World Bank: Malaysia needs to mobilise its revenue decline

by ANIS HAZIM / pic by TMR FILE

MALAYSIA’S fiscal space is shrinking as the country’s revenue collection persistently declined over a decade from 21% of GDP in 2012 to 14.3% in the 2022 forecast.

World Bank lead economist for Malaysia Dr Apurva Sanghi saw the implication of the problem is to rebuild fiscal buffers through fiscal consolidation, which is absolutely critical.

However, he viewed that fast consolidation will undermine the country’s recovery and growth, while slow consolidation will increase the fiscal sustainability risks.

Thus, the economist recommended that the consolidation should proceed once the output gap is closed.

“The latest estimates show that the gap will close not before 2022. So not before the end of the year,” Apurva told a virtual media briefing today in conjunction with the World Bank’s June 2022 Malaysia Economic Monitor report publication.

He noted that the report suggested Malaysia should strike a balance between raising revenues through new sources such as the Goods and Services Tax (GST) and increasing the efficiency of expenditure.

“There’s been a seven percentage point decline in Malaysia’s revenue as a share of GDP just over the last 10 years. So, clearly there is a need to mobilise revenue,” he said.

Apart from GST, he said the government should review the exemptions to the personal income tax and mobilising new sources of revenue.

When asked whether the reintroduction of GST will be the best way to expand Malaysia’s revenue, Apurva said it has to be part of a broader position strategy for the country. 

“Now the GST is indeed better than the current Sales and Service Tax. More than 170 countries around the world have established some sort of a value-added tax (VAT) or GST regime because it is a consumption tax. 

“Sixty percent of the economy depends on consumption is a tax that widens the tax base and brings in more revenue,” he noted.

However, he noted that many countries have used tax exemptions to address the regressivity of GST. 

“But in our view, tax exemptions may not always be the best option because they break the VAT chain and reduce the VAT base,” he added.

Meanwhile, the World Bank has projected Malaysia’s GDP to expand 5.5% in 2022 after growing 3.1% in 2021, and continue to expand 4.5% in 2023 and 4.4% in 2024. 

Malaysia’s inflation is also projected to increase as the World Bank expects the Consumer Price Index to increase but remain relatively manageable at between 2.5% and 3.5% in 2022 compared to 2.5% in 2021.