KUALA LUMPUR ― Malaysia on Friday (Nov 6) unveiled an expansionary budget today aimed at spurring domestic activity, according to government reports, as it grapples with the economic fallout of the Covid-19 pandemic amid rising political uncertainty.

The passage of the budget is seen as vital for both the coronavirus-hit economy and Prime Minister Tan Sri Muhyiddin Yassin, whose position is under threat from the Opposition and cracks in his own coalition. A defeat of the budget would amount to a no confidence vote for Muhyiddin, and would plunge the country into more political instability.

The government boosted spending in the 2021 budget by 2.5 per cent to RM322.5 billion (S$105.1 billion) even as the fiscal deficit is expected to hit 6 per cent this year ― its highest since the 2009 global financial crisis, one of the reports showed.

“The government believes that the current fiscal policy response is the right course of action,” Muhyiddin said in his foreword for the government's 2021 fiscal outlook report, released ahead of the budget speech.

“There has been an urgent need to ensure (that) substantial stimulus measures and (the) economic recovery plan are implemented expeditiously.”

Spending grew in 2020 as the government rolled out RM305 billion worth of stimulus packages to cushion the blow from Covid-19, while revenues shrunk along with the economy, projected to fall 4.5 per cent this year, the report showed.

But the fiscal deficit will likely narrow slightly in 2021 to 5.4 per cent, with the economy seen rebounding 6.5-7.5 per cent and revenues rising next year on improved domestic and global demand, it said.

The budget comes as Malaysia's economy has been hard hit by the pandemic. The trade-reliant economy saw its first contraction in over a decade in the second quarter, as the coronavirus outbreak hit business activity and exports, causing gross domestic product (GDP) to drop 17.1 per cent.

Growth next year is expected to be supported by a 2.7 per cent rise in gross exports after a 5.2 per cent fall in 2020, according a separate report on the economic outlook.

But government debt is also expected to rise moderately to 61 per cent of GDP in 2021 ― above the government's self-imposed limit of 60 per cent ― as it boosts borrowing to finance fiscal support.

The total spending increase includes a 4.3 per cent rise in the operating budget ― the cost of running the government ― to RM236.5 billion, while development spending on items such as infrastructure will jump 38 per cent to RM69 billion in 2021.

Revenue meanwhile is seen rising 4.2 per cent to RM236.9 billion ringgit next year, including an estimated RM18 billion in dividends from state energy firm Petronas.

Monetary policy will continue to provide support to the economic recovery next year, the government said in the economic outlook report, flagging “the resurgence of Covid-19 cases, geopolitical tensions and weak commodity prices” as downside risks. REUTERS