Fiscal reform takes centre stage in Putrajaya

By ALIFAH ZAINUDDIN / Graphic By TMR

THE new government led by Prime Minister Tun Dr Mahathir Mohamad spares no time to put the economy back on track ahead of promises to keep investors’ confidence in check and more prudent public spending.

On Saturday, three days after polling day, Dr Mahathir made several key decisions to strengthen his administration which include the formation of a five-member Council of Elders and the appointment of DAP secretary general Lim Guan Eng as the finance minister.

The Pakatan Harapan government has committed to address leakages from corruption and wastages through a series of economic measures within the next 100 days.

These include populist pledges to abolish the Goods and Services Tax (GST), drop toll fees, reinstate fuel subsidies and re-evaluate Chinese investment deals.

Economist Prof Dr Yeah Kim Leng said, while some actions may be temporarily credit negative, overall improvements in government spending will create fiscal sustainability in the longer term.

“If we can see greater efficiency across different industries such as utilities, transport and ports, the economy can perform even better. Market deregulation can reinvigorate confidence and investments in these sectors,” Yeah told The Malaysian Reserve. He said at present, reports suggest that some government contracts are overvalued by 15% to 25%.

“The government is paying at an excessive price for a number of projects so there could be substantial savings if certain contracts are re-evaluated and awarded through an open tender system,” Yeah said, adding that plans to limit the number of ministries will also help reduce government spending.

Meanwhile, the replacement of the GST with the Sales and Services Tax is expected to have an immediate impact on consumer spending.

Yeah said the reduction in tax burden will see households having an additional RM20 billion in disposable income at the expense of a narrower tax base.

“The offset is, of course, that the government will have RM20 billion less to spend. They can probably anticipate higher dividends from Petroliam Nasional Bhd due to improved oil prices but other than that, additional revenue will come from cost savings,” he said.

Meanwhile, Asian Strategy and Leadership Institute research and business development director Lau Zheng Zhou said the new administration will have to find a balance between satisfying public needs and being mindful of the country’s fiscal position.

“It is premature to make a conclusion about the health of our public finance because we have yet to see our Cabinet line-up and their policies. But, I suspect the final policies will be more refined and balanced compared to the manifesto because the new administration will take external factors into account too,” Lau said.

Galen Centre for Health and Social Policy CEO Azrul Mohd Khalib cautioned of incurring higher debt if the government’s operating expenditure level is not reduced.

Azrul said the country’s operating expenditure has grown at an average of 6% over the past 10 years from RM123.1 billion in 2007 to RM219.91 billion in 2017. At the same time, revenue grew at a slower rate of 4.9% over the past decade. If the trend continues, the fiscal debt level could reach reach RM1 trillion in three years.

“Corruption, leakages, wastage and excessive spending have contributed towards the increasing cost of government, misappropriation of resources and the need to find more sources of tax revenue.

“Identifying and addressing these shortcomings will be critical to ensure that meaningful reforms in economic policies and institutions are successful. If not, the gap left by the abolishment of the GST, reintroduction of subsidies and other costly initiatives will dramatically increase debt levels,” he said.