M40 group in the middle-income trap?

  • Business
  • Saturday, 18 Nov 2017

Penerima Bantuan Rakyat 1Malaysia (BR1M) warga emas Minah Mat Resat,81, ceria ketika menunaikan baucer di kaunter selepas majlis Penyampaian BR1M Parlimen Bera oleh Menteri Kemajuan Luar Bandar dan Wilayah, Datuk Seri Ismail Sabri Yaakob hari ini. — Bernama

ANNUALLY, the national budget has always been hotly debated by Malaysians, after unveiling in the parliament.

While some Malaysians hail the budgets, others feel disappointed, pointing out the lack of action for their group.

In all recent budgets, key focus had always been on the bottom-40 (B40) households, with income below RM3,860.

Most proposed action plans were aimed at assisting them to better cope with the rising cost of living as well as to eradicate poverty. While the government is still optimistic of achieving high income nation status by 2020, most households are struggling to maintain a decent lifestyle. This is especially true for the urbanite middle-40 (M40) households earning between RM3,860 and RM8,319 who are hoping for more assistance from the government.

With income growing at a slower pace compared to costof living, the M40 group is experiencing depressed disposable income, which could be detrimental to future consumption activity and is the key to sustained economic expansion.

On top of it, private consumption is also dragged down by the high household debt-to-GDP ratio of 85.6% of total GDP, rising unemployment rates in recent months, and weak exchange rate domestically.

According to Department of Statistic’s 2016 Household Income and Basic Amenities survey, both average annual household median and mean income grew 6.6% and 6.3% respectively. At these growths, it is noted that income growth has dropped below the 2009-2014 compounded annual growth rate of 10.1%.

M40 measures at a glance

This year, Budget 2018 has unveiled a few initiatives that may benefit the M40 households as a whole. Notably, the two point reduction in personal income tax rates for income tax band ranging between RM20,000 and RM70,000 would result in income tax rates charged at 3% to 14%, depending on the income bracket.

Accordingly, the reduction in personal income tax will translate into an increase in disposable income, boosting consumer spending. As a large portion of these households in this category are not eligible for Bantuan Rakyat 1Malaysia handouts (pic), this measure acts as an alternative way for the government to boost spending.

According to the government’s estimate, consumers will have an additional RM300 to RM1,000 per household, amounting cumulatively to around RM1.5bil in extra disposable income that will strengthen GDP growth.

Besides that, there were other minor measures benefiting the M40 group announced in the recent budget such as the extension of step-up financing to private developers, abolishment of selected tolls in Selangor, Kedah and Johor, exemption of GST by services provided by local authorities, and 20% discount on full PTPTN loan repayments.

Fresh initiatives for affordable housing

Time and again, the affordable housing conundrum has always been a pressing matter. According to National Property Information Centre, Malaysian House Price Index grew 6.9% y-o-y in 2016, outpacing the average annual median income growth of 6.6% within the same year.

For this reason, the government has unveiled RM2.2bil worth of affordable housing initiatives, which is equivalent to 4.8% of total development expenditure to encourage more homeownership among low income earners. Currently, affordable housing initiatives such as Perumahan Rakyat 1Malaysia (PR1MA), People’s Housing Programme (PPR), Rumah Mesra Rakyat and MyBeautiful New homes have been expanded, with additional units allocated for each scheme.

However, the affordable housing commitment set by the government of 1.1m units by end 2018 has yet to be fulfilled. According to the Urban Wellbeing, Housing and Local Government Minister Tan Sri Noh Omar, the government has completed a total of 255,341 units of affordable homes to date, just 23.2% of the targeted commitment.

This time around, the government improved the earlier end-financing scheme by PR1MA to be extended to include private housing developers, promoting more construction of affordable homes to address this supply issue. Although the details for the scheme have yet to be finalised, the participation of private housing developers will clearly be beneficial to new home buyers.

Buyers will now be offered a wider range of affordable homes instead of just being limited to PR1MA housing. In return, property players ought to be incentivised via tax breaks, subsidies for building material costs, and a reduction in compliance costs.

Meanwhile, within the M40 group, fresh graduates who have just entered the workforce bear the heaviest burden of coping with the rising cost of living, while being weighed down by PTPTN loans.

At the moment, many of these graduates face difficulties in purchasing their first homes, barely earning enough to save up for their first home downpayments, let alone the capability to finance the mortgage loan. Therefore, the government may also consider tweaking the rent-to-own schemes, to enable new job entrants, to be given an option to purchase the house at a predetermined price after renting it for three to five years.

This option should come with a no-sale clause in the first five years. Positively, potential first-home buyers will enjoy the benefit of rent as saving, which can be converted as downpayment when applying for a mortgage loan after the fifth year. Additionally, supply of rent-to-own housing schemes can be improved by focusing on transit oriented development, especially for new graduates, with pricing rentals of around RM300 per month.

This can be modelled after the PPR flats, which are currently meant for underprivileged families. A single affordable housing authority which is a regulatory body with full executive powers, tentatively named 1Malaysian Affordable Housing Board, should be formed under the Act. With best practices, it can be expected to excel, ending the affordable housing gaps and ensure good success rates.

The agency should be empowered to negotiate with the respective state governments to develop parcels of unused government land within close proximity to highways, train stations and other public infrastructures. With the assistance of the authority, developers can tap underserved markets with better transportation facilities, along the Sungai Buloh-Kajang Line (MRT1), Sungai Buloh-Putrajaya-Serdang Line (MRT2) and Circle Line (MRT3).

Easing connectivity and mobility

In conjunction with this, the government may consider implementing a targeted discount on public transports such as buses and trains, as well as a targeted subsidy for the pump prices. This can be granted to the B40s and M40s, channelling part of the GST collections back to the people in need.

Given the recent recovery in Brent crude oil prices (US$62.20 per barrel as of Nov 14), domestic pump prices will likely continue to increase in the upcoming year. At the moment, pump prices (RON95) have already soared to RM2.38 per litre, the highest since the implementation of the managed floating mechanism and the removal of petrol subsidies in December 2014. A safety net is very much needed, if we are serious about addressing the rising cost of living arising from higher transportation cost.

According to government statistics, transportation cost account for some 20% of our monthly expenditure, after food expenses (35%). If implemented, the targeted subsidy will benefit the poorer households.

For a start, the government can issue discount cards – 20% discount for RON95 with a limit of 50 litres a month, and 20% to 30% discounts on public transport fares. For those who drive regularly, a 20% subsidy of 50 litres per month will be translated into savings of around RM24 per month (based on the RON95 current price of RM2.38 per litre).

As an alternative for those who do not possess their own vehicles, a 20% to 30% discount on public transport fares may sum up to a significant amount monthly, depending on the distance of travel and fares charged. Recently, the government announced a 50% discount on MRT2 fares until Aug 31 in conjunction with National Day.

According to the Transport Ministry, the current completed phase of MRT2 ridership amounted to 4.2 million in August. However, as soon as the discounted period ended, ridership fell by 26.2% down to 3.1 million. Overall, this shows that besides easing the cost of transportation for consumers, discounts promote higher ridership numbers. In fact, revenue lost from discounts given would be regained in the long run by the public transport operators.

Manokaran Mottain is the chief economist at Alliance Bank Malaysia Bhd.

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