By Ernie Bower & Jeremiah Magpile

Money is fundamental to politics. That is the case nearly everywhere, but in Malaysia, the relationship between these two is special.  Prime Minister Najib Razak has painstakingly tried to time national elections for just the right moment.  Under the parliamentary system, he must call for polls before April 2013.  Not surprisingly, his 2013 budget, announced last week, sets the stage for him to call elections and reveals hints about the state of Malaysian politics and Najib’s outlook.

Najib will almost certainly win the elections, but the question is by what margin. The days of Barisan Nasional, the ruling coalition, controlling two thirds of Parliament are long gone.  Malaysians have shown they want choices in recent elections and it is clear that many find the opposition led by Anwar Ibrahim and Pakatan Rakyat useful in driving improved governance and reform.

Najib himself has shown an inclination for reform, but recognizes his most serious threat comes from within his United Malays National Organisation party, or UMNO. Many conservative UMNO members are not as keen on reform as their leader.  UMNO “ultras” a  conservative faction  of members of Parliament (MPs), and more generally right leaning MPs have a focused agenda and may be able to sway the party. Conventional thinking in Kuala Lumpur is that Najib must win a greater majority of seats than his predecessor, Abdullah Badawi, or he will face a leadership challenge in UMNO shortly after the general elections.

In this context, Najib released the national budget September 28.  While giving a rhetorical nod to reducing the deficit, he focused on a traditional path of extending cash handouts to lower income families and government employees, and increasing infrastructure spending.  Many of the construction contracts for these projects historically go to firms with strong UMNO ties, which in turn support their local candidates.

The government plans to spend $81.7 billion in 2013, slightly lower than this year’s $82.7 billion, and aims to increase GDP growth from 4.5 percent  to 5.5 percent.  The budget deficit is predicted to narrow from 4.5 to 4 percent of GDP. The goal is to cap total government debt, currently at $164.6 billion  at 55 percent. The inflation rate is expected to stay under 3 percent.. Finally, budget revenue is estimated to increase slightly, further chipping away at the deficit.

According to the Ministry of Finance, private and public consumption is expected to drive domestic demand and expand 4.2 percent in 2013.

Najib also tried, in his proposed budget, to hand out goodies in areas he thinks will add value to the Malaysian economy such as innovation and education.  The budget appealed to younger voters through measures such as rebates on smartphones for those aged 21-30. These voters make up a quarter of the 13 million-strong electorate. In addition, the budget included subsidies and rebates for schoolchildren, and high school, and university students.

Rural development and entrepreneurial growth are priorities for Najib.  The budget allocates $16.3 billion for development and agriculture, with an additional $327 million to encourage small and medium enterprises and industrial areas. A total of $3.6 billion was allocated to social programs that cover education and training, health, welfare, housing, and community development.

While Najib mostly followed conventional practice with pledges to raise public sector salaries, provide cash handouts, and increase infrastructure projects, he has tried to control expansion of government subsidies.  He slipped into the budget a cut in sugar subsides by six cents per kilogram, and increased the real property gains tax from 10 to 15 percent, hoping to curb speculation. However, he avoided tackling the politically charged fuel and food subsidies – for now.  Eighteen percent of government revenue goes towards these areas.

Najib understands that the established culture of entitlements is a dagger pointed at the heart of Malaysia’s competitiveness, but he can only win this fight with a strong mandate. If he’s reelected with some political momentum, analysts expect Najib to continue his fight to “de-subsidize” the Malaysian economy. Without it, he will have to cut deals with elements of his own party that do not want to see reform, creating a recipe for Malaysia to muddle along instead of making real strides forward in the next several years.

Whether Najib calls snap elections – by rule he only needs to allow 10 days for preparation and campaigning from the time he announces to the date of the election – in October or November, or waits until 2013, he is a likely to win and hold on to his seat.  His margin of victory will determine whether this son of a former prime minister can effectively reform the system that he has grown up in and move Malaysia forward, or whether he will have to be content to make only marginal adjustments to a Malaysia that is facing increasing competition from its neighbors.

Mr. Ernest Z. Bower holds the Chair for Southeast Asia Studies at CSIS. You can follow him on twitter here: @BowerCSIS . Mr. Jeremiah Magpile is a researcher with the Chair for Southeast Asia Studies.