| I. INTRODUCTION |
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| Mr. Speaker Sir, |
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We are grateful to
the Almighty for enabling us to assemble here today for the tabling of the 2002 Budget.
This Budget is crucial for us as we need to address the greater challenges arising
from an increasingly difficult external environment. |
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| 2. |
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World economic growth
slowed down since the beginning of the year, following weak economic performance
in the United States and Japan. The horrendous attack on the United States further
aggravated global economic conditions with prospects of an early recovery becoming
more uncertain. The attack was inhuman with thousands of lives being lost. The whole
world was shocked and the effects are indeed far reaching. It not only weakened economic
performance, but also threatened global political stability and security. Malaysia
opposes violence. At the same time, we are also against a war to combat violence.
War is not a solution as many more lives will be lost and more resources destroyed.
It will also cause further sufferings. It will not eradicate terrorism, nor curb
terrorist activities. Those involved are not Afghans and not many are in Afghanistan.
These terrorists reside in many countries and can launch their attacks from any location.
Malaysia has fought terrorism for 42 years. While our military assaults were only
confined to terrorists, we also undertook psychological warfare to win the hearts
and minds of the people to neutralise their support, while eradicating the root cause
of terrorism. |
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| 3. |
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Military assaults
alone will not solve the problem. War will only worsen the already weak world economy.
Already we have to face war risks. Links with our trading partners may be disrupted.
Costs of insurance on shipping, freight and air transportation have escalated. Global
demand for products will continue to decline while costs of trading will increase. |
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| 4. |
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The aftermath of
the September 11 incident witnessed a crash in major equity markets, some unprecedented.
Equity markets in the United States were the worst affected with the Dow Jones declining
by double digits, to the lowest level in recent years. A day after the attack, stock
markets throughout the world experienced heavy selling pressure. The Dax Index fell
8.5 per cent, marking its biggest single-day decline. The FTSE Index shed 5.7 per
cent, also reflecting the largest single-day fall since 1987. The Nikkei Index which
was already at its lowest level in 17 years, declined further by 6.6 per cent to
a new low. Similarly, other stock market indices, like the Hang Seng and the STI
also slumped. Stock markets in Taiwan, Thailand and Kuala Lumpur which reopened on
13 September, experienced similar declines. |
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| 5. |
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Costs of finance
and insurance will surge. Investor sentiment and consumer confidence deteriorated.
There was flight to quality with investors shifting their funds to other financial
centres. The United States is no longer a 'safe haven'. Amidst this environment,
the prospects for an early recovery are increasingly dim. Industrial economies may
be faced with the possibility of recession. With the possibility of a prolonged attack
on Afghanistan, global economic prospects will undoubtedly deteriorate further. |
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| 6. |
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As an immediate response
to prevent the economy from deteriorating, the United States Administration injected
liquidity into the financial system and reduced interest rate to 2.5 per cent. This
represented the ninth interest rate cut from the level of 6.5 per cent early this
year. The United States Congress approved a 40 billion dollar fiscal allocation for
reconstruction, security and relief efforts. An additional 75 billion dollar fiscal
stimulus package was also announced. The United States Administration further approved
a bail-out package of 15 billion dollars to support their airlines industry. In this
regard, when Malaysia restructured its companies, including our national airlines,
international financial institutions, in particular the IMF and World Bank accused
us of bailing out cronies. We were accused of practising nepotism and lacking in
transparency in corporate governance. It is obvious that in critical situations,
other countries also adopt the very measures that we undertook which were criticised.
Apart from bailing out, other measures taken by Malaysia which were once condemned
by the foreign media are also being implemented by these countries. The foreign media
did not condemn these actions. The foreign media themselves is now not that independent
anymore. The safety of the majority is more important than total freedom. |
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| 7. |
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As an open economy
with trade accounting for more than 200 per cent of GDP, the Malaysian economy has
been affected by the growing difficulties in the external sector. The economy has
just recovered from the financial crisis of 1997-1998. However in the ,light of the
recent developments, GDP growth for 2001 which had been revised from 7 per cent to
between 5 to 6 per cent in March 2001, has been further revised downwards to between
1 to 2 per cent. The Government responded immediately by putting in place measures
to prevent further deterioration in the economy. As we cannot be overly dependent
on external trade, growth must be led by domestic economic activities as well as
by exploring new markets. |
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| 8. |
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In line with the
domestic-led growth policy, the Government announced an additional pre-emptive fiscal
package of 4.3 billion ringgit on 25 September 2001. This is an addition to the earlier
pre- emptive package of 3 billion ringgit which was announced in March. The package
is aimed at stimulating domestic economic activities as well as alleviating the negative
impact on the low-income group and the disadvantaged. It is also aimed at promoting
business activities, increasing income opportunities for small entrepreneurs and
assisting retail businesses. In this regard, specific small rural projects have been
offered to class F Bumiputera and non- Bumiputera contractors. The package will provide
skill training for retrenched workers and unemployed graduates. |
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| 9. |
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The fiscal stimulus
package will not have its intended impact of generating higher growth, if the programmes
and projects under the package are not implemented immediately. The Government has,
therefore, reviewed the procedures, rules and guidelines on the implementation of
development projects and payments to contractors. |
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| 10. |
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To expedite the implementation
of projects, ministries and agencies have been empowered with greater delegated authority.
