Tight finances stemmimg from lower incomes require prudent spending by the Govt
GOVERNMENT finances are in dire straits and the delay in giving out the pocket money allowance programme to elegible students since August is just one sign of how challenging things are. As federal legislators convene next Friday for the tabling of the supply bill that will be passed as Budget 2017, there is the hope that several issues will be addressed.
There is no denying that the Malaysian economy is not in very good shape and that is the crux of the problem. But besides the issue of how to spur growth, there is the perennial problem of so-called “leakages”, the local euphemism for corruption. Tackle this issue and a large part of the funding woes will be solved, as funds will go where they should go, to the benefit of Malaysians.
Although the tabling of the supply bill is not the right forum to discuss how to tighten governance, there is an urgent need to ensure that money is spent wisely and should not disappear into the pockets of corrupt civil servants, as recent cases such as the millions in cash, jewellery and cars seized from the top two officials of the Sabah Water Department revealed.
There is the sense that, despite promises to tighten spending and clamp down on leakages, the same problems crop up every year, as the Auditor-General’s annual reports show. Procuring goods or services at way above market prices is just one of the examples of wasteful spending encountered every year in the report.
Another issue is affordable housing. It is not just about property developers preferring to build high-end residential properties because of the better margins. It is also because a slowing economy means that a substantial number of working Malaysians, who are mostly wage earners, cannot afford to buy their own homes since their employers, facing tougher times, are less generous with pay, including increments and bonuses.
There is demand for housing but wage earners just cannot afford it as they are burdened with other commitments such as the higher cost of living and high debt levels, two other issues that Budget 2017 should take note of. Even wage earners in the top 20% need some form of government aid to buy a home, a Khazanah Research Institute report shows.
Growth and private consumption
Judging from the talk around town, many believe that Budget 2017 will be an election budget, given the speculation that the general election may be called by the third quarter of next year. But election budget or not, there is still the need to be prudent in spending, given the tighter finances stemmimg from lower revenue.
Economists are generally not very confident of the Malaysian economy’s performance for next year. Growth was weighed down by weak exports in the first half of this year, and while many predict that growth will accelerate in the second-half, that prospect is now further away, given that exports continue to be weak.
Although the official guidance is for gross domestic product (GDP) to expand by 4% to 4.5% this year, this is likely to come in at the lower end because of weak exports and private sector spending. While private consumption and investments have started recovering, both could very well weaken should economic conditions remain challenging. The outlook for loans growth remains weak. In short, the best-case scenario is for flat growth next year and no recession.
The Socio-Economic Research Centre believes that with global trade likely to remain soft, the potential for Malaysia to enjoy higher GDP growth rates could come from an economy-wide productivity growth. “Domestic demand remains the key driver of growth,” the centre says in its inaugural economic report.
It says private consumption and investment indicators are showing mixed outcomes, with loan indicators improving in August on smaller rate contractions in loan applications and disbursement, while loan approvals increased marginally.
“Amid global challenges, the Government should present a prudent growth-oriented budget without straying from the fiscal deficit reduction road map,” it points out, saying that since the economy is not in a recession, the deficit target should not be relaxed on fiscal stimulus grounds.
AllianceDBS Research chief economist Manokaran Mottain tells StarBizWeek that the economy faces several more challenging years and that the budget allocation should reflect this by helping people cope. Amid fears of where more cuts could come as the Government seeks to save where it can, he says what the economy needs is to boost private consumption by cutting the goods and services tax (GST), while RAM Rating Services Bhd analyst Jason Fong says an expansion of the list of GST-exempt or zero-rated items will be politically palatable and will likely target goods which will have a marginal impact on fiscal revenues.
Manokaran suggests that the GST be reduced to 5% from 6% for a limited period to boost consumption rather than cutting personal income tax. “The GST is a broad-based tax, a 1% cut will help more people than an income tax cut, as far fewer people pay income tax,” he says. Barely over a tenth of the Malaysian workforce of 14.73 million pay personal income tax.
