A feel-good, election budget after all?

It will take several more years before Malaysia can enjoy a balanced budget, according to an economist


The upcoming Budget 2018 has been highly speculated to be an “election budget”, while many others believe it may turn out to be “rakyat-friendly”. But the question is, will the government address the issues that are affecting the people?

Economist Jomo Kwame Sundaram (picture) emphasised how crucial it is for the government to spend its money well annually to yield significant growth for the country’s economy, at a recent pre-Budget 2018 Facebook Live interview by The Intelligent Money Sdn Bhd (iMoney).

DM Analytics chief economist Dr Muhammed Abdul Khalid is convinced that poor management of the economy and the country’s finances would most likely see the government stifled.

“Instead of focusing on growth shown by gross domestic product figures, the country needs to focus on taking on matters that include poverty, fiscal policy reform, as well as strengthening development outlay for poorer regions,” explained Muhammed.

He added that the prime minister ought to keep to his promise of bringing down the federal government’s budget fiscal deficit, which now is stalled at 3%.

Jomo theorised that in the event there is an increase in oil prices, the budget deficit will be hard to erase. It will take several more years before Malaysia can enjoy a balanced budget.

“Malaysia has been running on dull budget deficits for the last two decades without any serious effort to put the country’s economy on a sustainable growth path.

“That is something that is sorely lacking in the Malaysian framework,” he said.

Between 2012 and 2014, Jomo suspected that most people — particularly low-income earners — improved, thanks to the introduction of the minimum wage and ongoing “full employment” reinforced by higher commodity prices.

“What we’ve had recently, however, is the talk in terms of living standards.

“The exchange rate has gone south, decreasing 25% over the last three years, and we have seen the Goods and Services Tax (GST) being introduced, affecting everyone across the board — primarily the lower income group,” he claimed.

Jomo further added that a number of such factors has left the people pondering what exactly is being measured by the government and why the measurements did not influence the prices and consumer sentiments positively.

The 1Malaysia People’s Aid has been among the few things that have helped the lower income group between 2012 and 2014, apart from the release of the new minimum wage and higher commodity prices.

“Subsequently, none of such things have boosted the lives of that group of people,” Jomo said.

He also pointed out various infrastructure projects by the government, which are mostly overpriced and involve huge commitments that impact the debts taken on by the government through the public sector.

“These has led to the downfall in consumer confidence that has been negative for some time, corresponding to CLSA Ltd and MIER (the Malaysian Institute of Economic Research),” added Jomo.

In a similar interview, iMoney group CEO Lee Ching Wei said based on the firm’s recent survey, a whop- ping 49% of 1,000 Malaysians considered the country under recession, while another 40% felt that the country is moving into that direction.

“People are not finding any advancement in their spending power, despite the growing economic figures,” Lee said.

Muhammed is convinced that consumer sentiments have been greatly stricken, due to the rising cost of food and products on the back of the deteriorating ringgit.

“Food prices have continued rising, as transport charges have been increasing due to the floating petrol prices.

“Official unemployment has gone up from 2.9% in 2014 to 3.5% in 2016, though it is still commendably low. In addition to that, there are concerns about high youth unemployment, especially among the tertiary educated,” he said.

Muhammed said wage growth has stunted after the initial introduction of the minimum wage, whereas real incomes have been hit by higher prices and taxes.

Restructuring of GST

In terms of GST, Jomo reported that adhering to the introduction in April 2015, tax revenue from households increased from RM42 billion in 2014 to RM67 billion in 2016.

“With GST, it has more than doubled the contribution of indirect tax from RM17 billion to RM39 billion.

“Concurrently, the income tax revenue has considerably increased from RM24 billion in 2014 to RM28 billion in 2016,” he said.

Jomo said government subsidies and assistance have declined, falling from RM43 billion in 2013 to RM25 billion in 2016 — with most food price subsidies removed between 2013 and 2016.

“A value-added tax demands a considerable amount of bookkeeping, which small businesses are finding hard to keep up because of the risks involved.

“Bear in mind, GST — like most consumption taxes — is quite inequitable and this regressiveness has increased over time,” he said, adding to his point that after taxation, income distribution is worse than before taxation.

On whether the GST should be called off, Jomo feels that it should not be scraped off entirely and that different types of taxes can be introduced.

“We can’t just scrap the GST off because there will be revenue gaps in the country — we should move to a more progressive taxation,” he said.

Meanwhile, Kelana Jaya MP Wong Chen believes that to eliminate the GST, Malaysia has to go to pre-GST days.

“There will be a consumption tax instead, but more subtle. The government has reassured the country that 5% is set for the next five years,” stated Wong.

“Commit to some clarity, so businesses can plan and adjust to it for the next number of years, similarly as Singapore,” he added.

Jomo and Lee said apart from the increase in GST revenue, the government’s subsidy bill has also come down significantly due to the liberalisation of the energy policy.

“The government used to subsidise retail petrol prices at the pump.

“Now, the subsidy bill has dropped to less than 15% of government expenditure and it will continue to drop in the years to come.

“Having said that, the reduced subsidy is not something that is popular with the people because the cost of living has gone up,” concluded Jomo.


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