By Stephanie Phang
Aug. 28 (Bloomberg) -- Malaysia's Prime Minister Abdullah Ahmad Badawi, facing challenges to his leadership amid slowing growth and faster inflation, may cut taxes and put more cash in the hands of consumers to bolster support in his 2009 budget.
Abdullah, 68, may propose income tax reductions, lower employee contributions to the national pension fund and cash handouts or rebates to the poor in his budget speech tomorrow, according to economists surveyed by Bloomberg News.
The U.S.-led economic slowdown has hurt Malaysian exports, threatening growth and complicating Abdullah's efforts to stay in power after the ruling coalition's worst election performance in half a century in March. Opposition leader Anwar Ibrahim this week won a by-election, returning to parliament for the first time in a decade and furthering his plan to oust the government.
``Anwar's landslide victory could prompt more desperate and populist measures by the incumbent government to retain its grip on power,'' said Kit Wei Zheng, a Singapore-based economist at Citigroup Inc. ``There is definitely an upside risk to the fiscal deficit.''
Malaysia has refrained from joining its neighbors in raising borrowing costs to cool inflation this year. The central bank this week held its overnight policy rate at 3.5 percent for a 19th straight meeting, citing concern growth will falter, even as inflation reached a 26-year high in July.
The $151 billion Southeast Asian economy probably expanded 6 percent in the second quarter, the slowest pace in a year, according to the median forecast of 16 economists surveyed by Bloomberg News in the week to Aug. 26.
`Political Uncertainty'
``Rising prices, a falling stock market and increased political uncertainty are likely to have dampened consumer spending during the second quarter,'' said Nikhilesh Bhattacharyya, an economist at Moody's Economy.com in Sydney.
Abdullah will announce new economic growth forecasts for 2008 and next year tomorrow, together with estimates for the budget deficit and public spending plans.
Asian governments from the Philippines to Singapore have cut growth forecasts this year as a U.S. slowdown spreads. Inflation that the Asian Development Bank estimates may reach a decade high in 2008 has forced governments to spend more on subsidies to help the poor cope with higher oil and food prices.
Malaysia's inflation accelerated to 8.5 percent last month after the government cut fuel subsidies to keep down its own costs as oil prices rose. The central bank this week said inflation should ``moderate substantially'' in the second half of 2009.
Voter anger over rising prices contributed to opposition gains in March elections that deprived Abdullah's ruling coalition of its two-thirds majority in parliament.
Public Discontent
In response to public discontent over costlier fuel, Abdullah last week cut gasoline prices by 5.6 percent and lowered diesel costs by 3.1 percent, saying he wants to ease the burden of consumers and reduce inflationary pressure. In June, he shelved some public works projects to focus public spending on food security, public transportation and housing and help Malaysians cope with surging prices.
Anwar, 61, a member of Abdullah's coalition until he was fired a decade ago, is now the leader of an alliance of opposition parties and has said he plans to lure enough lawmakers from the ruling coalition to form a new government next month. The former deputy premier has promised to reduce fuel prices should he seize power.
Tax Relief
``Budget 2009 should factor in the need to boost government popularity via people-oriented measures now that Anwar has completed another phase of his political comeback,'' said Suhaimi Ilias, an economist at Aseambankers Malaysia Bhd. in Kuala Lumpur. ``There is this immediate need to address the downside risks to growth and upside risks to inflation.''
Abdullah may increase rebates or relief for taxpayers, cut the road tax on vehicles, and increase the number of items whose prices are controlled in tomorrow's budget, said Lee Heng Guie, an economist at CIMB Investment Bank Bhd. in Kuala Lumpur.
He may also reduce import taxes on raw materials, and lower a withholding tax on dividends for real estate investment trusts, to reduce business costs and encourage investment, according to Citigroup. To make up for the lower revenue as a result of tax cuts, the government may raise taxes on cigarettes and alcohol.
Malaysia last cut the top income tax rate to 28 percent from 29 percent in 2002. The government has posted budget deficits since 1998, when it began spending more than it earned to revive an economy hurt by the 1997 Asian financial crisis.
To contact the reporter on this story: Stephanie Phang in Kuala Lumpur at sphang@bloomberg.net
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