Using this year’s estimated GST collection as a base, Manokaran calculates that every 1% cut will mean RM6.5bil in foregone taxes. In the first six months of this year, GST collections totalled RM17.2bil, or 44% of the total projected GST collection this year of RM39bil.
The argument against a cut in the GST rate largely lies in the concern over the federal budget deficit, targeted to be reduced to 3.1% of GDP this year from 3.2% last year. A cut in the GST rate will mean a loss in revenue, which Manokaran and others argue can be made up from the rise in oil-related revenue since the average price of oil is higher than the revised Budget 2016 oil price assumption.
The danger is that demand for oil is still weak and the impact from the cuts in production agreed by the Organisation of the Petroleum Exporting Countries (Opec) is yet to be seen since the members have to settle with each other on how to allocate the production cuts, as well as coordinate their cuts with non-Opec members such as Russia. The oil price may very well weaken should the outcome, both of demand and cuts, be below market expectations.
Because consumer sentiment is still weak, private consumption, which recovered in the second quarter, can still fall. Weak private consumption, which makes up 54% of GDP, will mean lower GST revenue. A better bet is a cut in personal income tax rates because the main consumers of goods and services that are taxed under the GST regime come from the higher tax brackets, whereas many in the lower tax brackets consume less GST-rated goods and services.
Weak private consumption will also mean that businesses, already buffeted by global uncertainties, may pull back on investing, impacting private investments. Without businesses expanding, jobs will be scarcer. Unemployment, as the latest Statistics Department data shows, is steadily climbing with every indication that it could reach the levels seen in the global financial crisis of 2008/2009.
Budget 2017 will have to address the issue of growth and how private sector consumption and investment can help support that growth. Economists are split over whether the development expenditure will be raised under Budget 2017 after having been cut in the last two budgets. If the development expenditure is not raised, can a combination of tax cuts and tax breaks help make a difference without adversely impacting the ability of gathering revenue?
Vulnerable groups and affordable housing
A downturn in the economic cycle or slower growth will almost certainly impact the lower-income brackets, which cover the Government’s definition of those under the Bottom-40 income group, as well as the lower levels of the Middle-40 income group.
Assuming this is an election budget, most economists expect the higher payout for the 1Malaysia People’s Aid (BR1M) to benefit those across the Bottom-40 and the bottom rungs of the Middle-40 income brackets. Citigroup Inc economist Kit Wei Zheng says in a report that higher BR1M payouts will probably be the centerpiece of cost of living measures, to match inflation and offset the rise in household costs arising from GST and subsidy rationalisation.
He says the BR1M transfers could be further expanded up to RM1,200 for the lowest income tier earning RM1,000 a month and RM450 per month (for singles), bringing the total allocation under these payouts to RM6.5bil to RM7bil under Budget 2017. The payouts totalled RM5.9bil under Budget 2016.
Kit is not ruling out that the income-eligibility ceiling of households for BR1M be raised to RM4,500 to RM5,000 a month from RM4,000 under Budget 2016, which was also raised from RM3,000. He says this could be a move to wrest Opposition-held urban seats by enticing middle-income urban voters in Peninsular Malaysia.
“Middle-income households may potentially benefit from a host of tax reliefs and rebates. One example could be a continuation of the special tax relief of RM2,000 for individuals earning up to RM8,000 a month,” he says, adding that other tax reliefs may also see their eligibility ceilings raised.
Kit expects the Government to enhance ongoing efforts to provide affordable housing through extensions of existing programmes to enable more first-time buyers to purchase homes, but no relaxation of bank-lending rules. “To account for the rising cost of living, the Govern-ment may choose to also raise the income ceiling for the qualification to certain schemes, for example, raising the income eligibility for the First Home Scheme from the current RM5,000 to RM7,000 a month,” he says.
Other additional moves to make home ownership easier include the increase of fund allocation to the Employees Provident Fund’s Account 2 to 40% from 30% to enable first-time home buyers greater flexiblity in meeting their housing financing needs in response to the financing gap between loan and down payments.
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