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.