Budget 2020: Feedback from Professor Mahendhiran Nair

Professor Mahendhiran Nair (Monash)

Professor Mahendhiran Nair FCPA (Australia) FASc, Vice-President (Research & Development) and CEO Monash Malaysia R&D, shares his views on Budget 2020 and concludes that “it is the best budget the government can propose under the most difficult global economic environment at present, without increasing the nation’s deficit position.” His analysis in full below:

Budget 2020: “Driving Growth and Equitable Outcomes towards Shared Prosperity” addressed the three core objectives:

  • Creating a high value-based economy with full participation of all segments of society and economy.
  • Bridging the economic disparities among all segments of the population, income groups, ethnicity, regions and supply chain – this is to ensure no communities are left behind as the economy transition to become a high value-added economy.
  • Nurturing a unified, prosperous and dignified nation – be a leading economic centre in the Asian region

Budget 2020 is to help the nation navigate the turbulent global economy environment, build strong economic resilience by moving up the global innovation value chain and ensuring that no segments of the population is left behind as the economy transition to its next stage of development.

Total budget for 2020 is RM297 billion; of which RM241 is allocated for operating expenditure and RM56 billion for development expenditure. The debt and liabilities ratio declined from 79.3% in 2017 to 75.4% in 2018 and increased to 77.1% in June 2019 due to reviving of major infrastructure projects and bailout of Tabung Haji (RM20 billion).

Fiscal deficit 3.7% in 2018 and targeted to drop to 3.4% in 2019. The government envisaged this to drop to 3% in 2020; but due to global uncertainty and the fiscal measures needed to sustain economic growth, the deficit will gravitate around 3.2%. in 2020. Over the medium term, as the global economic attains a steady state and the Malaysian economy become more competitive, there is expectation that the deficit will reduce to around 2.8%.

GDP is expected to grow from 4.7% in 2019 to 4.8% in 2020; and inflation to be around 2% in 2020.

Key feature of the budget is building a resilient national innovation ecosystem that will weather the global economic uncertainties, carve-out niche areas that will draw-in high value-added investments, create high value-added jobs and spur new sources of growth.

The budget is seen as the first of its several budgets to achieving SPV 2030 – the initiatives put in place are similar to Keynesian expansionary policies, investing in infrastructure, talent and important resources that will create value-added economic sectors and high-income jobs for Malaysians. The policies and strategies put in place in Budget 2020 is also to enhance the global competitiveness the local industries and distribute the wealth more equitable across all segments of the populations and economic agents.

To achieve the above objective, this budget endeavours to build and strengthen the blueprints of the national innovation ecosystem (7is):

1. Infrastructure development – major infrastructure programs

Improving the physical infrastructure of the country – preparing for a more technology-intensive economy: these include upgrading and developing new transportation systems (ports, roads and logistic networks), constructing new buildings & facilities and other infrastructure, including intensifying corridor development plans; all of which, will improve the quality of life, reduce the cost of living & cost of doing business and business efficiency.

As part of the initiative, include the reduction in the toll rates over the years and undertaking major infrastructure development in the rural areas, especially in East Malaysia. Close to RM10.9 billion was allocated for rural development initiatives.

A key initiative of the major infrastructure development programs is building more affordable homes and introduction of better schemes for home ownership among the B40 group and improving the living conditions in public housing estates.

The major capital investment in infrastructure will be critical for the economy to create new jobs, stimulate domestic demand and increase foreign direct investment amid the dampened global economic climate. The infrastructure development, especially in the rural areas are important for closing the wealth gap between the rural and urban areas. Good infrastructure in the rural areas will connect communities and businesses in these locations to more thriving and vibrant regions; thus, having significant positive economic spill-over impact in the rural areas and creating much needed high-income jobs in these localities.

2. Infrastructure development (Digital infrastructure)

Major investments have been gazetted for upgrading the digital infrastructure of the country. This is to prepare the nation for a more information- and technological driven society powered by Industry 4.0. In this context the National Fiberisation & Connectivity Plan will be rolled out over the next 5 years with a cost of RM21.6 billion. This is envisaged to provide high speed, affordable connectivity to all regions, especially rural areas and in East Malaysia. Public facilities and schools will be part of the information highway (RM210 million) – acculturating a technology-savvy young generation that will lead Malaysia’s next industrial revolution.

The major upgrading of the technological infrastructure is important to enhance the reach and richness of firms’ access to input resources, information, knowledge, market intelligence and markets. Increasing the adoption of new technology is also important to enhance the creativity of students, employability of the workforce and enhancing the global competitiveness of Malaysian industries.

3. Intellectual Capital – building the talent stock of the country

The budget provides the biggest proportion of funding for education and training (RM64.1 billion) – to nurture the talent of the future that will power Malaysia’s next sources of economic growth and wealth. The funding provided are for upgrading and building new schools and learning facilities. The funding is also to improve the quality of student learning of all segment of the population, including vulnerable communities. Good education and relevant skills will be important catalyst for preparing students for jobs of the future.

