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SCMP Reporter

Squads of riot police with water cannon and tear gas surrounded Parliament yesterday as Malaysian Prime Minister Mahathir Mohamad delivered his first budget as Finance Minister, unveiling a host of populist give-away measures.

 In typical unorthodox manner, Dr Mahathir proposed waiving all taxes on income earned next year and allowing losses incurred next year to be carried forward for tax relief.

 He also offered all public servants one Saturday a month off to help boost consumer spending, and urged the private sector to do the same.

 Most of the initiatives announced were aimed at boosting public and business confidence to spur exports and growth.

 'Fiscal stimulus is necessary to speed up economic recovery,' Dr Mahathir told Parliament as he unveiled Malaysia's first planned budget deficit in six years.

 Tax breaks were declared for the manufacturing, trading, tourism, unit trust, life insurance and banking industries, along with a huge rise in infrastructure spending.

 Special relief was also offered to financial institutions prepared to restructure and merge by the end of June.

  Dr Mahathir's approach was in stark contrast to the austere budget delivered by Anwar Ibrahim last year, which the premier partly blamed for leading the country into its first recession in 13 years.

 Anwar's last budget, before being sacked as finance minister and deputy prime minister in September, envisaged a 2.8 per cent surplus this year.

 Instead, because of Dr Mahathir's intervention to boost growth through fiscal stimulus since July, the government expects to end the year with a M$9.6 billion (about HK$19.58 billion) deficit or 3.7 per cent of GNP.

 The government has spent an extra $7 billion this year which had not been budgeted for, mainly on development projects, to halt sliding economic growth.

 Hundreds of supporters of the jailed Anwar demonstrated a kilometre from Parliament shortly before Dr Mahathir delivered his budget address.

 To finance the deficit, Malaysia is hoping to get US$2-$3 billion from Japan's $30 billion regional aid fund and analysts say it may also seek help from the World Bank and other international development banks.

 There will also be windfall taxes on palm oil, plus higher so-called 'sin taxes' on gambling, tobacco and alcohol.

 Starting in 2000, the tax assessment system based on income earned in the preceding year will be changed to the current year. To cater for this, no taxes will be levied on income derived next year.

 A self-assessment system will also be introduced which, it is hoped, will improve efficiency.

 Of the government's M$65.1 billion expenditure planned for next year, about $18 billion has been allocated for development expenditure.

 Dr Mahathir said: 'For the development expenditure, priority is given to projects that can generate economic activity, enhance efficiency and competitiveness as well as reduce the outflow of reserves.

 'In line with the objective of stimulating the economy, infrastructure development is given priority.'  To boost Port Klang near Kuala Lumpur and deter Malaysians from exporting goods through Singapore, generous tax exemptions have been announced for traders who use local insurance, shipping and ports.

 Tax exemptions have also been announced on renting Malaysian ships.

 With these and other expansionary measures made possible under capital controls announced on September 1, Mr Mahathir hopes the Malaysian economy can bounce back and enjoy 1 per cent growth next year.

 'With discipline, determination and perseverance, the economy will recover in 1999,' he said.



Mahathir declares 1999 as tax free