South-East Asia Correspondent, David Willis, in Kuala Lumpur: Riot police stood guard outside parliament

This is the exact opposite of the advice given by the International Monetary Fund.

The budget statement included a series of measures intended to revive Malaysia's flagging economy by increasing spending and making borrowing cheaper.

Anwar was sacked as finance minister in September

The proposals have been met with scepticism by international financial observers.

Dr Mahathir used the budget speech to reiterate his attack on foreign currency speculators and Western financial institutions, blaming their greed and policies for much of Asia's economic crisis.

He called for the "support of the majority of the people" to counter the effects of speculation, saying: "Our nation will be revitalised and attempts to recolonise us will therefore fail."

Riot police

Anti-government protesters were prevented from marching on parliament

But even as the prime minister spoke, a ring of riot police sealed off the area around parliament to prevent anti-government demonstrators from approaching the building.

Police in central Kuala Lumpur used water cannon to disperse around 200 supporters of the deposed deputy prime minister and finance minister, Anwar Ibrahim, who gathered at the national mosque to demand political reform.

Demonstrations in support of Mr Anwar, who is awaiting trial on charges of corruption and sexual misconduct, have been declared illegal.

Mega-projects

Dr Mahathir: "We are supporting business in every way"

The prime minister - who also holds the Finance portfolio following Mr Anwar's dismissal - said income tax would be abolished for one year, but taxes on gambling, alcohol and cigarettes would be increased.

He said the economy would shrink 4.8 % this year in the country's first recession in 13 years, but the stimulus package would spur a mild recovery in 1999.

Dr Mahathir defended strict currency controls imposed in August

Priority would be given to what have become known as 'mega-projects', such as the multi-million dollar creation of a new government village.

The budget amounts to a direct reversal of the austerity measures announced by Mr Anwar in his role as finance minister when Asia's economic crisis first hit Malaysia last year.

Mr Anwar had called for the slashing of government spending and the postponement of some mega-projects favoured by the prime minister in Malaysia's drive to achieve industrialised nation-status by the year 2020.

The spending plans will mean Malaysia's first deficit in more than a decade - more than 6 % of total output.

The BBC's economics correspondent says the general view is that the policy may work in the short-term by giving the economy a boost, but the long-term risks are huge.

Part of the reason behind Malaysia's economic difficulties is the huge debts owed to banks - now firms are being encouraged to borrow more.