More measures needed in addressing income inequality

The govt’s efforts to redistribute income may be less effective or ambitious compared to other nations 


RECENT focus on national inequality has honed in on uplifting the bottom 40% income group (B40), while fostering inclusive growth. 

Malaysia’s Gini coefficient, a measure of income distribution, dropped significantly from 0.51 in 1970 to 0.401 in 2014, indicating a notable reduction in income inequality over the past four decades. 

However, compared to fellow Asean nations, Malaysia still contends with a relatively high-income gap. Government policies have been pivotal in addressing this issue. 

The New Economic Policy (NEP), initiated in 1970 and concluded in 1990, was a cornerstone. This was followed by the National Development Policy (NDP) from 1991 to 2000, the National Vision Policy (NVP) from 2001 to 2010, and the most recent New Economic Model (NEM) from 2011 to 2020. 

These policies have played a crucial role in ensuring equitable income distribution among Malaysians. While the NEP was lauded for successfully balancing income redistribution with growth, subsequent reports suggest that income inequality increased in the early 90s, even when applying the growth with equity principle in the NDP and NVP. 

This suggests that the government’s efforts to redistribute income may be less effective or ambitious compared to other nations. 

To catalyse further progress in reducing the income gap, certain adjustments may be necessary. 

The govt needs to invest more on education for the bottom to middle rank of the wage earners such as B40 or M40, says Azmi (pic: Bernama)

Minimum Wage Execution Not Enough

Nusantara Academy for Strategic Research (NASR) geo-strategist and senior fellow Prof Dr Azmi Hassan told The Malaysian Reserve (TMR) that one of the short-term measures the government has taken to reduce income inequalities was to increase the minimum wage for employees. 

Since July 1, the minimum wage was increased from RM1,200 to RM1,500 per month for employers who employ fewer than five employees, other than an employer who carries out a professional activity classified under the Malaysia Standard Classification of Occupations (MASCO). 

“However, it (the minimum wage implementation) is not enough,” he said. 

He then suggested that the government can “utilize” income tax as a means to reduce the income gap among wage-earners or the top-tier income group (T20), a strategy already implemented by other Asean countries. 

In other words, to raise taxes for the top income brackets, such as the T20. Currently, the tax rate for the top income bracket in Malaysia is low at 25%, compared to other Asian countries such as Korea (38%) and Thailand (35%). 

Increasing this rate of 25% to be more in line with other countries, would most likely help reduce the income inequality in Malaysia. 

Furthermore, the political analyst also emphasized that the government needs to formulate a robust long-term plan spanning 5 to 10 years, rather than relying on short-term solutions. 

“The government needs to invest more on education for the bottom to middle rank of the wage earners such as B40 or middle 40% income group (M40). 

“More investment in such would allow the current workers to be more skilful. Subsequently, they can earn more,” he told TMR. 

Azmi added that the expertise or skills that they acquired would help the nation’s development in the long run. 

Hence, he emphasised the importance of increased investment in education, particularly for the B40 group, highlighting the need to rescale and upskill individuals within this segment of society. 

Meanwhile in its report, RHB Investment Bank Bhd (RHB Research) said that efficient fiscal policies, that may include broadening the tax base and enhancing tax administration while ensuring inclusive economic growth, are needed to address the income inequality issue in the nation. 

“Addressing income inequality would require a comprehensive approach and the implementation of policies focusing on progressive taxation, social safety nets, equitable access to education, as well as skill development,” it said. 

On the same note, RHB Research said higher spending on crucial sectors such as education and healthcare, a targeted approach in terms of subsidies, as well as assistance programmes are needed to reduce income inequality. 

The report added that to balance fiscal sustainability and the need for social safety nets for the lower-income group, the gradual transformation of blanket subsidies to targeted transfers is necessary. 

Further noting that reducing the income gap between regions and states might take longer, the investment bank said this was because it involved the development of infrastructure such as the upgrading of transport and communication networks in remote areas. 

