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PETALING JAYA: With the pressure mounting to narrow the country’s fiscal deficit to below the projected 3% of the gross domestic product (GDP) level for this year, some economists are optimistic the Pakatan Harapan government will be able to attain the forecast figure although it may not be smooth sailing.

Sunway University Business School professor of economics Yeah Kim Leng said there would likely be a combination of revenue enhancement and expenditure-based measures being instituted to keep the fiscal deficit to less than RM40bil or below 3% of the projected GDP in 2018.

For the present government to maintain the budget deficit at about RM40bil or 2.8% of GDP, he said the loss in GST revenue could be partially offset by higher petroleum revenue should the current high world oil price continue to prevail or by an increase in non-tax revenue sources such as dividends from Petronas and other GLCs as well as sale or privatisation of government assets.

Last Wednesday, the Finance Ministry announced that the GST would be zero-rated from June 1. Capital Economics in a research note said although the move to scrap the GST was expected to give the economy a fiscal boost, it would likely cause a 1% increase to the government’s budget deficit.

Moody’s Investors Service said the abolition of the GST would increase the government’s reliance on oil-related revenues and would also narrow the tax base. If GST was abolished “without adjusting measures,” that would be a credit negative for the country, it noted.

AmBank Group chief economist Anthony Dass, however, felt the a fiscal deficit of 2.8% for this year was within reach. The move to review some mega projects and abolish the GST would help improve the wastages and in turn will be able to maintain the 2.8% fiscal deficit for the year.

He added that if it was to assume an environment where there is weaker transparency, financial prudence, reduction in wastages and corruption, and better public service, the deficit is expected to swell up to RM51bil, which translates into a fiscal deficit of 3.5% of GDP.

“However, based on the success stories of Penang and Selangor under the PH, if we factor in a 5% reduction in operating expenditure, the deficit will be around RM39bil to RM40bil, translating into a fiscal deficit of 2.7% or 2.8% of GDP,’’ Dass said.

“This would mean new initiatives needed to generate alternative revenue sources in the medium-to-long term. It should be noted that Malaysia’s average revenue to GDP has declined to 19% between 2010-2017, compared to 23% in the 1990s. This is in contrast with an average of more than 30% of GDP among single-A rated countries. As such, greater clarity with regards to the medium term revenue-generating measures is clearly needed,” he said.

He reiterated that the gap between the amount of SST to be collected in the near future – should it be re-introduced – and the abolished GST would not be as large as generally expected as the size of tax payers was now larger after the latter was introduced in 2015.

Price stickiness, he said could be a challenge in achieving the ultimate objective of removing the GST i.e. to lower the general price level. Even after the removal of GST, Zahidi noted that consumer prices could remain high due to its “sticky” nature.