Fitch Ratings: GST repeal a setback to fiscal consolidation

Pic By TMR File

THE repeal of the Goods and Services Tax (GST) and its replacement with a narrower Sales and Service Tax (SST) was a significant setback to fiscal consolidation.

Fitch Ratings Inc, in its response to the recently announced Budget 2020, stated that resulting net revenue loss of around 1% of GDP has effectively increased reliance on commodity receipts.

“Fiscal credibility could suffer if consolidation were to be repeatedly delayed, for example from difficulties in raising enough revenue to offset shortfalls from GST, which was repealed after the 2018 election,” the rating agency said in a statement yesterday.

Last Friday, Finance Minister Lim Guan Eng in his budget speech reiterated that the government will not introduce GST even if the prolonged US-China trade war worsen.

Meanwhile, early this month, World Bank Group lead economist for Malaysia Richard Record had proposed the government to widen the SST coverage to rebuild fiscal buffers.

Commenting on the budget, Record said in a media release that further efforts will be needed to boost public sector revenues, which continue to fall well short of comparator economies.

Separately, Fitch Ratings said Malaysia’s 2020 budget contains modest fiscal easing of the deficit target in response to increased economic growth risks.

However, it does not represent a significant shift in the government’s consolidation efforts.

Fitch Ratings has maintained medium-term fiscal outlook, albeit the new fiscal targets are slightly looser than its expectations.

Fitch Ratings said the government also aims to achieve a fiscal target of 3.2% of GDP next year and it expects to meet this year’s 3.4% target, and projects deficits to average 2.8% over the medium term.

“These medium-term targets are consistent with reducing Malaysia’s high public debt, which is a sovereign rating weakness, although the reduction may be slightly delayed,” it said.

Fitch Ratings also stated that the increasing non-oil revenues and further economic diversification would be a meaningful support to medium-term consolidation.

“The budget contains various measures to support non-commodity based growth, including demand-side measures such as increasing the minimum wage by 9%, and structural measures to support investment, including a 10-year tax break for the electronics industry and steps to support small and medium entrepreneurs,” it said.

The rating agency said these incentives may help relocate investment (foreign direct investments) into the country, but investors also face heightened political uncertainty.