Malaysian Prime Minister Abdullah Ahmad Badawi said on Monday the government would not eliminate its chronic budget deficit by 2006, his predecessor's goal, and that aiming for such a target could hurt growth.
Abdullah, who unveiled the country's eighth straight fiscal deficit in his 2005 budget last week, told reporters the deficit would be reduced "progressively and gradually".
Asked if Malaysia would be able to balance its budget by 2006, he said: "I don't think that we will be able to do that."
Under his predecessor, Mahathir Mohamad, Malaysia's stated policy was to try to balance the books by 2006, cutting the deficit from 2003's 5.3 percent of gross domestic product (GDP) to 4.5 percent this year and one to two percent in 2005.
Asked when the government expected to balance its books, Abdullah said: "We are not going to get very obsessed with that.
"We must make sure that we will not reduce the deficit so drastically just to achieve a balanced budget in ways that might cause a contraction of the economy."
The government forecast last week that the budget deficit would fall to 3.8 percent of GDP in 2005 from 4.5 percent this year.
Abdullah, also finance minister, had previously said an insistence on balancing the budget by 2006 could result in drastic cuts in expenditure that might cause the economy to contract.
Malaysia has run a fiscal shortfall since 1998 and ratings agencies have warned that the country's standing could suffer if the government loosened its fiscal stance further.
On Friday, Standard & Poor's said Malaysia's fiscal adjustment was modest in the context of stronger growth and higher oil revenues.
However, economists do not expect any failure by Malaysia to balance its books by 2006 to harm its credit rating.
"As long as the broad trend in gradually reducing the deficit can be maintained, it will not affect the country's standing," said DBS Bank economist Wong Chee Seng, who expects the government to balance its budget by 2007 at the earliest.
Abdullah said the government would fund the budget deficit through domestic sources. He said fuel subsidies and certain tax exemptions for oil firms because of increased costs would cost the government a total of 10.7 billion ringgit ($2.8 billion) in 2004.
Echoing earlier comments, Abdullah said the government would have to review the subsidies if oil prices continued to rise.
He has said that the rising cost of subsidies was the biggest problem for his government.
The prime minister said the government would receive revenue of about 400 million ringgit from an increase in taxes on tobacco and alcohol products announced in the budget last week.
It would cost the government about 1.2 billion ringgit to pay a bonus of up to 1-1/2 months of annual salary to civil servants as proposed in the budget, he said.