Malaysia Cuts Taxes, Pledges Handouts to Fight Inflation, Anwar

By Stephanie Phang and Soraya Permatasari

Aug. 29 (Bloomberg) -- Malaysian Premier Abdullah Ahmad Badawi cut taxes, promised free electricity for the poor and raised food subsidies in a budget designed to fight inflation and prevent the opposition from seizing power.

Announcing a 5.1 percent increase in next year's spending, Abdullah today pledged bonuses to civil servants, lowered duty on home purchases and doubled the number of households on state welfare. Higher spending in 2008 will reverse five years of shrinking budget deficits and create Malaysia's biggest overspend since 2003.

Abdullah, 68, is facing renewed calls from his own ruling National Front coalition to resign after leading the government in March to its worst election performance in half a century. Today's handouts may soften the impact of the fastest inflation in 26 years and stall a campaign by opposition leader Anwar Ibrahim to oust the government.

``These are populist measures,'' said Singapore-based Kelvin Miranda, an investment strategist at Blufire Asset Management Sdn., which manages $110 million in assets. ``He's trying to buy time.''

The government will reduce the top personal tax rate to 27 percent in 2009 from 28 percent, Abdullah said in a speech to parliament. About 1.1 million lower-income households will be eligible for free electricity, while the premier allocated an extra 3.6 billion ringgit for food subsidies this year.

Suffering Poor

The handouts are ``not commensurate with the vast increase in inflation and high costs,'' Anwar said after Abdullah's speech. ``What is given does not actually alleviate the problems and sufferings of the poor.''

The government's 2008 budget shortfall will reach 34.5 billion ringgit, or 4.8 percent of gross domestic product, the Ministry of Finance said today. The deficit last grew in 2002.

Abdullah increased by 20 percent the tax on cigarettes sold by companies including British American Tobacco (Malaysia) Bhd. to help offset the widening gap between spending and revenue.

Voter anger over rising prices contributed to opposition gains in the March vote that deprived Abdullah's coalition of its two-thirds majority in parliament. Malaysia's inflation accelerated to 8.5 percent last month after the government raised fuel prices to lower subsidies as crude surged.

Malaysian stocks jumped the most in more than five months on speculation that the first cut to the personal income tax rate in seven years will spur consumer spending. Abdullah proposed a range of tax exemptions for employers, from medical costs to maternity expenses.

Economic Growth

Abdullah needs Malaysians to spend more as exports slow to the U.S., Malaysia's largest trading partner. The Asian nation's economy expanded at the slowest pace in a year in the second quarter as manufacturing eased amid a global slowdown and faster inflation hurt consumer spending.

Southeast Asia's third-largest economy grew 6.3 percent in the three months ended June from a year earlier, down from a 7.1 percent gain in the first quarter, the central bank said today. Economic growth is forecast to ease to 5.7 percent this year and 5.4 percent in 2009, the weakest pace since 2005.

Anwar, who won a parliamentary by-election this week, 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.

``The government is responsive to the concerns of the people and has taken measures to lighten the burden of all Malaysians,'' Abdullah said in his speech. ``Efforts by certain parties to destabilize the country by attempting to seize power through illegitimate means, and without the mandate of the people, must be rejected.''

Gasoline Prices

Governments across Asia are spending more on subsidies to help the poor cope with higher oil and food costs. Inflation that the Asian Development Bank estimates may reach the highest in a decade in 2008 has stoked voter unrest in the region.

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. The government will also spend 5 billion ringgit on cash rebates to car owners this year, is subsidizing gasoline for taxis and has allocated 2.5 billion ringgit for food security.

Malaysia's government subsidies on bread, cooking oil, fuel and programs to enhance food security will jump to 34.1 billion ringgit this year and total 33.8 billion ringgit in 2009, according to the finance ministry. Still, the ministry expects the budget deficit to narrow to 3.6 percent of GDP next year.

Inflation in Malaysia will remain high until early 2009 before ``moderating towards mid-year,'' according to today's report by the Finance Ministry. The government will introduce new measures to boost its social assistance program, it said.

To contact the reporters on this story: Stephanie Phang in Kuala Lumpur at sphang@bloomberg.net; Soraya Permatasari in Kuala Lumpur soraya@bloomberg.net