Measures to boost economy


  • Business
  • Saturday, 25 Jan 2003

BY ERROL OH

WHAT our economy needs most right now are good old-fashioned confidence and certainty. Unfortunately, it is not as if you can get out there and buy some. The key is to introduce measures to increase economic activities and consumer spending. 

It is no surprise then that Prime Minister Datuk Seri Dr Mahathir Mohamad, who is also finance minister, revealed earlier this month that the government might go on another round of pump-priming to boost the economy. It has been reported subsequently that the details will be announced in March. 

Meanwhile, there has already been quite a bit of speculation as to what sort of measures will be introduced. Some may be repeats of steps from the two economic stimulus packages unveiled in March and September 2001. After all, if these worked well previously, why not use them again? 

At the same time, the situation this time around demands new ways to sustain growth. And it is understood that the authorities have sought input from various industries and experts. 

BizWeek spoke to economists and analysts to get an idea of what is needed to keep the economy moving forward under these trying conditions. 

Strictly, not all the measures discussed come under the fiscal policy banner – for example, loans and interest rates are matters for the monetary managers to handle – and may thus be excluded from the pump-priming plan. 

Nevertheless, observers say the economy ultimately requires a stimulus package that covers all initiatives aimed at raising government spending and private consumption. 

 

Speeding up of construction and infrastructure projects 

This was the main thrust of both the 2001 pump-priming programmes. When it comes to pump priming, construction is favoured because it provides the strongest and fastest multiplier effect.  

However, observers say the approach now may be a little different. For one thing, most of the larger projects have already been awarded. If at all there is any focus on these, it will be to expedite the implementation so that the spill over will be felt sooner. 

Analysts say the increase in construction activities will be apparent for projects on a more modest scale, such as schools and hospitals. This is because they have shorter gestation periods and will thus produce spin-offs faster. In addition, this is an opportunity to spread the contracts more widely so that the smaller players can have a bigger, direct share of the action. 

 

A lower EPF contribution rate 

This is another tried and tested method to push up consumer spending. The idea is to give wage earners a little extra to spend. Otherwise, the money would have ended up in the Employees Provident Fund (EPF), which has been under fire lately because of its declining dividend rates. 

Between April 2001 and last April, employee's contribution to the EPF was reduced from 11 per cent to 9 per cent, while the employer's portion remained at 12 per cent. According to the fund, this was equivalent to adding RM1.5 billion into the employees' pocket. 

Observers expect the government to cut the employee's contribution rate by 1 or 2 per cent. Assuming contributions rise by 5 per cent this year – in 2001, total contributions swelled by almost 7 per cent – we can expect contributors' take-home pay to collectively increase by close to RM1.58 billion. 

 

Individuals to pay less income tax 

The last time the government lowered individual income tax rates was in Budget 2002. The rates for all income bands were slashed by one or two percentage points. The maximum individual income tax rate, which had stood at 29 per cent, was reduced to 28 per cent, thus harmonising with the corporate tax rate. 

It was estimated then that the government would forgo RM873 million in revenue as a result of these measures, which also covered residents and co-operatives. Also, because of the new rate structure, about 91,000 people were expected to be spared from having to pay income tax. 

Some analysts think that the government will again reduce the tax rates for individuals so that they will have higher disposable income. However, there may be a need to make up for the loss in revenue. 

Furthermore, some people believe that taxpayers, bothered by the economic uncertainty, may just put aside the extra money for a rainy day instead of spending it. 

 

Tax deduction for interest payments on homes 

By introducing this, the government can help invigorate the property market (by encouraging purchase of homes) and raise the disposable income of house-buyers. This is rather similar to last year's stamp duty waiver. Developers and banks should also be happy if there is indeed such a move. 

 

Greater support for the SMEs 

The aim is to brighten business sentiment in the country. The Malaysian Institute of Economic Research's Business Conditions Index has recorded almost an eight-point drop. Budget 2003 included incentives for small-and medium-enterprises (SMEs) but there is room for more assistance. 

Says OCBC Investment Research in a recent report, “While not trying to discourage local producers from being efficient, we believe that the authorities could boost business confidence by providing further incentives or relief for manufacturing investments.” 

Another welcome move would be to ensure quicker disbursement of funds or loans to SMEs. 

Cut in key intervention rate 

Those advocating this measure point out that there is excess liquidity (about RM60 billion) in the domestic banking system. As such, reducing the intervention rate is appropriate so as to make loans more affordable. This is also important for spurring loan growth. The market has been talking about this possibility for several months, and this has sparked a sell-down of banking stocks last November.  

 

Attracting FDIs 

A crucial element in sustaining Malaysia's growth is its ability to draw foreign direct investments (FDIs). In the face of mounting competition for investor dollars and the sagging global economy, there is a need for fresh strategies. The government will probably adopt a more focused approach, narrowing down the sectors and activities in which FDIs will offer the biggest benefits. The next step is to tailor incentives to lure the right people. 

For example, the services sector has been identified as a new growth engine. It is likely that there will be stout efforts to draw FDIs in this field. 

A related aspect is the need to improve investor confidence in the country and the stock market. 

 

Training matters 

Human resource development will continue to be on the agenda. Affin-UOB Securities says it expects the stimulus package to include programmes to enhance workers' skills and productivity, as well as to provide training for graduates and school-leavers. 

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