MARC today released its report on Budget 2013, analysing the thrust and content of the Federal Government’s spending priorities, and assessing the macroeconomic projections for the coming year.

Looking ahead to 2013, the government is expecting the economy to grow at a 4.5%-5.5% pace, with domestic demand in the form of higher investment and sustained consumption likely to be the driver of growth, an assessment which is broadly in line with MARC’s expectations. While the external sector is expected to remain weak, it will not hold back sustained economic growth.

On the fiscal front, the government is aiming for a reduction in the deficit to 4.0% of gross domestic product (GDP), having beaten this year’s target by achieving a reduction in the deficit to 4.5%. We think the target is well in hand, with both the government’s revenue and expenditure projections being overly conservative. It would only take a difference of RM5 billion to reduce the deficit by 0.5 percentage points, with the biggest risk to the forecast being average crude oil prices in 2013.

The allocations in the budget were in line with its aims of boosting investment and providing assistance to the middle- and low-income as well as the disadvantaged groups. Various incentives will be given to promote domestic investment, including for small and medium enterprises (SMEs) development, while income assistance will be given to low-income households, farmers and fishermen. Personal income taxes were also adjusted for the middle class, with higher relief and a surprising rate cut for the lower income bands. Another surprise in the budget was the introduction of insurance/takaful schemes to protect farmers, fishermen and hawkers, a measure that provides real benefits to the beneficiary groups without requiring a heavy fiscal commitment by the government.

In housing, the government has opted to continue pursuing public-funded affordable housing projects rather than relying on private developers, although the mild increase in Real Property Gains Tax (RPGT) will not have much impact on house price speculation. Although this is a long-term solution to the country’s housing problem, MARC is hopeful of seeing faster implementation of these projects.

MARC was also looking for a clearer timetable for the implementation of Goods and Services Tax (GST) which was, however, not forthcoming.

Overall MARC believes that the government has managed to achieve an unenviable balancing act between the need to rein in expenditure while at the same time meeting the aspirations of the people and putting the economy on a more competitive footing.