ender Boards at ministries have been given the authority to approve tenders up to
50 million ringgit for works procurement and 30 million ringgit for supplies and
services. Their Tender Boards can also approve restricted tenders up to 5 million
ringgit without Treasury approval. As for statutory bodies, the approval limit for
tenders for all supplies, services and works has been raised to 100 million ringgit
and up to 10 million ringgit for restricted tenders. This delegation should not result
in abuses of authority, but should be accorded greater responsibility. |
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| 11. |
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A task force has
been established in the Ministry of Finance to monitor the progress as well as identify
and address plementation problems to ensure that all measures under the fiscal stimulus
are implemented immediately. A Flying Squad has also been established to ensure that
the implementation of public and privatised projects is carried out as scheduled.
In order to expedite payment, all Ministries and agencies are required to pay 50
per cent upon submission of claims. Payment of claims must be settled within 30 days
from the date of submission. The Administration, including Ministers will monitor
financial management without getting involved in decision making. Aggrieved parties
will have recourse to the Ministers. On the other hand, Ministers must exercise care
and caution in their supervisory functions to avoid accusations of favouritism. |
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| 12. |
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Monetary policy will
continue to be accommodative to complement fiscal stimulus. On 20 September, Bank
Negara Malaysia reduced the 3-month intervention rate by 50 basis points to 5 per
cent, aimed at stimulating business sentiment and consumer confidence. This reduction
represents the first cut in more than two years and is in tandem with actions taken
by other .central banks in several major industrialised countries. Following the
reduction, the base lending rate of commercial banks and finance companies declined
to reach historical lows of 6.4 per cent and 7.45 per cent, respectively. |
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| II. ECONOMIC CHALLENGES |
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| Mr. Speaker Sir, |
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| 13. |
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We have proven our
ability to successfully manage our economy under all circumstances, through boom
and bust. Our ability and success should provide the confidence and should drive
us to mobilise efforts and respond immediately to challenges arising from the instability
in the external environment. In moving forward, we have to intensify efforts to overcome
obstacles that could derail our goal of achieving developed nation status. |
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| Reducing Dependence
on Electronics Exports |
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| 14. |
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Malaysia is the world's
17th largest trading nation. Electronics is the nation's main export, contributing
nearly half the export earnings of the manufacturing sector and 41 per cent of the
nation's export earnings. However, more than 70 per cent of electronics components
comprise imported intermediate goods. As such, the nation has not been able to maxi
mise benefits from higher value-added activities of exports. Gross exports is expected
to decline by 10.6 per cent, following the significant contraction in global demand
for electronics products this year. We must, therefore, diversify the sources of
exports as well as explore new markets. We cannot be overly dependent on a particular
export item, especially one with a high import content. However, we should not reduce
the exports of electronics. Instead, we should endeavour to increase the export of
other items in order to reduce our dependence on exports of electronics. |
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| Realising the
Full Potential of the Services Sector |
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| 15. |
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The services sector
is one of the main contributors to growth, accounting for 55 per cent of GDP in 2001.
