Back in January, the official deficit projection for 2015 was revised up by the government to 3.2% of GDP from 3.0% due to the falling energy prices. I concluded then the new target was achievable if government revenue would increase by at least 1.2% YoY. It was a reasonable target eight or nine months ago.
Unfortunately, a lot of things have happened since then and that 1.2% YoY revenue growth does not look easy anymore. That means, the current deficit target seems incredible now.
I have updated my sensitivity analysis. I think the fiscal deficit this year will likely be around 3.5%-3.9% of GDP. I did a tighter projection for work but I can afford to cast a wider net here.
Below is a table of deficit-to-GDP, dependent on revenue and NGDP changes this year. I have highlighted several cells in red corresponding to my expectations.
The assumptions (projections?) are:
- 0%-2% revenue contraction
- 4%-5% NGDP growth.
- For government spending growth, I imputed 1.2% YoY into my model, which is the exact increase the government announced from its budget revision back in January. I do not expect any spending cut due to… hmm… some political imperatives and I suppose, Keynesian tendencies within the government. I am unsure how the Monday announcement would affect spending as details are scarce so far but my gut feeling says it will not matter.
The weaker revenue is mostly due to depressed petroleum tax collection, lower petroleum royalties and lower dividend. I am a bit unsure how other taxes, especially company and individual income taxes, will change. But what we do have is the first half data and individual income tax collection is already down by 33% YoY, partly, I guess, because of the earlier tax cuts. Company income tax collection rose strongly however, increasing 43% YoY but judging from earning reports so far, I think the second half will be very different.
The 1MDB Minister Prime Minister Finance Minister will table the government budget on October 23. We will know more then.
- My current expectation is based on 1.2% spending growth, 0%-2% revenue contraction and 4%-5% NGDP growth. These are part of the three assumptions listed above.
- Back in January 2015 during the revised budget, the assumptions were 1.2% spending growth, 1%-2% revenue growth and 4%-5% NGDP growth.
- The original 2015 official projection, shared in October 2014, was 3.2% spending growth, 4.5% revenue growth and 9% NGDP growth.
You can see the drastic change in projections and assumption since October 2014. Maybe a table will be clearer for comparison:
