Why prices are still high

OIL exporting countries should be happy with the current level and outlook for crude petroleum prices. From a low of around US$30 per barrel just two years ago, prices have climbed steadily, reaching highs of about US$80 per barrel. Malaysia should benefit as crude oil is one of our main exports.

It is much needed as the Goods and Services Tax (GST) has been replaced with the purportedly “cheaper” Sales and Service (SST) to fulfil an electoral promise. Consequentially, the state coffers are expected to be reduced by about RM21bil.

Against this backdrop, the man on the street is a bit confused. If oil revenue has gone up, the dreaded GST is gone and with toll collections still ongoing, why are there hints being dropped that belt-tightening measures can be expected in Budget 2019? If that is so, why was the GST scrapped?

There is also speculation that payments in the form of people’s aid (bantuan) may be reduced or even eliminated. It is opined rather disingenuously that the recipients will become lazy (which is an insulting misconception) and adopt a “subsidy mentality”.

This is hurtful to those who are making ends meet by taking on two jobs or moonlighting as sellers of burgers or banana fritters at roadside stalls. Unfortunately, they tend to be from one race and this could lead to social discord.

These persons generally represent those working in lower-paying jobs in the civil service and corporates, and those toiling in the rural sector who are subject to the elements of nature. Their wages contrast heavily with the amounts paid to those higher up the rung.

To add insult to injury, the much touted minimum wage has been translated into a meagre RM50 increase, a far cry from expectations!

Apparently, there is lack of understanding of fiscal economics here. “People’s aid” is meant to offset the cost of living among the lower income group due to increased prices resulting from GST. It is essentially a redistribution exercise.

A prominent Universiti Sains Malaysia Economics professor has penned a substantive article on the impact of GST, its role in the country’s taxation system and the efforts required to ameliorate the effects of this tax on the lower income group. It is good reading to the uninitiated and an eye-opener especially given that the SST, though applicable to a smaller base of goods, has not in effect led to an overall reduction in prices.

To the chagrin of many, it has been acknowledged that the SST has, in reality, led to increase in prices of specific goods.

GST allows for lower individual and corporate taxes. For the latter, it serves as an incentive to attract foreign investment, given the comparable tax rates in Vietnam and Singapore. One must remember that the market has already factored in the 6% GST into the prices, and with the SST also at 6%, there is no unbridled rush by the business community to reduce prices for the sake of the nation. But this should not come as a surprise.

To be fair, there has been some effort to dispense with SST. In construction, SST has been waived on the presumption that if construction costs decrease, there will be a consequential reduction in housing prices. This is where the naivety of the policy makers is revealed.

The Construction Industry Development Board’s chief executive has stated that based on an overall study, pursuant to the tax waiver, the construction costs of residential properties are expected to go down by 3% to 5%, “Board: Housing prices may drop” (The Star, Sept 29). In the same breath is the qualifier: “The tax exemption looks like it will cause a high impact but actually other costs are high. Construction materials only represent one component of the overall costs of property development.”

Translated simply, it means that housing prices may not come down!

It must be remembered that whichever sector it is, this is the common language of the business community – “other costs have gone up; there are other factors to consider; tax exemption only affects one component.”

In this scenario, which has been played out over the years, one thing is crystal clear – once prices are up, there is the propensity for it to remain at that level, whatever incentives or tax exemptions are provided in hindsight.

This appears ironic – but welcome to the world of reality. It is the psychology of free market thinking and many are uneducated on this score and its consequential effects.

While higher oil prices are a boon, one must remember that (as has been promised) pump prices will be kept stable at current prices. This entails subsidies which not only distort the true production costs but are also frowned upon by analysts.

We continue to lament about the RM1 trillion debt which, based on international norms of computing national debt, is actually at a manageable level. This is the view of rating agencies who accord ratings based on in-depth economic analysis. These ratings determine a host of factors including ability to service our debt and interest rates should we decide to raise new debt or refinance. They don’t opine that we are headed for bankruptcy!

The electorate will adopt a “wait and see” attitude both on the upcoming budget as well as the fiscal and monetary policies to be adopted.

WALTER SANDOSAM

Kuala Lumpur