Expansion of SST not a long-term solution

THE expansion of the Sales and Services Tax (SST) is a necessary, if bitter, pill for the rakyat to swallow. While the rationale – to broaden the government’s revenue base and secure long-term fiscal sustainability – is a responsible and crucial goal, it represents only one side of the fiscal equation.

True sustainability is not just about how much money a government collects but also how effectively it uses that money. For Malaysia, this means confronting a difficult truth.

Consider the day-to-day cost of running the country. According to data from the Accountant-General’s Department, this figure has climbed significantly. In 2018, it stood at RM231bil. By 2023, it had swelled to RM311.3bil, representing a compounded annual growth rate of 6.15%.

This significant increase in spending could be justifiable if it corresponded with a proportional increase in the quality of public services and policy implementation. Unfortunately, the evidence points in the opposite direction. As our government spending has grown, its perceived efficiency has declined.  

A key global benchmark for this is the World Bank’s Worldwide Governance Indicators (WGI). One of its six dimensions, Government Effectiveness, is particularly telling. An indicator of the state’s administrative capability, it captures perceptions of households, firms and experts on the quality of public services, competence and independence of the civil service, and the quality of policy formulation and implementation.

In 2018, Malaysia’s global percentile rank for Government Effectiveness was 81.9, meaning that we performed better than 81.9% of the countries surveyed. However, it fell to 79 in 2019, rose to 81.9 in 2020, fell again to 80.5 in 2021, and hit a low of 79.2 in 2022 before a slight recovery to 79.7 in 2023. The overall trajectory is one of decline!

While our spending has increased significantly, the perception of our government’s ability to deliver has gone down.  

To secure our future prosperity, we must move beyond merely funding the current system and begin to fundamentally improve it. We can learn from countries that have successfully navigated this path.

First, we can look to New Zealand and its overhaul of public sector accountability. In the 1980s, facing its own public sector challenges, New Zealand transformed its civil service by replacing permanent tenure for ministry heads with fixed-term, performance-based contracts.

The principle was simple – top officials, the equivalent of our secretaries-general and directors-general, were no longer just custodians of a bureaucracy but chief executives accountable for delivering specific, measurable outcomes agreed with their ministers. This created a powerful incentive structure focused on results and not just process.

Adopting a similar model in Malaysia would inject accountability into the highest echelons of our civil service, shifting the culture from one of entitlement to one of performance.  

Second, we can embrace the holistic digital vision of Estonia. Many countries have e-government services, but Estonia built a truly seamless digital state. Its success is not in its websites but in its foundational architecture.

Two pillars are key. First is the “X-Road”, a secure data exchange layer that allows all public and private sector systems to communicate; and second is the e-ID, a state-issued digital identity for every resident. This architecture enables the “once-only” principle, where a citizen only ever has to provide a piece of information to the government once.

With their e-ID, Estonians can access 99% of government services, vote online, sign documents digitally, access healthcare records, manage banking, and shop securely.

It is a re-engineering of the state that eliminates red tape, reduces opportunities for corruption, and delivers massive efficiency gains.

This means Malaysia’s digital strategy must prioritise building a holistic digital foundation to connect all disparate systems rather than simply creating more standalone websites and apps.  

The expansion of the SST may provide a temporary fiscal boost, but it is not a long-term solution. True fiscal sustainability and national competitiveness will only be achieved when we have the courage to improve the performance of government to more efficiently deliver quality public services to the people.

ANDREW FAN

Sustainable Development Solutions Network Asia

Sunway University