Malaysian Prime Minister Najib Razak, who is also the Finance Minister, will table the 2017 Budget in Parliament today. The challenging global economic environment, which has seen slumps in oil prices since 2014, will make fiscal prudence a priority in the upcoming Budget allocations by the Najib government.

Public debt as a percentage of gross domestic product is almost hitting Malaysia’s 55 per cent ceiling, while the Budget deficit was 5.6 per cent of GDP from January to June, well above the year’s 3.1 per cent target.

The government will have to balance social and economic stability imperatives. This means concurrently addressing the pressing needs of the people by spending on welfare programmes and health and education, while ensuring a lower fiscal deficit target, which is necessary to maintain Malaysia’s credit ratings and foreign investor confidence.

If the Najib government is able to deliver a Budget that sufficiently manages these two imperatives, it may be in a position to stem public dissatisfaction until the Malaysian economy picks up year, as is projected by the World Bank. This would set the stage for Mr Najib, who is also president of the ruling United Malays National Organisation (Umno) to call for a snap election, which many observers are expecting in the middle of next year.

For much of the year, the Najib government has had to act to recover from the cumulative impact of tumultuous events such as allegations of mismanagement and corruption by Mr Najib over the debt-ridden state fund 1Malaysia Development Berhad (1MDB), the slump in oil and commodity prices that hampered Malaysia’s economic growth, the massive foreign capital outflows on expectations of a United States interest rate hike and the ensuing stock market fall, the ringgit’s freefall last year that made it the worst performing currency in Asia, and inflationary pressures that resulted in a rise in the cost of imported goods and the overall cost of living.

Mr Najib acted quickly to consolidate political power by removing dissenters from within the government, and then substantially reduced 1MDB’s debt load by selling off assets to Chinese firms. These moves sent a strong signal to foreign investors who were worried about political instabilities and 1MDB’s ability to repay its debts.

Such actions, notwithstanding the political repercussions at the domestic level, have actually contributed to Malaysia’s economic stability outlook. For example, a September report by the Global Risk Insights, which analyses political and economic risks for investors, stated that even though 1MDB continues to dominate the headlines, it has little bearing on Malaysia’s economic landscape.

Among the reasons cited for a positive outlook for Malaysia were Mr Najib’s ability to reinforce governmental unity at a time when foreign regulators are investigating the country’s affairs; the recovering ringgit making it the best performing Asian currency so far this year; the government’s commitment to the Trans-Pacific Partnership trade agreement; and the World Bank’s positive economic growth projections.

Despite the positive projections, public confidence, especially over the economy, is decidedly pessimistic. A Financial Times Confidential Research survey last month revealed that Malaysians were more pessimistic over their country’s economy compared to the Indonesians, Filipinos, Thais and Vietnamese.

In fact, a majority of Malaysians surveyed expected the economy (and the political climate) to worsen over the next six months.

CAN NAJIB BALANCE THE BUDGET?

This lack of public confidence is reflective of the grim reality of many Malaysians, struggling with inflation, stagnant wages and high private household debt that has been particularly exacerbated over the past two years since the economic slowdown.

An August report by the Khazanah Research Institute showed that only 10.8 per cent of Malaysian households have enough savings to tide over financial shocks caused by unexpected events such as loss of income, changes in interest rates, death or divorce.

There is also lingering public unhappiness with the 6 per cent Goods and Services Tax introduced last year, despite the government’s staunch defence of the scheme.

It is not surprising, then, that the public is not easily swayed by the recent positive projections for the economy. To minimise the impact of the slowdown, the government has already indicated that it would continue its welfare spending for the bottom 40 per cent income group in the 2017 Budget.

However, pundits have suggested that more attention needs to be given to the middle-income group, which has borne the brunt of inflationary pressures in the form of tax rebates.

However, there is a limit to how much the Budget can ameliorate people’s economic struggles, especially in a climate where the government has less money to spend because of the sharp dive in global crude prices.

The Prime Minister has, therefore, cautioned against an overly optimistic Budget, even though populist measures have been a theme of Malaysian Budgets since he took over in 2009.

One of his key challenges this year is to maintain a balanced Budget while ensuring that the concerns of the lower- and middle-income groups are assuaged. These groups represent important electorates for Umno in the next election and could determine the outcome of the polls.

The opposition is likely to scrutinise the Budget closely and jump on any missteps. Already, Kluang Member of Parliament Liew Chin Tong and Dr Dzulkefly Ahmad, Amanah’s strategy director, have warned against a further increase in the Budget for the Prime Minister’s Department. (It rose from 4.9 per cent in 2009 to 7.6 per cent last year). They argued that the increased spending came at the expense of other more important areas such as education.

In sum, the Budget allocation will be crucial for the government as it prepares for a possible early election. It must be seen to help the lower and middle classes cope with the inflationary pressures that have impacted the cost of living in Malaysia.

Any failure on the part of the Prime Minister could result in a decline in support for the governing coalition, which could prove detrimental given that the 2013 election was won by a razor-thin margin.

ABOUT THE AUTHORS:

Saleena Saleem and Mohamed Nawab Osman are both with the Malaysia Programme at the S Rajaratnam School of International Studies (RSIS), Nanyang Technological University. Ms Saleem is an Associate Research Fellow while Dr Nawab is the programme coordinator.