GST existed for a while in Malaysia, beginning in 2015, but was repealed under a new government in 2018. Now there's talk of reviving it. — Filepic/The Star
THERE has been a loud clamouring for the return of the goods and services tax (GST) and the immediate removal of all forms of subsidy so as to balance the books and to reduce the government’s debts.
This is despite Prime Minister Datuk Seri Anwar Ibrahim repeatedly stating that the GST would not be imposed in the near term.
Much as the debate is about more fiscal restraint, some outdated textbook ideas are being promoted, which could lead to an unnecessary self-imposed austerity that could scar our social and economic fabrics.
The response of the United States and European Union to the Global Financial Crisis in 2008 which centred around austerity caused permanent damages to the lives of millions and resulted in the rise of populism such as Brexit and the Trump presidency.
We must avoid walking into self-harming austerity unwittingly.
First, the public purse doesn’t run on the same logic as private households. There is a huge difference between microeconomics and macroeconomics.
A crucial role of fiscal policy is to sustain aggregate demand in the event of a downturn or recession.
The private households want to avoid incurring debts they can’t repay.
But for public debts, the question is not how much is owed but for what purpose.
If debt is incurred and then syphoned off by despots and corrupt officials, it is criminal and a deprivation of public welfare, thus warranting the harshest condemnation and punishment.
Curb wastage and stop corruption by all means.
However, if debt is incurred for productive reasons, whether to bring a depressed economy out of the doldrums or to finance much-needed infrastructure projects with a strong multiplier effect for the betterment of the people, it should be welcome.
What matters in this case is not the absolute level of debt but the sustainability of debt, that is the ability of a government to pay the interest on its debt obligations over time without defaulting.
A true measure of debt sustainability requires sophisticated analyses and frameworks, the likes of which are undertaken by organisations like the World Bank and the International Monetary Fund (IMF).
But a good proxy is the debt-to-gross domestic product (GDP) ratio.
Malaysia’s federal government debt was RM1.08 trillion as of end-2022 according to the Finance Ministry, with total public debt including guaranteed commitments and other liabilities (such as 1Malaysia Development Bhd) standing at RM1.45 trillion.
However, the main problem is not its size, but its relative size to the overall economic pie, measured by GDP.
Currently, the federal government debt-to-GDP ratio is 60.4%, rising to 80.9% if we include liabilities (which may be off-budget but still require the government’s support and could influence our credit rating).
At this juncture, we must not forget that we can (and should) bring our debt-to-GDP ratio down by doubling down on the denominator, that is by accelerating GDP growth.
Policy sequencing should always place growing the pie as the top priority, and not cutting deficits.
Bank Negara and the Treasury projected that the economy would grow by 4% to 5% this year.
The World Bank has just reduced its projections across Asia due to China’s slowdown, revising Malaysia’s projected growth rate to 3.9%.
At the launch of the Madani Economy framework, Anwar stated the aspiration to grow at 6% per annum over the course of the next decade.
If the economy grows at 5% averagely, it would take 15 years to double the size of the GDP whereas at 6%, it would take slightly more than a decade to achieve the same.
Lessons from the first economic takeoff
I would like to draw your attention to the first economic takeoff that Malaysia experienced in the late 1980s and 1990s.
In 1985, the government incurred significant debts as a result of former prime minister Tun Dr Mahathir Mohamad’s push for heavy industry, including Proton and steel.
The United States forced the Japanese yen to appreciate through the Plaza Accord (resulting in higher repayment of yen-denominated debts), coupled with a cyclical downturn of the electronic and electrical products sector, and the collapse of oil and commodity prices.
The initial response of the-then finance minister Tun Daim Zainuddin was to impose austerity by massively and suddenly cutting government spending.
The economy duly collapsed, registering a 9% decline in GDP in 1985.
In 1986, the government switched gear. There is a reason why the Promotion of Industry Act bears the year “1986” on it.
To resuscitate the economy, the government allowed for 100% foreign ownership of export-oriented manufacturing firms and established a set of incentives to promote more foreign direct investment (FDI) into the economy.
By 1988, the effort bore fruits: the economy took off with a spectacular annual average growth rate of 9% until the Asian Financial Crisis in 1997.
Luck has it that the appreciating yen, Korean won, New Taiwan dollar and Singapore dollar triggered a massive wave of relocation to South-East Asia economies, especially to Malaysia.
At the same time, the withdrawal of the generalised system of preferences – special tariff concessions on selected imports into the US – from Japan, South Korea, Taiwan and Singapore in 1988 helped attract capitals from these countries to relocate production to Malaysia.
In 1989, as a 12-year-old boy from a struggling family, I was selling lottery tickets on the streets as well as working part-time at a Chinese restaurant in Subang Parade, Selangor.
I could see many Japanese and Korean businessmen, engineers and technicians at the restaurant every lunch hour and at dinners.
They were from the industrial areas of Shah Alam and Sungai Way.
In the 2023 context, as opposed to 1986, a lot of focus should also be on domestic direct investment (DDI).
The growth narrative
Malaysia in 2023 has a great potential of a second economic takeoff. The Unity government has the potential to be a stable government for the long haul thus providing the basis for long-term growth.
From the time China joined the World Trade Organisation in 2001 until recent years, most manufacturing investments from around the world went to China, resulting in Malaysia’s premature deindustrialisation.
But the de-risking that shifts away from China is so visible nowadays and Malaysia stands to gain.