This budget gives emphasis to mainstreaming TVET education; thus, increasing funding from RM5.7 billion in 2019 to RM5.9 billion in 2020 for TVET education. As part of this initiative, strong emphasis will be given to building strong public-private partnership, collaboration with Public Skills Training Program (ILKA) and ensure a pathway into MTUN is made available for more ambitious students. HRDF will also work with TVET institutions to upgrade to skills of the current workforce. The budget also gives emphasis to professional certification; and various schemes will be introduced, including EPF withdrawal and matching fund with HRDF for workers to upgrade their skills set for the fast-changing economic sectors. Lack of mid-level technically trained workforce has been a major challenge for industries in Malaysia. Greater emphasis to TVET education will close this gap in the industrial ecosystem of the nation. But this will require careful curation of the curriculum to ensure the TVET programs are fit-for-purpose and meet the needs of current and future industries.

It is envisaged that as the Malaysian workforce becomes more knowledge and technology intensive, and as the economy moves up the innovation value chain, there will be less reliance on cheap foreign labour. The industry-relevant education and skills training will be important to reduce the mismatch in the supply and demand of talent and address the graduate unemployment problem. There are also provisions within the budget to provide incentives for students and the workforce to continuously upgrade their skill set so that enable them to continue to be employed and take-on more higher income jobs; all of which, will increase national productivity and income of the nation.

Government recognises that the Bumiputra community is lagging behind other communities in employment in high-income sectors. As such, significant resources have been provided in this budget for the community to acquire the necessary skills to enable them to work and lead firms in more technology- and knowledge-intensive sectors. To achieve this, the government has allocated close to RM6.6 billion for MARA, UiTM and Yayasan Peneraju Pendidikan Bumiputra to assist bumiputra students to acquire the necessary academic quality, certifications and skills to be employed in the high-income sectors of the economy.

4. Interaction (Building Smart and Sustainable Public Private Partnerships)

Government alone cannot transform the economy into a high value-added economy. The transformation will require all parties (industry, government agencies, community organisations and the rakyat) to work in partnership with a common objective to enhance socioeconomic development in an equitable way. To foster strong partnership between all parties, many of the schemes were put in place in this budget are to foster strong public-private partnerships with respect to major infrastructure and infrastructure projects, skills training programs, matching R&D grant schemes, developing business friendly policies, incentives to internationalise business (via MATRADE) and financing schemes and platforms (for SMEs, MAGIC and MyCIF).

Incentives are also given to foster strong partnership between government and the private sector to provide employment opportunities for all segments of the Malaysian population. Close to RM6.5 billion have been allocated over the next 5 years for this initiative under the [email protected] initiative; [email protected] (wage incentive:Rm500, hiring incentive: RM300); [email protected] (wage incentive:Rm500, hiring incentive: RM300); [email protected] (wage incentive:Rm500, hiring incentive: RM300); and [email protected] – priority is given to TVET courses

To encourage greater women participation in the labour force, provision is given for establishing and refurbishing the childcare facilities. Tax incentive are also provided for operators of these facilities to improve and expand their services.

Strong cooperation among all stakeholder in the economy and increasing women participation in the workforce will not only increase productivity of the economic sectors, increase employability of the graduates, increase disposable income, increase tax revenue and reduce government burden on social services.

5. Incentives for moving up the global innovation value chain

This budget provides significant incentives for firms to adopt to the new realities of the global economy – more technology intensive, open and competitive global economy. Incentives provided in the budget are multidimensional with the common objective of strengthening corporate Malaysia and enabling them to move up the global innovation value chain – among the major incentives’ schemes include the following:

