Malaysia PM courts voters in budget, pledges lower deficit

KUALA LUMPUR (Reuters) - Malaysia's Prime Minister Najib Razak courted voters with one-off perks on Friday in his last budget before a national election, while reassuring markets by pledging to cut the country's fiscal deficit and tackle a rising debt burden.

Najib, facing a tough election he must call by April, dished out 500 ringgit (98.6 pounds) payments to all low-income families, 100 ringgit each to 5.4 million schoolchildren and handed a 1.5 month bonus to the country's civil servants.

"This budget will focus on improving the quality of life of the people, ensuring sustainable growth, spending prudently and reducing the fiscal deficit," Najib, who is also finance minister, said in his address to parliament.

Rating agencies Standard & Poor's and Fitch recently warned of rising fiscal pressures in Malaysia that could lead to a downgrade. The country's public debt as a percentage of GDP is just short of its self-imposed ceiling of 55 percent - up from 43 percent in 2008 - while its expected budget deficit of 4.5 percent in 2012 is among Asia's biggest.

To address those concerns, Najib pledged the budget deficit would fall to 4.0 percent of GDP in 2013. The government, which has run a budget deficit every year since the 1997 Asian financial crisis, had previously forecast a 4.7 percent gap for 2012.

The government sees the deficit shrinking on improved tax collection and slightly higher economic growth of between 4.5 - 5.5 percent next year from between 4.5-5 percent this year.

As expected, Najib did not announce major structural reforms that analysts say are crucial to putting Malaysia's public finances on a more sustainable footing and reducing its heavy dependence on oil revenues.

State oil giant Petronas contributes up to 45 percent of government revenues. Fuel subsidies to ease driving costs for Malaysians have more than doubled in the past three years as oil prices have risen sharply.

The government says it wants to introduce a goods and services tax to widen the revenue base in a country where only about 10 percent of the workforce pays income taxes and to cut the fuel subsidies that are among Asia's highest.

Najib said more time is needed to prepare the public for such unpopular steps.

"The government will not shirk from taking the right action although it is challenging," he said, referring to tax reform.

After a sharp rise in subsidy costs this year, the annual report said that government assistance on staples such as fuel, sugar and flour should fall to 37.6 billion ringgit in 2013 from 42.4 billion ringgit this year.

Najib presented the budget with a close eye on elections that he must call by next April and which are shaping up as the closest in the country's history.

His government has announced a series of targeted handouts to lower-income Malaysians and civil servants since last year's budget, but polls have yet to show a convincing bounce for Najib or his coalition.

The economy grew at a brisk annual pace of 5.4 percent in the second quarter, but many lower-income and middle-class Malaysians complain their salaries have not kept pace with rising living costs and surging house prices.

In a nod to those complaints, Najib announced a rise of 5 percentage points in the capital gains tax on property.

(Additional reporting by Niluksi Koswanage in KUALA LUMPUR; Writing by Stuart Grudgings:; Editing by Neil Fullick)