By Siva Sithraputhran and Yantoultra Ngui
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 what could be the long-ruling coalition's closest election, dished out 500 ringgit ($160) 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 among other steps.
"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. He must call an election by April.
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 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, sees the deficit shrinking on better tax collection and slightly higher economic growth of 4.5-5.5 percent in 2013 from 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.
Azrul Azwar Ahmad Tajudin, Bank Islam chief economist, said the government had not made clear how it would achieve such a steep fall in the deficit next year.
"The government can afford the giveaways, but this budget lacks the fiscal reforms that many quarters have been clamoring for, especially the global rating agencies," he said.
State oil giant Petronas contributes up to 45 percent of Malaysia's 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.
The prime minister announced a cut in sugar subsidies by 0.2 ringgit per kilogram, aimed at tackling rising diabetes rates. The government had increased subsidies by the same amount earlier this year.
Najib presented the budget with a close eye on the election.
Although the coalition is widely expected to win the election, it suffered its worst-ever performance in 2008 polls and opposition gains suggest it could face its closest-ever vote this time.
Financial markets showed no significant reaction to the budget, which was delivered in the last hour of trading on the Kuala Lumpur Stock Exchange.
Underlining the political nature of the budget, Najib ended his speech with a fierce attack on the opposition, saying it was "sowing seeds of conflict and hate" in the multiracial nation.
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 concerns, Najib announced a rise of 5 percentage points in the capital gains tax on property and pledged 1.9 billion ringgit to build 123,000 affordable houses.
He also trimmed income taxes for poorer Malaysians by 1 percentage point, announced a fresh 250 ringgit cash handout for unmarried low-income Malaysians, and pledged 1.5 billion ringgit to stabilize the price of cooking oil. He said the government would cut students' outstanding loans by up to 20 percent - stealing the thunder from an opposition pledge to ease student debts.
(Additional reporting by Niluksi Koswanage, Anuradha Raghu and Al-Zaquan Amer Hamzah.; Writing by Stuart Grudgings:; Editing by Neil Fullick)
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