Budget 2021 was tabled by the Minister of Finance in the Parliament on 6 November 2020. Overall, this is a difficult budget. Because of the COVID-19 pandemic, the Malaysian economy is facing a very challenging time. As the effects of the pandemic on the economy are likely to persist until next year, we see that the government has proposed various measures in response to the challenges, including allocation of RM17 billion to the COVID-19 Fund.
Other measures of interest include increasing cash handouts to the B40 group, allowing unemployed Employer Provident Fund (EPF) contributors to withdraw RM500 per month from Account 1 for 12 months, and allowing B40 and micro enterprises to extend their loan moratorium by three months, or reduce monthly repayments by 50% for six months.
Budget 2021 proposes to increase cash handouts to the B40 group in 2021. Under the budget, families with a monthly household income of below RM5,000 will receive more cash handouts compared to previous years. The amount of the handout will vary with household income and the number of children. Some commentators lament that cash handouts have now become an entrenched feature in the government budget and that this may breed a culture of dependency.
Nonetheless, it is undeniable that the B40 is the group that is most vulnerable to the negative effects of the recession. Considering that, increasing cash handouts to the B40 is a reasonable policy. According to a report released by the World Bank in June, Malaysia’s total spending on assistance to low-income households to the ratio of GDP is behind other upper-middle income countries. Hence, there is room for Malaysia to increase cash handouts to the B40 group.
Of course, to address the concern that cash handouts may breed a culture of dependency, the government can in the future, consider making the distribution of cash handouts conditional on participation in upskilling and reskilling programmes, so that those who receive handouts can increase their ability to make a decent living on their own.
Budget 2021 also proposes to allow unemployed EPF members to withdraw RM500 per month for 12 months from their Account 1 starting next year. There are a few things that are worth paying attention to regarding this proposal.
Firstly, this proposed policy is not limited to the B40, but is applicable to all unemployed EPF contributors. Among the almost 90,000 job losses reported to Social Security Organisation (Sosco) until October, 26% involves the professional category while 13% involves managerial positions. While job losses reported to Sosco is only a small fraction of the overall unemployment number (due to high incidence of informal jobs), it does show that the B40 is not the only group whose income is affected by the recession.
Allowing unemployed EFP contributors to withdraw RM500 per month can allow those who do not have much savings on their own to withdraw the money from their EPF Account 1 to help them overcome their difficult personal financial situations associated with unemployment. Of course, if the unemployed members do have other savings, it is highly recommended that they use other savings before withdrawing from EPF Account 1, considering that the dividend for the EPF balance is much higher than the interest rates offered by banks.
It is worthwhile to point out that not all those who are unemployed will be able to benefit fully from this proposed policy, because many of the unemployed workers are not EPF contributors, and among the EPF contributors, 32% has less than RM1,000 balance in their Account 1, according to the Minister of Finance.
A third highlight of Budget 2021 is the proposal to extend the loan moratorium to the B40 and micro enterprises with a loan below RM150,000 for a period of 3 months or reduce monthly repayment by 50% for six months. M40 borrowers whose income is affected can also apply repayment assistance with a simplified process.
This proposal has the benefit of making the loan moratorium more targeted compared to automatic extension to all borrowers. According to data gathered by banks, as many as 85% of borrowers have started loan repayment as of October after the automatic loan moratorium ended on 30 September, showing that the majority of borrowers do not need to have their loan moratorium extended. It is a good move to make the extension more targeted and only help those who truly need the assistance.
As for the prospects of economic recovery next year, Budget 2021 forecasts that the growth of Gross Domestic Product (GDP) will be between 6.5% and 7.5% in 2021. Whether this forecast will materialise or not will depend to a large extent on the development of the COVID-19 situation.
If the pandemic is under control, a strong recovery is possible. However, if Conditional Movement Control Order (CMCO) persists until next year or even the stricter Movement Control Order (MCO) is reintroduced, then the recovery can be expected to be weak.
This commentary is a thought leadership piece by Dr Teo Wing Leong, Head of School of Economics at the University of Nottingham Malaysia.
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Posted on 18th November 2020