Anwar Seeks to Tax Vanity to Keep Malaysia Fiscally Sound

Anisah Shukry
·4 min read
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(Bloomberg) -- Malaysian Prime Minister Anwar Ibrahim unveiled a revised 2023 budget that proposes to tax vanity spending and use the funds to protect livelihoods, as part of a wider move to narrow the government’s budget deficit.

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The administration will set aside 388.1 billion ringgit ($87.5 billion) this year, Anwar, who also holds the finance portfolio, said in his budget speech Friday. That’s more than what the previous administration had budgeted, and will be funded by higher tax collections, including a new levy on luxury goods.

The tax measures will help narrow the fiscal deficit to 5% of gross domestic product this year, in line with Bloomberg’s survey. The gap was 5.5% in 2022, and the government plans to trim it to 3.2% of GDP by 2025.

Malaysia 10-year yields were little changed at 3.94%. The benchmark stock index fell 0.1% at the close in a third day of losses.

Announcing the plan to tax luxury goods without specifying the rate, Anwar said the levy would cover luxury watches and fashion items.

“Everything that is luxurious should be taxed properly,” he said, adding that the government will also study the introduction of a capital gains tax for the disposal of unlisted shares by companies from next year.

Boosting revenue will bolster Malaysia’s fiscal resilience against threats from a dimming global economy. Alongside reassuring credit rating companies, the tax move seeks to woo the masses ahead of local polls this year.

Anwar rose to power through the support of rival blocs after no clear winner emerged from the Nov. 19 general election. His approval ratings, while positive, trail that of his predecessors during their first few months in office.

The fiscal consolidation plan should keep “risks at bay for the ringgit and Malaysia bonds for this year at least,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets in Singapore.

The government is beefing up development expenditure this year, setting aside 97 billion ringgit for the economy, social services and security sector. That’s about 35% higher than last year’s spending, and 2 billion ringgit more than what the previous government had committed for 2023. Transportation alone will be allocated 17.6 billion ringgit, mainly for the construction of roads and highways as well as upgrading existing infrastructure.

At the same time, operational expenditure is revised higher to account for increased spending on retirement as well as subsidies and social assistance. The government will see a “gradual shift” toward a more targeted subsidy mechanism, while continuing to provide cash assistance to the lower income group, according to the report.

Malaysia expects direct tax collection alone to rise 6.9% from a year ago, primarily from companies and individual income tax. Anwar, who expects the economy to grow faster than 4.5% this year, is also counting on dividend from state oil company Petroliam Nasional Bhd. to help bolster government finances.

Overall, revenue is seen declining 1% from a year ago on lower crude oil prices — a smaller decrease than that projected by the previous government.

The revised figures reflect the end of pandemic-era aid and the realities of slowing economic growth and lower commodity prices.

“2023 is expected to be a challenging year,” Anwar said. “The government will continue to be vigilant of economic headwinds as well as any potential geopolitical conflict in order to devise the appropriate strategies and actions.”

Here are some other key budget measures:

  • Anwar sets aside up to 64 billion ringgit for subsidies, aid and incentives

  • Households earning less than 2,500 ringgit can receive up to 2,500 ringgit aid, based on number of children in the family

  • Additional 600 ringgit will be given to the very poor in the form of food baskets and vouchers

  • Malaysia will reduce personal income tax rate for mid-income earners by 2%

    • The income tax adjustment is expected to provide 2.4 million taxpayers with excess disposable income of up to 1,300 ringgit a month

  • Employees’ Provident Fund members aged 40 to 54 with less than 10,000 ringgit in their Account 1 to get 500 ringgit to top-up their retirement savings; the move will benefit up to 2 million members

--With assistance from Cynthia Li, Chester Yung, Marcus Wong, Anuradha Raghu, Liau Y-Sing, Cecilia Yap, Joy Lee, Kok Leong Chan and Anders Melin.

(Updates with details on budget measures in bullets. A previous version of this story was corrected to fix total spending size after the government revised the number.)

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