as the implementation of diesel subsidy rationalization and revision in electricity tariffs, it should provide some comfort on OPEX cost and stay within the Budget 2024’s projection.
Budget 2025
The MADANI government is expected to remain firm on its continued commitment to fiscal consolidation. The fiscal deficit/GDP target for 2025 is likely to be around -3.5%. It would be based on:
- Government’s plan to meet the 12 Malaysia Plan Mid-Term Review (12 MP MTR) target. The fiscal deficit/GDP is projected to hover between -3.0% to -3.5% by the end of 2025.
- Besides, the Mid-Term Fiscal Framework (MTFF) target of fiscal deficit/GDP to average around -3.5% between 2024 – 2026.
- Commitment to the Public Finance and Fiscal Responsibility Act that was passed on 11 October 2023 with the objective to lower the fiscal deficit to 3% or less in the next 3-5 years.
Revenue from tax will continue to be the primary source of government funds. A conservative projection of a 3-4% increase in tax collection would be supported by (1) higher corporate and individual tax revenues from a more optimistic economic outlook; (2) broadening of the tax base; (3) further improvement in tax compliance, and (4) collection via the phasing in of “e-invoicing” starting 1 June 2024 for full implementation on 1 July 2025.
On the non-tax revenue, the dividend payout from Petronas will be lower than 2024’s RM32 billion following the decline in oil price. It is consistent with the 12 MPMTR where the government highlighted their commitment to widen the tax base structure.
[Reference Table One: Fiscal and Macroeconomic Projection]
Macroeconomic outlook
Budget 2025 GDP projection could be penned between 4.5% – 5.5%. Private consumption is expected to be the main engine of growth, supported by sustained improvements in labor market conditions and wage growth. Public consumption will grow following the revision in civil service pay hikes.
Business investment will continue to be supported by ongoing multiyear investments and the realization of the recently robust approved investments in the private sector. Meanwhile, public investment activity will be supported by the ongoing strategic infrastructure projects such as ECRL; KVLRT3; Pan Borneo Highway; JB-Singapore RTS
External demand will continue to remain conducive following the strengthened global tech upcycle as well as improvement in global demand in light of synchronized global monetary easing.
Headline inflation is expected to range between 2.5% to 3.0% in 2025. The upside risk to inflation will depend on the potential implementation of RON 95 subsidy rationalization and the quantum of retail fuel price adjustment. Also, some knock-on effects from the realization of the civil service pay hike could kick in December 2024.
Overnight Policy Rate (OPR) is likely to stay around 3.00%. With a more stable borrowing cost, the loan growth would continue to grow between 4.5% -5.5%.
Tax revenue sustainability
Since the abolishment of GST in 2018, the tax base growth has somewhat remained stagnant (% of GDP). The average government revenue post-GST era averages 16.4% of GDP vs. 17.2% during the GST era (2015 – 2017).
Hence, the government is motivated to look at measures to widen its tax base and we think Budget 2025 will introduce new tax measures.
To date, the government has implemented revenue enhancement measures such as Capital Gains Tax and 10% Low-Value Goods Tax effective 1 Jan 2024; Services Tax base expansion and rate adjustment to 6%-8% range from 6% as well as “Sugar Tax” hike, up to RM0.50 per liter from RM0.40 per liter.
For 2025, we believe the government may introduce/implement the following:
Sugar Tax: Further expansion of “Sugar Tax”. This comes after the Health Minister proposed to raise the tax on sugar-sweetened beverages to 20% of the retail price as part of its “war on sugar” campaign.
High-Value Goods Tax: High-value goods tax (HVGT) is very likely to be back on the table. Although HVGT was expected to roll out on 1st May 2024, it was delayed as the government continues to work on fine-tuning tax scope and legal framework. If implemented, HVGT is projected to generate RM0.7 billion annually.
Global Anti-Base Erosion: Global minimum tax based on Global Anti-Base Erosion (GloBE) rules. Companies affected will be imposed with 15% tax effective 1st January 2025, aligning with international taxation standards, especially in curbing tax base erosion activities and transferring profits to countries with low tax rates.
At this juncture, we believe that GST will not be included in Budget 2025. While there’s increasing speculation among market participants about the potential reintroduction of GST, statements from some government officials indicate that the economy is not yet ready for that move.
We suspect the government may expand the scope of SST to increase the revenue considering, SST covers 41% of all goods and services while GST covered 76% previously.
OPEX Conundrum
In light of the Public Finance and Fiscal Responsibility Act 2023, the government would continue to rationalize its operating expenditure (OPEX). The Budget 2025 is poised to include OPEX consolidation, particularly in subsidy expenditure. The quantum of consolidation will remain modest.
The new remuneration scheme for the civil service will cost the government an additional RM10 billion. Salary raised between 7% to 15% is expected to be rolled out in December 2024. This would bring the total emoluments to above RM 100 billion for the first time in 2025.
The new remuneration scheme adjustment will occur in two phases. Phase 1 would begin on December 1, 2024, with an 8% increase for the implementing, management, and professional groups, and a 4% increase for top management. Phase 2 will start on January 1, 2026, with a 7% increase for the former and a 3% increase for the latter. Additionally, pension adjustments will be based on the final salary changes for retirees in December 2024.