Nevertheless, there is scope for further improvement. The nation has modern ports
and airports with the potential for becoming the hubs for cargo movement as well
as attracting domestic and international integrated express operators. Johor ports
must seize the opportunities from their strategic location and proximity to Singapore
to provide world-class port services. Meanwhile, the Senai airport should become
the air cargo hub in the region. Given the potential of Johor ports and Senai airport,
a more efficient and effective integrated transportation system must be immediately
developed to link air, land and marine transportation network in the south of the
Peninsular. |
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| 16. |
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The performance of
the tourism sector has been excellent. Currently, foreign tourist arrivals have recorded
the highest level at more than 1 million a month. Nevertheless, concerns on the safety
of air travel, particularly in the west in the wake of the September 11 attack, will
affect tourist arrivals from these countries. Thus, efforts must be intensified to
attract tourists from Asia, in particular from countries in the Persian Gulf and
West Asia as well as India, China and ASEAN, in addition to further promoting domestic
tourism. The transport, tourism and hotel industries should collaborate and participate
in the Government's tourism promotional efforts. |
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| Enhancing the
Performance of the Agriculture Sector |
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| 17. |
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The nation is endowed
with fertile land which can be utilised for the cultivation of crops and rearing
of livestock. However, the growth of the agriculture sector has been concentrated
only on a few commodities, such as rubber and oil palm. These commodities are subject
to price fluctuations, thus affecting incomes, in particular, of the smallholders.
We are also overly reliant on food imports, which exceeded 11 billion ringgit last
year. It is, therefore, vital to diversify the agriculture sector to produce higher
value-added products. Emphasis has not been given to fresh and salt water fish farming
as well as rearing of cattle, goats and other livestock, such as ostrich, deer and
ducks. Mixed farming has as yet not been promoted. These efforts have not been undertaken
on a large scale although our strength lies in managing large agricultural estates.
Smallholders have not yet merged themselves through cooperatives or companies for
this purpose. |
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| Increasing
the Dynamism of the Private Sector |
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| 18. |
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The private sector
has been adversely affected by the global economic slowdown. Its contribution to
GDP has declined significantly to 12.8 per cent compared to 32 per cent prior to
the financial crisis. Since 1997, economic growth has been driven mainly by public
sector investment. However, in the long term, economic growth cannot continue to
rely solely on public sector investment through fiscal stimulus. Neither can we depend
on the inflows of foreign direct investment, due to its volatility and greater competition
from other countries, such as China and Latin America. The private sector has not
identified its comparative advantage in areas where it can increase production. |
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| Improving Competitiveness |
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| 19. |
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In the era of globalisation
and liberalisation, the nation faces greater competition from producers in international
markets, particularly with the emergence of developing countries, such as China.
Several reports have indicated that the nation's competitiveness has declined in
the medium term. In other words, our productivity has not increased in line with
the increase in the cost of production. If this trend is not checked, Malaysia will
lose its share in the international market. As a result, workers may lose their jobs,
wages will not increase and there will be no additional new job opportunities. |
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| III. BUDGET STRATEGY
2002 |
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| 20. |
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In the light of the
increasingly more difficult global economic outlook and greater challenges encountered
as well as the need to address domestic issues, 2002 Budget will focus on the following
strategies: |
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strengthening the
nation's economic growth through increased domestic expenditure, enhancing the role
of the private sector and increasing competitiveness; |
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diversifying sources
of growth through trade and domestic industrial activities without reducing the role
of foreign direct investment as well as ensuring the continued expansion of the nation's
exports; and |
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ensuring equitable
distribution of wealth between urban and rural areas, between high and low income
groups and between the more developed and less developed states. |
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| First Strategy:
Strengthening the Nation's Economic Growth |
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| Increasing Domestic
Expenditure |
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| 21. |
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The more conventional
way to revitalise the economy is through increasing public expenditure. For 2001,
we had used this approach with a fiscal stimulus of 3 billion ringgit in March. With
the worsening of the global and US economies, following the September 11 attacks,
an additional expenditure of 4.3 billion ringgit was approved. |
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| 22. |
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Money will only generate
wealth if it changes hands. Suppliers of goods and services will earn profits from
