Mahathir leaves prudent legacy in parting budget

Mahathir leaves prudent legacy in parting budget

Eileen Ng, Agence France-Presse, Kuala Lumpur

When Abdullah Ahmad Badawi takes over as Malaysia's fifth premier in November, there will be few economic worries on his mind.

Prime Minister Mahathir Mohamad shuffled the cards in his farewell budget on Friday, ending six years of pump-priming to cut a towering deficit and setting the economy on a sustainable track for his successor, analysts say.

There were few goodies for the man-in-the-street despite impending elections, with no tax cuts for individuals or businesses, no cheaper cars under a regional free trade pact in 2005 but higher "sin tax" for smokers and drinkers.

The prudent 2004 budget pins growth at 5.5 percent to 6.0 percent, up from 4.5 percent in 2003, and aims to shrink the deficit to 3.3 percent of gross domestic product from 5.4 percent this year through a 21 percent drop in development expenditure.

It is the seventh straight deficit and the government hopes to balance the books by 2006 by making the private sector the growth engine.

"Mahathir has set a sustainable growth track and reduced the burden on his successor to balance the budget," said Azrul Azwar, economist with MIDF Sisma Securities.

Despite disappointment over the absence of tax cuts, he said there were benefits for selected groups including single mothers, the disabled and senior citizens.

The premier also gave a one-month bonus to civil servants, higher child relief for taxpayers and abolished road tax for 5.6 million owners of motorcycles below 150cc.

Abdullah can therefore, focus on polls widely tipped to be called early next year and seen as the first test of his popularity as he seeks to fill the shoes of a man who has transformed Malaysia from an agricultural backwater into an industrial heavyweight, Azrul said.

Chew Theam Hock, tax partner at KPMG, said the restraint was understandable following a 7.3-billion-ringgit (US$1.9 billion) stimulus package in May.

"There will be a bit of disappointment for (those) hoping for cuts in personal taxes. After all, it is his last year but it's reasonably decent and when you have limited bullets, it's best to use them sparingly."

Economists however, say the growth and deficit targets may be too bullish while manufacturers bemoan the high 28 percent corporate tax rate.

They noted the government overshot in its spending in recent years with the deficit jumping to 5.4 percent this year from 3.9 projected earlier, and to 5.6 percent in 2002 from an initial forecast of 4.7.

To halt pump priming and expect strong growth will also be tough, with market consensus pegging growth at between five and 5.5 percent.

"My concerns are that the targets are slightly tough to achieve and the corporate tax rate is increasingly unattractive, which could hurt investment," said Nizam Idris, regional economist with Singapore-based IDEAglobal.

In Asia, Malaysia's corporate tax is higher than Hong Kong's 16 percent, Singapore's 22 percent, South Korea's 24 percent and Taiwan's 25 percent. But it is lower than 30 percent in China, Thailand, Indonesia and Brunei, and 32 percent in the Philippines.

Economic rival Singapore has committed to lower tax further to 20 percent by 2005, further widening the gap with Malaysia, which also faces stiff competition for investment from low-cost producers like Thailand and China.

The Federation of Malaysian Manufacturers urged the government to cut corporate tax in future, describing it as the "most transparent tool" to woo investors and raise disposable income to boost consumption.

But Mahathir said investors have received sufficient tax breaks and Malaysia wanted to cut dependence on foreign investment and build up its small and medium-sized industries which make-up 90 percent of local firms.

The premier gave tax boosts for manufacturing, agriculture, education, tourism and technology sectors in his final push after 22 years in power, hoping to realize his dream of making Malaysia an industrialized nation by 2020.