I can see at least 3 major engines of growth, namely, reindustrialisation, green transition and TechUp, which means more automation, more digitalisation, more innovation, and more adoption of technology in general.
The other 3 potential engines of growth would be investing in “good life”, such as better healthcare, better cities and better housing; job-led consumption growth, and the prosperity of regions such as Greater Johor Bahru.
It has been pointed out by the Prime Minister that during the heyday of the first economic takeoff between 1988 and 1997, investment as a ratio to GDP was at 40% but in the last 25 years, the ratio hovers around 20%-25%.
Thus, growth through investment should be the primary concern for the economy.
And, one cannot deny that growth would require some investment from the government too, apart from the government shaping the policy environment for investment and growth.
Therefore, austerity should be avoided.
Of course, growth should avoid exuberance, especially speculation in real estate, but should instead be led by innovation and value adding.
Over the past 25 years, especially in the last decade or so, growth has been often driven by private consumption, and quite often by debt-fueled consumption.
For instance, early Employees’ Provident Fund (EPF) withdrawals during Covid-19 pandemic fueled a short-lived consumption boost.
Any policy action would have to be cognisant of the need to sustain consumption, thus aggregate demand. Focusing on creating exponential growth which fruits will be shared across the society will mean the government collecting more taxes from corporations and also from individuals when their incomes increase. Such taxes are progressive and not regressive like the GST.
GST: what’s good for businesses is not necessarily good for consumers
Prime Minister Anwar has chosen the right course: focus on reducing fuel subsidy and not to pursue the reintroduction of GST now.
Those who argue that GST is good for businesses are not wrong. Businesses can claim back the input tax and only the final consumers pay for GST. Unlike now, sales tax is paid by businesses.
Herein lies the trouble: what is good for businesses is not good for the final consumers, and once the final consumers are forced to pay GST, the resulting cutting of consumption is akin to the killing of the golden goose.
Some even argue that with GST in place, there could be tax cuts for businesses and a reduction in top marginal tax rates. However, the era of competitive tax cuts is over.
Even low tax economies such as Hong Kong and Singapore, which benefit from not having to shoulder the cost of sustaining hinterlands, will refrain from tax cuts even if they have yet to contemplate a tax hike for a simple reason: their populations are ageing thus requiring more financial outlays to care for them.
For those who complain that too few Malaysians pay income taxes, they should know that most people do not pay taxes because they are not eligible to pay taxes.
Yes, they don’t earn enough to qualify themselves to pay income taxes. To pay income taxes, one needs to have a gross income of around RM4,000.
With median wage in 2022 at RM2,424, it means half of Malaysian workers are earning less than RM2,424, only about half of the RM4,000 threshold.
I hope enough policy makers pay attention to the proposal by Tan Sri Yong Poh Kon, former President of Federation of Malaysian Manufacturers, on expanding SST Plus but ensuring that it doesn’t go beyond the factory gate.
Based on the calculations by Yong and the Malaysian Institute of Economic Research, with 480,000 companies collecting GST, the tax was estimated to potentially bring a collection of RM44bil, and after refunds it would be a RM35bil net contribution to the Treasury.
Meanwhile, a reformed SST Plus can collect RM28bil from just 80,000 eligible companies.
Through 16% of collecting companies, SST Plus can provide 80% of what GST promised to deliver (RM28bil); freeing 400,000 SMEs from becoming collection points, at RM25,000 per company per annum of compliance cost, amounting to RM10bil.
It actually takes RM10bil to collect the extra RM7bil (RM35bil minus RM28bil).
Pivoting from fuel subsidies to one-time green subsidies
On fuel subsidies, I hope its removal can be framed as a once-in-a-generation chance for the nation to implement green transition.
Fossil fuel is bad for the climate. But many Malaysians have no choice but to drive a car or ride a motorbike due to poor public transport.
The government could consider using the savings from fuel subsidies rationalisation to invest massively in creating a bus-based public transport system (and in some instances catamaran-based ferries) throughout the nation, especially in state capitals and their surrounding towns.
There should also be significant one-time subsidies for the purchase of electric vehicles (EV), two and four wheelers.
Ambitious subsidies can help build up a nascent EV industry. Industrial policy is now back in fashion with many nations ready to invest in industrial growth, more reason why austerity shouldn’t be on the policy menu.
Removing diesel subsidy can be implemented sooner as it affects mostly commercial vehicles.
For commercial vehicles, corporations will likely absorb some of the shocks while some will be passed on to the consumers.
The benefit of reducing diesel subsidy is that the bounty would double the effort: once we close the gap between Malaysia’s diesel price and that of its regional neighbours, smuggling will stop,
thus stopping the bleeding of fuel subsidy.
Of the RM50.8bil fuel subsidy in 2022, RM20.9bil went to diesel subsidy.
However, removal of petrol subsidies should be gradual and moderate, as it affects most ordinary Malaysians and would have more direct inflationary consequences, and paired with very rapid rollout and increase of public transport services, on top of the aforementioned EV subsidy.
The Malaysian economy is at a crossroads like that of 1986.
A self-inflicted and unwitting austerity drive would cause unnecessary sufferings and hold back the economy as a whole GST is not really needed at this stage of our economic development.
Just like in 1986, the nation should work hard to create exponential growth. This is the time for our second economic takeoff.
Liew Chin Tong is Malaysia’s Deputy Investment, Trade and Industry Minister. The views expressed here are the writer’s own.
