Najib Razak & Prince William

Malaysia recently unveiled its government budget for 2015, envisaging a further drop of the fiscal deficit from an estimated 3.5% to a planned 3.0% next year. This seems reasonably achievable on the face of it. Growth in 2014 was stronger than anyone expected, reaching 6.3% in the first half of the year, and should be in the region of 5.7% for the year as a whole.

If there was one overarching theme in this budget, it was tax reform and the measures intended to soften the blow. The introduction of the Goods and Services Tax (GST), slated to begin in April 2015, came with cuts in taxes, incentives and assistance for GST implementation, and an increase in cash transfers to middle and lower income households. It also says a great deal about the breadth of the opposition to GST that the list of items to be zero-rated or exempt was substantially expanded, weakening the revenue-raising capability of GST.

The budget also tried very hard to meet the expectations of the public. In an opinion poll conducted prior to the budget (results available here), the top concerns of Malaysians were the cost of living, followed by jobs and housing. With half of working Malaysians earning less than MYR1500 (USD500) a month, the rise in global food prices that dates back to before the Great Recession has crimped their standard of living. House price appreciation, boosted by low real interest rates over the past five years, has taken home ownership out of reach of many young families. Hence the limiting of the tax base for GST and the effective zero rating of petrol, diesel and gas. The government also expanded the scope of affordable housing schemes, and there were other measures for nearly every constituency. But in trying to do so much in the context of consolidating expenditure, the corresponding impact must necessarily be diffused.

Going forward moreover, Malaysia’s fiscal reform agenda still has a long road to travel. The income tax base is narrow, with perhaps 15% of workers paying any income tax. There remains a heavy reliance on oil & gas-derived revenue, which contributed over 30% in 2013. The sustained descent in global crude prices since June 2014 puts the government’s future revenue projections at some risk. Much of the substantial infrastructure spending that the government has committed to, have been taken off-budget via special purpose vehicles. There are also government guarantees on for example student loans, which have seen many delinquencies and which form the biggest portion of the government’s direct contingent liabilities, as well as on the opaque borrowings of 1Malaysia Development Berhad, the government’s latest sovereign wealth fund.

Looking even further afield, Malaysia’s population has begun to age. Retirees (those above 60) will form the fastest growing segment of the population over the next 25 years, almost tripling in numbers. With rapid urbanisation, increased longevity and higher living costs, the traditional reliance on the extended family as a social support system has gradually broken down. While public institutions like the Employees Provident Fund (which covers the private sector) and the Retirement Fund Incorporated (which covers the public sector) provide an avenue for retirement savings, the income replacement ratio is about half the recommended level for the former, while the latter has a growing funding gap. Both institutions together provide pension coverage for just 60% of the labour force, which means millions of Malaysians have little to no life savings except for what they can manage on their own. On that score, a household savings rate of under 2% gives reason for pause.

Other areas of Malaysia’s social safety net are still lacking. The budget mentions an employment insurance scheme, but no details were given on the specifics and funding of the scheme. Provision of healthcare will be a growing problem down the road as Malaysian society ages. Malaysia’s public healthcare system, while competent, faces constraints in capacity and having to compete with private hospitals for scarce talent.

In short, there will be future charges on the public purse that will need to be met if Malaysia is to deserve the appellation of a developed nation. Even as the government works towards achieving fiscal balance over the short term, we will need to start thinking about these future claims, and the sooner the better.

Nurhisham Hussein is a Malaysian economist. These are his personal views.