“This is further complicated by the rural-to-urban migration, where youths from rural areas migrate to urban areas in search of better employment opportunities and improved living standards. 

“This migration can result in a brain drain from rural areas, further exacerbating the urban-rural disparities in human capital and development,” said the report. 

According to Yeah, the economy is experiencing rising income inequality that worsened following the Covid-19 pandemic (pic: TMRpic)

Continued Sufferings from Pandemic

Similarly, Sunway University Business School economics professor Dr Yeah Kim Leng said the economy is also experiencing rising income inequality that worsened following the Covid-19 pandemic, with more households falling below the poverty line and M40 households slipping into the B40 category. 

“It is noted that the labour share of national income has been declining over the years, leading to a widening of the rich-poor income gap, which has to be immediately addressed,” he said. 

Yeah added that the appropriate policies and strategies have been incorporated into the 12th Malaysia Plan (12MP), especially the green economy and digitalisation thrusts. 

Referring to a recent statement by Klang MP Charles Santiago on the cost-of-living crisis affecting the bottom 60% income group (B60), which was downgraded from the B40 due to inflation and price increases, the professor emphasised that the main challenge is to effectively implement these strategies with clear and consistent action plans and efficient allocation of budget resources. 

“This means 60% of Malaysian households are now earning below RM4,850. The steep increase in prices of household necessities and essentials impacts different groups of people differently. 

“It also exposes the vulnerabilities in Malaysia’s food security, and hits the poor significantly as they spend about 25% of their monthly income on food as opposed to the rich, who spend about 12.6% (of their income),” he said. 

Yeah also added that according to household income survey data released by the Department of Statistics Malaysia (DoSM), the income distribution within the B40 group is uneven, even though it continues to increase annually, and the bottom segment of the group continues to experience slow or stagnant inflation-adjusted income increases. 

If financial resources and capacity allow, he said, expanding government help to B60 may be taken into consideration. 

“Unfortunately, with the need to reduce the high 6% or more deficit, and national debt level nearing 65% of GDP, the government has limited fiscal flexibility or space to extend the required assistance. 

“It will have to raise taxes or spread out the financial aid more widely with much smaller assistance received by each household compared to confining the aid to B40 or bottom 20% income group (B20),” he said. 

Yeah stated that the important measures to achieve “a rising tide that lifts all boats” are faster economic growth, luring high-quality investment that produces high-paying jobs, and raising labour productivity through upskilling and technology adoption. 

He emphasised that in order to sustain economic growth and development, the private sector’s dynamism, resources and inventive talents must be mobilised and encouraged given the government’s financial limits. 

Higher spending on crucial sectors such as healthcare is needed to reduce income inequality

More Cash Incentives 

In a recent development, Economy Minister Rafizi Ramli announced that employers will receive cash incentives after submitting relevant documents to prove that they have fulfilled the requirements of the progressive wage policy. 

He added that employers need to raise their workers’ wages first, and then produce evidence, before the government could give them the cash incentives. 

“The government will not give incentives just like that (without proof ). 

“This cash incentive is important to encourage employers, especially the micro, small and medium enterprises (MSMEs), to implement this policy. 

“Since the allocation is determined by the government, it will not be a financial burden on the government,” he said, adding that the incentives would be implemented on a first-come, first-served basis. 

However, Rafizi also said the allocations would depend on the government’s fiscal capacity. 

Additionally, he said any employer who met the conditions would get the incentives, unless the quota is already full for the year — in which case, the employer would have to wait until the following year. 

He said the policy is also linked to productivity as workers are required to attend government-recognised skills training courses and they need to meet the training requirements to remain on the progressive (wage) payroll. 

“Employees would then be able to enhance their talent and marketability, as well as increase productivity at work.” 

The economy minister further explained this would balance employees’ push for higher wages against employers’ demand for increased productivity. 

He mentioned as well that the white paper on the progressive wage policy would be tabled at the next Dewan Rakyat sitting. 

“The policy would be explained to employees and employers to gather their feedback,” he said. 

  • This article first appeared in The Malaysian Reserve weekly print edition