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“Vision 2020 would have succeeded, if not for the massive financial scandals, corruption and mismanagement of the previous Government”

Those were the exact words uttered by the current Minister of Finance, YB Lim Guan Eng as he began to table Budget 2020 in Parliament on 11th October 2019. 

While it is the second budget to be proposed under the Pakatan Harapan Government, the relatively new regime has the ambitious aim to improve the economic growth trajectory while bringing stability to the Government’s finances. 

YB Lim Guan Eng also touched on the sentiment of 2020 being a special year, given that Wawasan 2020 was envisioned by YAB Tun Dr Mahathir Mohamad nearly three decades ago to celebrate if Malaysia joins the ranks of developing nations. However, he condemned the previous administration for derailing Wawasan 2020, turning Malaysia into a kleptocracy where the previous BN administration allegedly siphoned funds to the tune of a total of RM150 billion. 

Notable business and economic aspects of the budget will be further discussed in this article, along with fiscal policies and the government initiatives implemented. 

Investments Initiatives

One of the main goals of Budget 2020 is to establish Malaysia as the leading destination for business investment. Numerous initiatives will be put in place to achieve this, the most notable incentive being RM1 billion worth of investments aimed to strategically spur investments from Fortune 500 companies and global “unicorns”. This will generate large amounts of investments as each company is set to invest at least RM5 billion each, which will be channeled into supporting local Small and Medium enterprises (SMEs). Another RM1 billion was allocated to support the efforts of transforming the best and most promising local businesses into globally competitive enterprises. These initiatives are forecasted to generate an additional 250,000 jobs over the next 5 years and strengthen the Malaysian manufacturing, service, and supply chain environment.

Another eminent initiative is the provision of tax incentives to further promote high-value added activities in the Electrical and Electronics (E&E) industry. This initiative was put forward to usher Malaysia into the 5G digital economy and Industry 4.0. Incentives include income tax exemption for up to 10 years and Investment Tax Allowances, a tax exemption on capital expenditure. These incentives aim to encourage companies in the E&E sector to reinvest in Malaysia. RM10 million was also allocated to the Ministry of International Trade and Industry (MITI) for the purpose of monitoring approved investments to ensure it is performing to its aims.

These initiatives to draw investments are likely to be fruitful. A recent poll amongst top business executives in Asia showed that they expected Southeast Asia to eclipse China as the region most likely to generate fruitful returns, especially as China is facing headwinds from the ongoing US-China trade war. However, Malaysia would have to rigorously compete with other ASEAN members to secure investors. According to the ASEAN Investment Report released at the end of 2018, Singapore, Indonesia and Vietnam accounted for 72% of Foreign Direct Investment inflows in the trading bloc, with Singapore remaining the region’s largest recipient. 

Tax Matters

Considering taxes will pay for 63.9% of the RM297 billion allocated for Budget 2020, with the largest proportion contributed from income tax, it is commendable that the government is seeking to improve its progressive income tax structure. Hence, a new bracket of taxable income was introduced for those earning above RM2 million. The tax rate is at 30%, which is a 2% increase from the current 28% rate. This increase will affect the richest in the country, numbered at approximately 2,000 individuals. 

However, we can’t help but ponder if raising the income tax on the top earners by a mere 2% would bring about any satisfactory outcomes in reducing income inequality, especially since Malaysia’s income gap has nearly doubled in the past two decades. To overcome the growing disparity in household incomes, perhaps our policymakers could take a leaf out of Sweden’s book. Sweden has one of the highest tax burdens with the richest being taxed a hefty 57% of their incomes. This may have contributed to them boasting one of the lowest GINI indexes in the world at 24.9%, while Malaysia is at a staggering 42.8%. 

Interestingly, it seems as though the Swedish Tax Agency managed to pull off what seems like an impossible magic trick – taking more than half of their citizen’s earnings whilst leaving them grateful and smiling. This is mainly due to the trust of the people in the state with a broad and deep faith that the money will be employed usefully for the welfare of its citizens. This is no quick fix and will take years, if not decades to address. But with the assurance that it is indeed possible to achieve such a balance, Malaysian authorities should simultaneously lay the groundwork to redistribute income more equitably while regaining the trust of Malaysians.

Entering the Digital Era

To facilitate a “Digital Malaysia”, the government allocated more than RM1 billion towards building digital businesses. RM500 million will be handed down to local SMEs to adopt digitalisation measures for their business operations, such as electronic Point Of Sale systems (e-POS), Enterprise Resource Planning (ERP), and electronic payroll system. An additional RM550 million is set to be apportioned towards providing Smart Automation grants for companies, specifically in the manufacturing and service sector to automate their business processes. These initiatives are predicted to re-energise those industries, raise productivity, and improve national competitiveness. 

In an era where FinTech is increasingly gaining global prominence, Bank Negara is in the midst of finalising licensing framework for digital banks to be established in Malaysia. The final framework will be issued by the first half of 2020 to invite applications. This could possibly mean that digital banks such as Monzo and Revolut would be established in Malaysia over the next few years. By extension, this shift could also see conventional banks such as Maybank, who currently dominate 60% of the market for mobile banking, lose a significant amount of their market share to these challenger banks. 

Despite the uncertain state of the global economy, rocked by the US-China trade war and Brexit, YB Lim Guan Eng is confident that the Malaysian economy will remain resilient moving forward into Wawasan 2020. In terms of our economic outlook, the Malaysian GDP growth is expected to improve to 4.8% from 4.7% and inflation is expected to remain well anchored at 2.1%. Once the Budget 2020 initiatives are put into place, we can only hope that Malaysia will gradually resurge as the Asian Economic Tiger once again.