(AFP) Prime Minister Dr Mahathir Mohamad is likely to announce tax cuts and higher public spending to ward off a recession in the 2002 budget to be released Friday, analysts said.

Analysts polled by AFP financial subsidiary AFX today said the budget would have to be expansionary to counter the impact of last month's terror attacks on New York and Washington on the US and global economies.

Mahathir, who is also finance mininster, is expected to announce a deficit budget, the country's since the 1997-98 Asian financial crisis.

"The budget will have to be friendly but this time round (it has to be) more purposeful as the economy is decelerating at a greater speed.

"There's legitimacy to spend, a need to cut down the cost of doing business and boost spending," said James Lau, the chief executive officer of SBB Securities.

Lau said the government should ensure that the money allocated for projects to stimulate the economy will filter down, and having a wider pool of contractors and paying them promptly could achieve this.

SBB Securities projects a budget deficit equivalent to 6.0-7.0 percent of gross national product, with economic growth of 0.5 percent this year and 4.0 percent next year.

'Deficit budget'

"Budget 2002 will be another deficit budget but we think the focus should be on incentives for investment.

"We expect the government to factor in the negative repercussions (of the economic downturn) and to have a budget that seeks to stimulate growth," Affin-UOB Securities economist Suhaimi Ilias said.

Suhaimi said there should be a cut in corporate tax, an extension and expansion in the scope of tax holidays and and a temporary freeze on electricity tariffs.

The economy was likely to perform flat to contracting 1.0 percent this year and returning to growth of 2.5-3.0 percent next year, he said.

A reduction in corporate tax is on the cards to cut business costs, analysts said.

Malaysia's corporate tax, at 28 percent, is higher than Singapore's 25.5 percent, Hong Kong's 16 percent and Taiwan's 25 percent but lower than China's 33 percent.

Analysts said in the face of intense competition for foreign direct investment from China, Malaysia would have to review its incentives to ensure that foreign investors do not relocate to China and to attract fresh investments.

For the eight months to August, Malaysia attracted RM13.8 billion in foreign direct investment compared with RM30.2 billion for the whole of 2000.

Slow implementations

In a move to avert a recession this year, the government in March announced a RM3 billion stimulus package, followed by another one for RM4.3 billion last month.

However, analysts noted that the government has been slow to implement the measures announced in March which could mean growth this year could be flat at best, compared with the original official forecast of 7.0 percent.

Against this background, Mahathir may also opt to cut employee contributions to the compulsory Employees' Provident Fund, which were reduced by two percentage points to 9.0 percent earlier this year in an effort to boost consumer spending.