5 Key Highlights From iMoney’s Pre-Budget Forum

5 Key Highlights From iMoney’s Pre-Budget Forum

With Budget 2018 around the corner, iMoney invited a panel of experts to discuss and share their views on a number of topics related to the Malaysian economy.

The panel reviewed the policies from the previous Budget 2017 to see if Malaysia is on track economically, and also discussed what could be announced in the next Budget.

If you’ve missed the Facebook live discussion, here are five key highlights from the forum:

1. The disparity between consumer perception and economic growth

Malaysia’s economy expanded at the fastest pace in more than two years in the second quarter of 2017 due to domestic demand and robust exports. According to World Bank, the gross domestic product (GDP) growth rate is predicted to rise to 4.9% for the year, which is slightly higher than the current projection range of 4.3% to 4.8%.

Despite the positive growth in numbers, the sentiment is not echoed by the consumers. During the live forum, there were a few contributing factors brought up by the panellists.

According to one of the panellists, Professor Dr. Jomo Kwame Sundaram, the former assistant secretary-general for economic development at the United Nations, the three main factors contributing to the negative sentiment on the ground are the implementation of the Goods and Services Tax (GST), the declining ringgit and also political scandals such as 1MDB and the fiasco surrounding Felda Global Ventures.

These were initially countered by measures such as the introduction of 1Malaysia People’s Aid (BR1M) and minimum wage and also alleviated by the higher commodity prices. However, in recent years, these are no longer effective to help with the rising cost of living.

This was echoed by Dr. Muhammed Abdul Khalid, founder and chief economist from DM Analytics, adding that other than GST and the declining ringgit, the reduction of subsidies also played a role.

“If ringgit drops, the prices of all these items [food] go up. It’s worse for low-income because they spend the bulk of their income on food,” Muhammed explained.

This is further exacerbated with wage increment at a slower pace, said Lee Ching Wei, CEO of iMoney Group.

Muhammed agreed, saying wage, after inflation adjustment, only grew by 0.9% last year, which in absolute value is only RM17.

“The worst thing is, which is quite surprising, at the mean level, the lowest income growth was for the B40 group. Usually this group of the population has the highest income growth compared to T20 and M40,” Muhammed added.

2. Malaysia’s taxation system needs to be more progressive

Malaysia tax system is inequitable.

This is the sentiment echoed by the panellists during the iMoney live forum last Tuesday.

“After taxation, income distribution is worse than before taxation,” said Jomo.

This is due to the regressive nature of certain taxes, such as GST. However, scrapping GST now is not a good idea because it will create a revenue gap which the government will need to fill from other channels so deficit in the budget does not increase.

The view among the economists is, the country should move to a more progressive tax structure, and this goes beyond reviewing, reducing or repealing GST.

Despite criticism, the government does not plan to repeal GST, and according to the Prime Minister Datuk Seri Najib Razak, GST helped the government offset the losses from the falling fuel price. The revenue from GST was recorded at RM39 billion in 2016.

The current tax system is regressive because it does not tax sources of earning fairly, Muhammed added. The Malaysian tax system also gives the affluent and corporations too many tax exemptions.

If you’re a wage earner, you get taxed, but if you buy or sell shares, or if you receive an inheritance, you don’t get taxed in Malaysia. Even for property flippers, the Real Property Gains Tax (RPGT) is only up to five years for Malaysians. Other countries tax these on top of individual and corporate income tax.

Another fallacy that we believe in is the theory of reducing corporate income tax to create more job opportunities and increase wage, said both economists.

Instead, there should be more incentives to enhance the productivity of the corporate sector.

“The country needs a sustainable revenue base for the country rather than just tinkering with the consumption tax,” said Jomo.

3. Budget 2018 should not cut investment in education and healthcare

In the previous Budget, the funding for the higher education ministry was set at RM6.117 billion, down from the RM7.575 billion allocated for 2016. As a result, 10 out of 20 public universities are now 70% dependent on public funds, ahead of the 2020 target.