Subsidy Consolidation or Rationalization
In the coming budget, the government will continue to move away from a blanket subsidy approach to a targeted approach.
To recap, the government’s OPEX rationalization in 2024 includes (1) diesel subsidy rationalization with effect from 10 June 2024; and (2) reduction in eggs subsidy, effective 17 July 2024. RM100 million egg subsidies were allocated in 2024 versus RM927 million in 2023; and (3) electricity tariff rationalization effective 1st Jan 2024.
The federal government spent a bulk of RM 223.5 billion on subsidies between 2012 and 2022, with 71.6% of the subsidy expenditure allocated to fuel. The focus is now on the RON 95 fuel subsidy rationalization. While it is on the table, the issue is all about timing, magnitude, and structure.
Unlike the rationalization of diesel fuel subsidy, the impact of RON95 rationalization would be felt more widely. However, the savings generated can be redirected to other government priorities, such as tackling the cost of living and improving healthcare.
The potential move to rationalize the RON 95 subsidy could hinge on the trajectory of Brent crude oil prices. Or could the government introduce the GST and delay the move to rationalize the RON 95 subsidy?
Development expenditure will remain sizeable
The development expenditure (DE) allocation is likely to hover around RM 70-80 billion. It would be in line with the revised ceiling under the 12 Malaysia Plan (12MP). Economic sectors in particular the transport subsector are expected to receive the largest share, with ongoing projects like the Central Spine Road, East Coast Rail Link, and Rapid Transit System driving public investment and construction growth.
Development expenditure funds will likely be injected into digital-related and renewable-energy sectors, aligning with MyDigital and the National Energy Transition Roadmap (NETR), respectively.
Additionally, healthcare could get higher allocation while some funds may be allocated to tackle water supply issues in Kelantan and Sabah as well as to speed up flood mitigation projects in several states.
Other areas of focus
The budget is expected to unveil measures and initiatives in areas of tackling the cost of living and business costs pressures, supporting the green economy, wage-enhancement and skills development, fostering investment through reducing bureaucracy and strategic investment funds, and strategic budgetary allocations for key sectors (affordable public housing, public transport, and infrastructure, ports, roads, healthcare, education, and training and digital infrastructure). Additionally, incentives for Johor-Singapore Special Economic Zone, including for family offices.
In tackling cost of living pressures, there could be further enhancements to Sumbangan Asas Rahmah and Sumbangan Tunai Rahmah estimated at least RM8 billion to RM10 billion, helping households with cost-of-living concerns.
Targeted tax relief and rebate measures for taxpayers and households to cope with immediate financial pressures such as an increase in personal tax relief; re-introducing the parental care tax relief; and extending the tax rebate.
Besides, income support schemes for old age and retirees via higher income relief and tax incentives for employers to offset employees’ monthly wages to employers who voluntarily re-employ workers after the retirement age of 60.
Businesses are still saddled with some form of price increases in materials and services. The budget may assist the small and medium enterprises (SMEs) to manage the rising costs through raising the first chargeable income that enjoys a preferential tax rate of 15% to the higher bracket from the current RM150,000; re-investment allowance and SJPP raised to RM40 million from RM20 million now.
The budget should look into not raising the new minimum wage (currently at RM1,500 per month) and also a multi-tiered foreign levy too steeply. It would weigh heavily on MSMEs.
The budget will formalize the implementation of a global minimum tax rate of 15% based on the Global Anti-Base Erosion Rules under Pillar Two in 2025. This is to align with international taxation standards, especially in curbing tax base erosion activities and transferring profits to countries with low tax rates.
The Qualified Domestic Minimum Top-up Tax (QDMTT), is a top-up mechanism to ensure that multi-national enterprises pay a minimum effective tax rate of 15% in each jurisdiction in which they operate. The QDMTT allows Malaysia the first right to charge top-up taxes on revenue from entities located in Malaysia that are paying low taxes.
Rising healthcare costs and medical insurance premiums are hitting the low-and middle-income households. The budget could look into the establishment of a Universal Healthcare Insurance Fund; capping the level of prices by setting maximum amounts that hospitals and physicians could receive from commercial insurers; capping the annual growth rate of those prices; and medical insurance subsidies.
The pilot run of the Progressive Wage Model (PWM) is below expectations. The budget is expected to enhance the PWM scheme to encourage sustainable wage enhancement and skills improvement.
For skill development, it could consider providing tax relief to individuals and parents of children who enroll in STEM courses as these courses incur high fees as well as TVET courses. Also, provide matching allowances covering tuition fees and living expenses for companies sponsoring TVET students and offer them full-time jobs upon graduation.
The budget is expected to incentivize sustainability by offering tax benefits like deductions or accelerated depreciation for companies investing in renewable energy, electric vehicles, and other green technologies. Additionally, a carbon tax framework, including an emissions trading scheme may be announced.
Infrastructure development. Budget 2025 is expected to provide further measures to enhance connectivity and support urban growth. Key focus areas include transportation networks, public utilities, digital infrastructure, and the green economy.
The budget is also anticipated to address the growing importance of the digital economy by expanding broadband access, fostering digital innovation, and developing smart cities. Investments in basic infrastructure upgrades, flood mitigation, renewable energy, and modernizing energy grids are also expected to be emphasized.