Think tank BMI Research has revised its forecast on Malaysia’s fiscal deficit, predicting that the deficit will be wider than previously anticipated.

In a statement today, it said it is revising its 2018 forecast from 2.8 percent of GDP to 4.0 percent of GDP. It is also revising its average deficit forecast for the period from 2018 to 2027 from 2.8 percent of GDP to 3.1 percent of GDP.

This followed the Ministry of Finance’s (MOF) announcement that the GST standard rate of six percent will be reduced to zero, effective June 1, which BMI said will have a negative impact on Malaysia’s fiscal consolidation efforts.

It also noted that the government has yet to announce detail on when and how the SST will be reinstated.

“Although we expect the government to iron out the details of the SST over the coming months, implementation is likely to take place only after 2018. This means that the government will forgo about half its GST revenues without any replacement for the remainder of 2018.

“GST accounted about 20 percent of total government revenues in 2017 and losing seven months of it will cause the fiscal deficit to widen considerably in 2018,” said BMI Research, a unit of Fitch Group.

Abolishing the GST and replacing it with the SST is a key campaign promise by Pakatan Harapan. As a step towards that, the MOF zero-rated the GST effective June 1 in line with Prime Minister Dr Mahathir Mohamad’s instructions to stop collecting the tax.

Businesses, however, must still follow other existing rules under the GST Act, such as issuing tax invoices and filing claims for tax credit.

The next day, the MOF said the shortfall will be cushioned by specific revenue and expenditure measures that will be announced in due course, including the reintroduction of the SST.

"Expenditure reduction will begin with rationalisation, efficiency measures and reduction in wastages. Of significance, oil prices have been higher than the US$52 per barrel estimated for Budget 2018. This provides fiscal buffers for the immediate future.

"Fiscal responsibility, transparency and governance will be a paramount consideration in rolling-out the fiscal reform," the MOF said.

However, BMI said its revised figures have already taken the rising oil prices into account, and this alone will only slightly offset the loss of GST revenue.

In addition, the tax revenue from GST was significantly higher than the SST scheme it replaced in April 2015, the latter accounting for only 7.8 percent of total government revenue.

All else being equal, this means Malaysia’s fiscal deficit is likely to widen over the next decade, it said.

BMI also warned that its forecast does not take into account other populist promises in Harapan’s manifesto that could be implemented in the coming months.

“The enactment of those policies, which include the reintroduction of petrol subsidies, could further widen the fiscal deficit,” it said.