Global recession and lower oil prices will wreak havoc to the Government's 2009 Budget

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Media Statement by Tony Pua in Petaling Jaya on Friday, 10^th October 2008:

Global recession and lower oil prices will wreak havoc to the Government's revenue and expenditure in its 2009 Budget

The Government's 2009 financial budget which had been highly aggressive with a record RM207.9 billion expenditure and overly optimistic in its revenue projection of RM176.2 billion will only lead the Government to fail to meet its budget deficit target for the 2nd year in a row.

For 2008, despite having projected a decline in budget deficit from 3.2% in 2007 to 3.1% in 2008, the Prime Minister have announced that the Government has failed to keep a lid on the deficit, which will balloon to 4.8% this year. This increase in deficit was despite an RM14.5 billion increase in revenue from the earlier projected 147.1 billion, thanks largely to the substantial increase in oil prices in 2007/8.

For 2009, the Government has projected a 3.6% budget deficit. However, in the light of the global economic crisis triggered by the financial markets turmoil in the United States, it will no longer be possible for the deficit target to the maintained.

In the 2009 Budget, the Government has projected a substantial revenue contribution from the petroluem sector of RM75 billion, which comprises 46.4% of the Government's total revenue. This record contribution from the sector is based solely on the assumption that the global crude oil prices remaining sky high, and the Malaysian crude, Tapis blend will average US$125 per barrel for 2009.

Table: Revenue Contribution of petroluem sector to the
Government relative to price and output 2004-2009

⁽¹⁾ 2008 budget estimate presented in 9/2007
⁽²⁾ 2008 revised budget estimated presented in 8/2008
Sources: Malaysia 2008/9, 2007/8 Economic Reports; Petronas Annual Report 2007/8

However, with the global recession and curtailed economic demand, global oil prices have fallen dramatically, with the Tapis blend now costing under US$100 per barrel. With nearly all analyst agreeing with a bleak 2009, it is now anticipated that oil prices may fall further.

The more than 20% fall in crude oil prices will have a major impact on the Government's revenue. We anticipate that at US$100 per barrel of Tapis blend, the Government will lose an estimated RM14 billion in revenue from the sector.

Without a any reduction in the Government's planned record expenditure, this will mean a massive increase in the Government's budget deficit to a precarious 5.4%, from its projected 3.6%.

Aside from the Petroluem income tax, the Government has also projected a RM3.3 billion or a 6.7% increase in personal, cooperatives and corporate income tax revenues despite a cut in corporate tax rate by 1% to 25%, adjustments to lower personal income taxes as well as the global economic slowdown. The government has also estimated the crude palm oil (CPO) price to average RM3,000 per barrel in 2009 although it has already dropped to less than RM1,800 today. This will only mean substantially lower profits for the Malaysian plantation companies. Any threat to these tax collections will hence further undermine the Government's ability to maintain its fiscal prudence.

As the Parliament will commence its debate on the 2009 Financial Budget from Monday next week onwards, we'd like to call upon the new Minister of Finance, Datuk Seri Najib Abdul Razak to table a new, revised and improved financial budget in parliament. This is especially required in the significant events which had occurred since the former Finance Minister had presented it in Parliament on 29th August, including the collapse of the global financial markets as well as commodity prices.

We will like to call upon the new Minister, as his first task in Parliament to slash operational expenditure which has exploded in recent years under Abdullah Ahmad Badawi's administration, from RM80.5 billion in 2004 to RM154.2 billion in 2009, or by 91.6%.

In the light of the volatile economic circumstances, Datuk Seri Najib must not only spew rhetoric about Malaysia's sound economic fundamentals and be in denial about the economic fallout which is about to hit us very hard, but instead take action and demonstrate his ability to soundly managing the country's financials to reassure investors and return the loss of confidence in Malaysia's economy.

Otherwise, the failure to even defend the budget deficit in his first year as the Minister of Finance will seriously erase any credibility he may have in managing Malaysia's economy.

* Tony Pua Kiam Wee, DAP National Publicity Secretary & MP for Petaling Jaya Utara