“What this Budget should not do is: Do not cut spending, especially development expenditure, for education and health,” said Muhammed, adding that these are not expenditure but investments which will bring returns to the country.

Research and resources will suffer when these expenditures are cut. The current spending of RM6 billion is not huge if compared to the interest on national debt at RM24 billion.

“We have the highest household debt in Asia, and much of it is from housing, but education is fast catching up,” said Jomo.

“We spend a lot on education but we don’t have much to show for it, but for healthcare, we don’t spend a lot but we have an impressive record.”

He further added that Malaysia should spend more on preventive healthcare and lauded the recent announcement by Health Minister Datuk Seri Dr S. Subramaniam on the reduction of cost for Hepatitis C treatment to RM500.

“We must be committed towards achieving universal health coverage,” said Jomo.

4. PR1MA and affordable housing

As of March 2017, a total of 6.3 million applications for the BR1M 2017 have been approved, with total allocation of RM5.41 billion.

Assuming only 1 million of these applicants need affordable housing, it seems pretty impossible for the government to provide affordable housing such as PR1MA to everyone, Wong Chen, Kelana Jaya MP said.

“Assuming we can build 10,000 houses a year, it can only serve 1% of those who need. This creates the ‘lucky draw’ mentality which encourages corruption,” said Wong.

With RM10 billion, Wong said he would rather use it for wage increase to reduce poverty rather than building affordable housing.

However, Jomo disagreed with the idea, saying that affordable housing is not an insoluble problem because there are countries which had successfully done it such as Singapore.

“The problem in Malaysia is the access to land is controlled and abused by politicians, and the politicians are often in bed with the developers,” added Jomo.

Although the current system is imperfect and it does lead to substandard housing, but it doesn’t mean these problems are insoluble.

5. Should we reinstate fuel subsidy?

It has been almost three years since Malaysia scrapped fuel subsidy back in December 1, 2014, and the current managed float system was introduced. This was during a time when crude oil prices fell to US$62 per barrel.

In May, Pandan MP Rafizi Ramli suggested that fuel subsidies could be reinstated once Pakatan Harapan was installed as the new government.

During the discussion, a Facebook user asked Wong to justify the return of fuel subsidies.

“As an oil producing country, we are morally obligated to subsidise fuel, and at the same time, decelerate our dependency on oil,” said Wong, adding that at one point, the question of fuel subsidies would not even arise as consumption of oil drops.

“It is our moral duty to subsidy the poorest,” Wong added.

This was labelled impractical and the worst thing to do for the country by both Jomo and Muhammed.

“We all know that the fuel subsidy is largely enjoyed by the middle class and not by the poorest,” Jomo said, adding that subsidy should be channelled towards public transportation.

bank negara

Image from Bank Negara Malaysia

A Bank Negara Malaysia report revealed, “It is estimated that the bottom 20% of households in Malaysia only receive 4% of the fuel subsidy, while the richest 20% receive 42% of the subsidy.”

This was also echoed by Muhammed who said fuel subsidy is the worst thing to do to help the poor. We also need to relook at the definition of poverty. As a developing country, we should look at the relative term of what being poor means, it is not just merely looking at the income.

So, will the budget deficit for Malaysia be reduced to the point where we achieve a balance budget?

An annual balanced budget should not be the target, but rather to balance the budget over the medium term.

“When the economy is doing well, the country should do some belt tightening and cut down expenses to pay down the deficit. When the economy is in bad shape, the country needs more productive government spending to counter the effect of the private sector declining,” said Jomo.

The country has been running a deficit since 1997. It made sense during the 1997 crisis, but it no longer makes sense now.

Wong agreed, “For developing country, it is reasonable to have an average deficit of 2% to 3%. However, in a 10-year cycle, we should try to record a two-year surplus.”

If you’ve missed the live forum, watch the full discussion below:

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