each transaction, while consumers will through the value of goods, realise the value
of their money. The higher the frequency with which money changes hands, the greater
is its contribution to the nation's growth and wealth creation. |
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| 23. |
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Expenditure is essential
in stimulating and increasing economic activities. The additional expenditure by
the Government in March and after the September 11 incident will enhance the velocity
of transactions of goods and services. Higher Government expenditure will enable
the implementation of more projects, increase the sales of building materials while
contractors and sub- contractors will receive payments and workers, wages. These
payments will spur consumption of goods and services. It is clear that the stimulus
package will benefit all, in terms of additional income. The Government will then
benefit in terms of higher collection of tax revenue from greater business activities. |
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| 24. |
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The Government will
adopt this strategy of fiscal expansion in 2002 Budget, through higher Operating
Expenditure and Development Expenditure. The fiscal stimulus will be implemented
as follows: |
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| Continuing the
Fiscal Stimulus |
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| 25. |
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I propose an amount
of 100.52 billion ringgit to be allocated for the 2002 Budget, an increase of 10.4
per cent compared to the original 2001 allocation. Of this, an amount of 66.98 billion
ringgit is for Operating Expenditure and 33.54 billion ringgit is for Development
Expenditure. Taking into account the revenue estimates of 73.4 billion ringgit, the
overall Federal Government account is estimated to record a deficit of 5 per cent
of GDP, amounting to 18.6 billion ringgit in 2002. The deficit is lower than the
22.4 billion ringgit or 6.5 per cent in 2001. |
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| 26. |
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An amount of 33.33
billion ringgit from the Operating Expenditure is allocated for Grants and Fixed
Payment obligations. This includes debt-service charges, payment of pensions and
gratuities and contributions to statutory funds. An amount of 17.58 billion ringgit
is for Emoluments, 12.07 billion ringgit for Services and Supplies, 1.53 billion
ringgit for purchase of office equipment
and facilities and 2.47 billion ringgit for other expenditure, including tax refunds. |
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| 27. |
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Of the proposed total
Development Expenditure, an amount of 13.11 billion ringgit or 39.1 per cent is allocated
to the economic sector, including rural development, agriculture, infrastructure,
industrial, rural electricity and water supply projects. An amount of 12.21 billion
ringgit or 36.4 per cent is allocated to the social sector, that is, for education
and training, health, welfare and community development as well as projects for youth
and sports. In addition, 3.31 billion ringgit or 9.9 per cent is allocated for the
security sector and 2.91 billion ringgit or 8.7 per cent allocated for the general
administration sector. The balance of 2 billion ringgit or 5.9 per cent is for Contingencies
Reserve. |
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| Encouraging Consumption |
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| 28. |
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The nation's income
has been affected following the global economic slowdown and the negative wealth
effect from the decline in share prices, thus affecting the purchasing power of the
rakyat. To increase the disposable income of the rakyat, I propose that the individual
income tax rate be reduced between 1 and 2 percentage points for all income bands.
The maximum individual income tax rate which is currently at 29 per cent is now reduced
to 28 per cent, thus harmonising with the corporate tax rate. In addition, with a
view to rewarding work efforts, the chargeable income subject to the maximum tax
rate be increased from more than 150 thousand ringgit to more than 250 thousand ringgit.
In line with this reduction, the income tax rate for cooperatives be reduced by 1
percentage point across the board while the income tax rate for non-residents be
reduced from 29 per cent to 28 per cent. These measures will result in a revenue
loss to the Government, amounting to 873 million ringgit. However, this amount will
be available for consumers to spend, thereby stimulating economic activities and
contributing to GDP growth. |
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| Further Stimulating
the Role of the Private Sector |
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| 29. |
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The private sector
has to resume its role as the main catalyst of economic growth. In this regard, the
Government will continue to offer special incentive packages as announced in the
2000 Budget to attract quality investments. To date, the Government has approved
20 projects with investments totalling 33 billion ringgit under the pre-package incentives,
mainly for petrochemicals and electronics. In addition to attracting new investors,
existing investors must also be encouraged to continue to reinvest in expansion projects,
modernisation, automation and diversification. Therefore, I propose that the period
for Reinvestment Allowance be extended from 5 to 15 years. |
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| 30. |
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Efforts to attract
investments are increasingly becoming challenging. In this respect, the Government
has received many proposals to reduce corporate tax. However, the Government does
not intend to reduce the corporate tax, since the rate is still competitive compared
to many ASEAN, Asian and other developed countries. Malaysia does not impose tax
on dividends, unlike several other countries, including Thailand, Taiwan and Japan.
