Budget 2018: EPF panelist warns of rising expenditure and shrinking tax revenue

  • Business Premium
  • Tuesday, 31 Oct 2017

KUALA LUMPUR: The Malaysian government’s expenditure, particularly in healthcare and pension payments are set to soar over the medium and long term, as the country moves towards becoming an aged population.

The country’s revenue from income taxes, on the other hand, will decline as people move away from salaried jobs in line with Industry 4.0 and the internet revolution, which will see more freelance opportunities arising, said EPF Economies and Capital Markets general manager Nurhisham Hussein. 

Speaking at the 2018 Post-Budget Dialogue organised by the Malaysian Economic Association, Nurhisham said the evolution of the country’s expenditure and revenue collection was inevitable, and needed to be addressed. 

“I am going to say something unpopular - my wish would be that income taxes were actually going up, expenditure was going up and that the government was borrowing more - and let me outline why,” he said.

Citing the country’s aging population, with a current median age of about 30 years, he notes that Malaysia is among the fastest aging nations in the world. 

“Within the next 30 years or so, we will be an aged economy, with about 15% to 20% of the population above the age of 60 years.

“If you look at household expenditure and how it evolves over time, in the area of healthcare specifically, the bulk of it is during the last two years of life,” he said.

Nurhisham stressed that healthcare costs were set to increase in line with the aging population.

“The allocation for the health ministry this year is about RM27bil and this is going to increase in double digit rates over the next 30 years. 

“We need to pay for that if we want to maintain the healthcare system that we currently have,” he said.

Secondly, he noted that the size of families were decreasing, apart from more people choosing to not get married or have children.

“Being Asian, we think that families will take care of the aged, but the family support system is disappearing, and eventually, this situation will entail support from the government,” he added.

Thirdly, he pointed out that government expenditure on the payment of pensions will also be increasing rapidly.

“I think as far as load on government finances is concerned, pension is going to be the number one issue over the coming years. 

“Even if we reform the pension system today, there would be a transition period of about 50 to 60 years. 

“We will still be paying pensions for today’s civil service, 60 years from now,” he said. 

Shrinking government income

On the income side, the challenges are not any less, Nurhisham said.

“We are talking about the evolution of the workforce. 

“Even today, if we look at the EPF membership, we have close to 15 million in the labour force and less than half are in the EPF system. 

“And out of this, only about two thirds of the contributors have a regular salary,” he said.

This, he said, meant that only about four million people were getting paid on a regular basis.

Citing Industry 4.0 and the internet revolution, Nurhisham says it is inevitable that the culture of work in the future would change.

“People will be less inclined to take salaried jobs and there will be more freelancers - it will be all about the gig and sharing economy.

“This means less salaried work, and it is going to have an impact in terms of income tax collection,” he explains.

This, he stressed, showed the need for a shift in thinking about how the government would fund its activities in the future.

Another issue is the demand for crude oil, which is likely to be reduced in the future.

Several governments, including the UK, France and China have already outlined plans to ban petrol vehicles by 2030.

“Demand will probably be good for the next few years as Opec extends production cuts, but in the long term, revenue from the energy sector is going to continue to decrease,” he said.

While the pressure on households and the government was less this year in terms of revenue, due to the projected increase in income from stabilising crude oil prices, Nurhisham said he was concerned about the medium to long term.

The fiscal deficit

Commenting on arguments about whether the government’s projected fiscal deficit should be lower than the announced 2.8%, in view of the current “good times”, Nurhisham said he was of the opinion that the government needed to first look at how it plans to handle the imminent changes in expenditure and revenue.

“There are gaps in our social safety net, in the income side, as well as in health and education that we have to cover. 

“For me, it is not about whether we should be running a surplus or deficit. I think it is a question of what kind of society we want, and what we want the government to do about it.

“Then we can figure out how much of surplus or deficit we require to fund this,” he says.

He added that one of the reasons why Malaysia has been running a fiscal deficit over the past years is because private investment has been poor, and this required the government to step in to fill the gap. 

“We need to have a more nuanced thinking about this and we need to think more about longer term implications.

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