Malaysia pledged today to cut its budget deficit next year after years of poor fiscal control and a surge in spending in 2009 pushed it to its highest level in 22 years.

However, the country's Second Finance Minister Ahmad Husni Hanadzlah, the top official in charge of the day-to-day running of the ministry, gave few clues as to how the deficit would be

cut in a year when oil revenues would be weak.

Husni told reporters that operating expenses would be cut by 15 percent next year after the government projected the budget deficit would hit 7.6 percent of gross domestic product in 2009, its highest level since 1987.

He also said the government was looking at means testing for fuel subsidies, which together with food subsidies cost the government RM30 billion annually, according to Husni. Last year, subsidies accounted for over a fifth of total budget spending.

"At this stage, (the deficit) next year will be lower than this year's deficit," Husni told a news conference, adding that operational spending would be cut by 15 percent in 2010.

Malaysia is drafting its 2010 budget after a year in which the government says the economy will shrink by 5 percent, its first major recession since the 1998 Asian financial crisis, while the government tries to rally support after record losses in state and national elections in 2008.

Husni said planned savings included selling or leasing government assets such as land and buildings, cutting down on overseas trips and scrapping direct tenders for government procurement for non-sensitive industries where open and selective tenders would result in greater efficiency.

However, wages for the more than 1.1 million civil servants, at 26.7 percent the largest component of operating expenditure, in 2008, would not be included in the cost-cutting drive.

"Since it would obviously be politically difficult, if not impossible, to cut wages or reduce civil service headcount, the most obvious candidates would be cutting subsidies - especially fuel," said Citibank economist, Kit Wei Zheng.

Politically difficult to implement GST

The International Monetary Fund last week urged the government to introduce a goods and services tax to boost revenues and the Fund forecast the deficit would hit 7.7 percent of GDP this year and only ease to 7.1 percent of GDP in 2010.

"We are looking at it (GST) seriously but the government does not want to cause any pain to the people," Husni said.

Kit said raising corporate and personal income taxes would erode Malaysia's competitiveness, but that it was not politically expedient to implement GST now.

"Given that it was politically difficult to implement GST even during the good years, it remains to be seen if GST implementation will be feasible in a post-crisis world of arguably slower growth," Kit said.

Malaysia shelved plans to implement GST in 2007 but has recently put it back on the drawing board due to declining oil revenues.

Malaysia's budget deficit excluding oil revenues will be 11 percent of GDP in 2008, according to the IMF, and with lower oil prices in 2009 than in 2008, the income from oil will shrink in 2010 as it is based on 2009 prices.

- Reuters