GST-induced inflation is a given, the danger now is stagflation

Media statement by DAP National Political Education Director and MP for Kluang Liew Chin Tong on 6th November 2014

Almost a month since Budget 2015 was presented on 10th October 2014, the Government and its backbenchers were trying hard to gloss over the question of GST-induced inflation, let alone answering the real danger on the horizon – that of stagflation.

The general defense of the Government is that there will be a small increase in prices for a short term and some goods would see a fall in prices due to the removal of Sales Tax. That is essentially the line adopted by even Prime Minister and Finance Minister Datuk Seri Najib Razak.

But GST-induced inflation is actually a given.

The government’s own Economic Report 2014/2015 (pg. 129) states “In 2015, inflation is expected to increase 4% – 5%, largely due to the implementation of Goods and Services Tax (GST) and spillover effect of fuel subsidy reduction in October 2014. Given the subdued external cost pressure, domestic cost remains the major factor that drives inflation in 2015. The implementation of the GST will have a transitory impact on the cost of goods and services.”

“However, the strong capacity expansion over the past years will help to mitigate the cost pressures, while a more cautious stance of consumers would also contribute to moderating demand and hence prevent inflation from becoming more entrenched.”

What the Government has yet to recognise is that of the danger of stagflation caused by a combination of factors such as 1) slower growth in major global economies thus reducing external demand of Malaysia’s goods and services; 2) the depletion of disposable income due to GST-induced inflation hence a plunge in domestic demand.

Stagflation is the combination of a “stagnant” economy and higher “inflation”.

The GST and fuel price hike would force the people to consume less which will hurt domestic demand- a prime mover of the Malaysian economy. At the same time, we could not rely on exports to boost the economy as the three major global markets—the United States, Europe and China’s demand are either weak or stagnant.

Needless to say, the fuel subsidy reduction is making goods and services more expensive than before, further draining the already shrinking disposable income of ordinary Malaysians.

The consequences of impending stagflation could be dire in terms of macroeconomic scale – with no growth, no wage increase, few jobs and higher cost of living. The trickle down effect on the rakyat, especially on the lower income group, will be painful. This has been proven in other countries which have experienced stagflation such as Russia, Thailand, and the US in the 1970s.

The government must take heed of the red flags and address the threat of stagflation with appropriate policy responses to get our economy moving again, or risk the impending disastrous consequences.

Liew Chin Tong