Furthermore, we have already provided various tax incentives to foreign and domestic
investors. If all these are taken into consideration, our effective tax rate is lower. |
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| 31. |
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Small and medium
companies, which are resilient and competitive, are the backbone for supporting growth
of larger industries. In order to compete in the international market, small and
medium companies must participate in the Global Supply Chain Management Network for
on-line and real-time procurement, production and logistics management. To use this
network, small and medium companies need to utilise internet-based common order code
such as RosettaNet, to communicate directly with global suppliers. A grant of 5 million
ringgit is provided for the development of RosettaNet. In addition, I propose that
the expenditure incurred .by multinational companies in pioneering this programme
for the benefit of the small and medium-scale companies be given deduction for purposes
of income tax. |
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| 32. |
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To increase the participation
of Bumiputera community in industrial and commercial activities, particularly in
the retail sector, the Government had launched the projek Usahawan Bumiputera Dalam
Bidang Peruncitan or PROSPER. This scheme is aimed at assisting small Bumiputera
entreprenuers who lack capital, face difficulties in securing suitable premises or
locations and experience management problems. Up to 8 October 2001, PROSPER has successfully
trained 2,997 Bumiputera entrepreneurs in the retail sector. A total of 82 business
proposals has been approved, of which 12 are from ex-army personnel. For 2002, an
additional 250 Bumiputera entrepreneurs are expected to be trained. PROSPER is not
a get-rich scheme but a serious scheme for long-term business undertakings that will
grow if managed properly. |
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| Increasing Competitiveness |
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| 33. |
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In the light of greater
challenges of a borderless world and with our commitment towards the implementation
of AFTA, the nation needs to increase its competitiveness and productivity to become
a global player in the international marketplace. As a measure to reduce the cost
of doing business and increase competitiveness, I propose that Industrial Building
Allowance granted to approved buildings including hotels be reviewed as follows:
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the annual allowance
be increased from 2 per cent to 3 per cent. As a result, companies can claim depreciation
within a shorter time frame, that is, from 45 years to 30 years; |
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initial allowance
of 10 per cent currently granted for capital expenditure incurred in the construction
of buildings be extended to capital expenditure incurred in the acquisition of buildings;
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Industrial Building
Allowance be given to all hotels. |
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| 34. |
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As a further measure
to reduce cost and increase competitiveness, I propose that import duties on 55 products
which have been long protected be reduced from between 20 per cent and 1 05 per cent
to between 10 per cent and 50 per cent. Among the products involved are aerated beverages,
woven fabric, lace and blankets. I further propose that import duties on 171 products
inclusive of intermediate goods such as multimedia projectors, telephone answering
machines, furniture components and photographic papers be reduced from between 5
per cent and 35 per cent to between 0 per cent and 25 per cent. In addition, as a
measure to reduce the cost of doing business for shipping companies in Malaysia,
I propose that income received by non-residents from renting containers to shipping
companies in Malaysia be exempted from income tax. |
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| 35. |
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I further propose
that the annual deduction on expenses incurred in acquiring proprietary rights such
as patents, industrial designs and trade marks be increased from 10 per cent to 20
per cent for a period of 5 years. It is hoped that this measure will accelerate the
acquisition of the state-of-the-art technology. |
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| 36. |
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To enhance productivity
and competitiveness, employers must undertake to train and upgrade the skills of
their workers. In this regard, the Government has set up the Human Resource Development
Fund as well as provided tax incentives for training in technical and vocational
fields. In addition, practical training schemes need to be encouraged as one of the
avenues to increase the supply of skilled and trained manpower. Therefore, I propose
that expenditure incurred by any person in providing practical training to individuals
who are not their employees be given deduction for purposes of income tax. |
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| 37. |
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The payment of bonus
is an incentive to workers to increase productivity. Currently, tax deduction on
bonus payments is limited to two months salary. I propose that the restriction on
bonus be abolished. It is hoped that this measure will provide an opportunity to
employers to offer remuneration which is commensurate with the their workers' productivity. |
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| 38. |
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The Government hopes
that trade associations will continue to play an important role, taking pro-active
measures to further develop their members' activities. To assist these associations
to strengthen their financial position, I propose that statutory income from subscription
fee be exempted from income tax. |
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| Development of
ICT and Venture Capital |
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| 39. |
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The national ICT
agenda aims to create a knowledgeable, informed and ICT -sawy society. The Government
has allocated an amount of 112.7 million ringgit to implement the Electronic Government
Flagship Project, 72.3 million ringgit for Smart Schools, 20 million ringgit for
Telemedicine, 86.3 million ringgit for Smart Card and 9.5 million ringgit for Integrated
Application. Apart from this, an amount of 487.67 million ringgit is allocated to
increase the computerisation programme in ministries and departments and 205.5 million
ringgit for computerisation of schools. |
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| 40. |
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To enhance the usage
of multi-purpose smart cards, financial institutions need to provide the appropriate
infrastructure including related equipment, such as loading devices and card readers.
As its implementation would require large capital outlays, I propose that smart cards
and its related equipment be given sales tax exemption. |
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