KUALA LUMPUR: The proposed stabilisation plan to be announced by the Government on Monday is seen as a proactive move to cushion the economy from an external fallout, but economists wonder what its effects will be on an already stretched budget deficit.

“Every stabilisation plan comes at a cost. It is a matter of how much and who will incur it. We do not expect it to be a massive pump-priming,’’ said ECM Libra Investment Bank Bhd economist Dr Lai Mun Chow.

He expects the cost to be moderate as the plan would support, instead of accelerate, growth.

“We also expect the stabilisation plan to be private sector-driven through government policy, rather than government-driven through public expenditure. It won’t be surprising if the Government also comes up with some reassuring policy measures for the local financial system,’’ he said.

The Government is expected to announce on Monday details of its stabilisation plan, which would contain measures to help the economy withstand the global financial crisis.

The budget deficit is forecast at 4.8% of gross domestic product (GDP) this year but it is projected to fall to 3.6% in 2009.
CIMB Research chief economist Lee Heng Guie, who forecasts GDP growth of 3% next year, said the new plan should not translate into a looser wallet.

“The Government should stick to its development spending allocation of RM51.7bil next year and not extend it further and run a bigger deficit,’’ he said.

The Government is expected to spend RM46.3bil on development this year.

Lee said fiscal prudence now would give the Government “additional reserves” later in case it needed to ratchet up spending to bolster the economy should the economic prognosis for the United States and the rest of the world sour.

AmInvestment Bank senior economist Manokaran Mottain, who has forecast economic growth of between 3% and 4% next year, believes the new measures to be unveiled by the Government will help steer the economy away from a recession.

He said non-fiscal measures, such as the previously used voluntary reductions in employee contributions to the Employees Provident Fund, would have a significant impact on growth.

“For the lower income group, that had a very good multiplier effect,’’ he said.

One silver lining for the Government, in case it decides on an expansionary stabilisation plan, is the fall in commodity prices.

Even though oil revenue makes up a big chunk of Government coffers, the fall in commodity prices means a smaller outlay on subsidies.

Lai said the 4.8% estimated budget deficit for this year was mainly due to the 225%, or RM23.6bil, increase in subsidies from RM10.5bil in 2007 to RM34.1bil in 2008. The petroleum-related tax and non-tax revenue in 2008 is estimated to be about RM10bil higher than that in the previous year.

“Therefore, as the prices of crude oil and other commodities ease off, the overall net effect on the government coffers will still be positive and it will certainly reduce the budget deficit,’’ he said. “In other words, the actual government budget deficit for 2008 could be lower than the estimated 4.8%.’’

“All in all, we do not expect the stabilisation plan to add to the 4.8% estimated government budget deficit for this year,” Lai added.

Worries over the fallout from the global financial crisis has permeated all countries. Stock markets have been battered and governments are mobilising to contain the damage.

However, the impact would be difficult to dodge, as Finance Minister Datuk Seri Najib Tun Razak said growth targets for next year may be tweaked and revised.