  • Financial Incentive Scheme for Technology Development and Innovation: The incentives given below are provided to help firms adopt new technology, undertake innovative endeavours and enhance their productivity and global competitiveness.
    • Attracting global and technology intensive firms – RM1 billion investment incentive over 5 years to attract Fortune 500 companies and global unicorns in high tech, manufacturing, creative and new economic sectors. These global firms must invest at least RM5 billion to create the local supply network consisting SMEs to benefit from this scheme.
    • Tax incentives for high-valued E&E firms to use 5G and I4.0 technology – tax exception for 10 years; and special investment tax allowance for existing firms to reinvest in Malaysia.
    • Incentive to develop new technology applications using 5G – 5G Ecosystem Development Grant RM50 million, plus matching grant of RM25 million; RM20 million digital content.
    • Matching funds for SMEs to adopt new digital technology – 50% matching grant up to RM5000 per company (RM500 million allocated over 5 years – for the first 100,000 firms.
    • Smart Manufacturing Matching Grant (RM550 million) for 1000 manufacturing firms up to RM2 million per firm.
    • One-Stop Digital Enhancement Centres to prepare SMEs for the 4IR (RM 70 million)
    • Cradle Fund -RM20 million
    • Digital Social Responsibility – improving digital skills of the workforce – given tax deduction.
  • Incentives for Business Development: The incentives provided under this scheme is to help businesses in the various sectors, especially micro and small businesses to acquire the necessary resources for business development and for these firms to expand their international footprints.
    • Skim Jaminan Pinjaman Perniagaan (SJPP) – RM 500 million
    • For Bumiputra Entrepreneurs – from increase from 70% to 80% with a guarantee fee of only 0.75%.
    • For SMEs: (i) women RM200 million (up to RM 1 million); (ii) RM300 million for Bumiputra SMEs.
    • Halal industry: RM10 million;
    • External Market Development Grant (MATRADE): RM50 million;
    • My Co-Investment Fund (MyCIF) (Security Commission): RM50 million.
    • Construction Consortiums Bidding for Overseas projects: RM1 billion (1:5 matching guarantee) for private equity that invest in Malaysian consortiums.
    • Bumiputra Entrepreneur Development grants, RM445 million (PUNB-RM150 million; SME Corp – RM75 million; TEKUN/SME/Pelaburan Hartaatanah – RM170 million; PENARAJU – RM50 million.
    • Strategic Projects (2% financing) -Sustainable Development Financing Fund (RM2 billion); Maritime & Logistic Fund (RM1 billion); and Industry Digitalisation Transformation Fund (RM2 billion).
    • Small Business Loans (4% interest) for Chinese community, RM100 million.
    • Indian Entrepreneurs, TEKUN SPUMI (4% interest), RM20 million.
    • MAGIC RM20 mil and MyCIF (P2P financing platforms), RM10 mil.

The multiple incentives provided for firms are expected firms to enhance their efficiency and productivity; enhance the supplier network and be plugged into the global supply chain and more importantly their market reach and richness for important resource and markets.

6. Institutional reforms and development

In this budget, resources have been channelled to strengthened the role of public institutions to ensure the public assets and resources are used in optimally ways so as to enable the country to achieve its objective of becoming a developed economy by 2030. Among the key initiatives undertaken are to strengthen and improve the efficiency of the public sector, financial sector and tax and custom offices. These reforms are to necessary to ensure these institutions are business friendly and support business development.

The budget also provides additional of RM10 million funding to strengthen the role of the Malaysian Anti-Corruption Agency (MACC) to undertake its tasks more expeditiously and to reduce rent-seeking behaviour that will raise the cost of doing business, stifle business development and foreign direct investment.

Others reforms include the establishment of the Independent Police Complaints and Misconduct Commission, the Malaysian Ombudsman to improve the government delivery machinery; raising the morale and quality of life of public service by improving their remuneration, compensation packages and living conditions.

The above-mentioned institutional reforms are important to ensure the national assets are not only getting better return on investment, but also better return on value in a more sustainable way. Careful monitoring of the targets set under Budget2020 and the SPV2030 will be critical for the success of the 2020 budget and SPV2030 plan in realising the vision of the Rakyat, as mandated to the PH government in the May 2018 election.

7. Integrity & Governance Systems

The budget provides various provisions to improve the technology, talent and undertake the institutional reforms to ensure the nation’s resources are used optimally to create sustained economic wealth and that the wealth of the nation is shared equitably among all segments of the population irrespective of race, religion, ethnicity and regions. These include the following: having open tender process for selling of government assets; use of technology to instil greater transparency and accountability in procurement of services and contracts; and putting in place more effective tracking mechanisms of project delivery, outcomes and timelines.

A key feature of the reforms is to build strong cooperation among the public sector, industry, community organisations and the Rakyat to effectively implement the strategies and policies to achieve the objectives set in the SPV2030 in a prudent way. In this context of budget 2020, the government has allocated adequate funds for development and meeting existing commitment, at the same time maintaining the budget deficit to be 3.2% of the GDP lower than 3.4% in 2019. With the institutional reforms proposed and incentives provided to intensify innovative capability of local firms and labour force, the revenue of the nation is expected to increase to RM244.5 billion (an increase of RM11.2 billion from 2019) and economic growth rate to 4.8% in 2020.  

Overall Summary:

Budget 2020 is the first of the budgets to set the platform for the nation’s development to become a developed economy by 2030, as outline in SPV2030 (Shared Prosperity Vision 2030).

In summary, it is a prudent budget but one which provides adequate funding to build a stronger national innovation ecosystem by empowering firms and the rakyat to acquire the necessary resources to become more agile, responsive and adaptable to volatile and competitive global economy.

Incentives proposed would also enable Malaysian firms to move up the global innovation value chain. The budget also gives emphasis to increasing the disposable income of Malaysian with various tax incentives and cast transfer program for the B40, include subsidy for petroleum and lower toll rates.

While firms may express some concern with the increase in minimum wage; adequate provision is given in the budget for them to obtain cost-competitiveness via adopting new technology and hiring incentive schemes of local Malaysians.

In my opinion, it is the best budget the government can propose under the most difficult global economic environment at present, without increasing the nation’s deficit position.