GST – Where Is The Macroeconomic Perspective?

Macroeconomic and political economy considerations have generally been absent from the Malaysian Government’s thinking about the Goods and Services Tax. The Government’s arguments, exemplified by Prime Minister Najib Razak’s recent blog post, are as followed:

“GST would reduce Malaysia’s dependency on oil and gas revenues, noting that with the recent fall in global prices of the commodity, Malaysia could not sustain on that income stream alone.

“Only 1 in 10 Malaysians pays personal income tax, and it is important that we broaden our tax base for the long-term good of the economy.

“It will help reduce our deficit, help us invest in our future, and help drive forward our national development.”

In short, the Government intends to broaden the tax base and increase its collected taxes with the objectives of lowering dependence on the now declining oil revenue and reducing fiscal deficit, all at once.

As soon as one stops putting blind faith in the so-called experts proposing GST, it is not difficult to see that the GST is not suited for Malaysia’s present economic terrain. It comes at a bad time, and it will not resolve the Government’s persistent fiscal deficit problems.

Promoters of GST also argue that many businesses have been evading taxes and this malpractice can be curbed through the GST because that tax system is more “transparent”.

The Government’s other explanation is that more than 160 countries in the world already implement some form of GST or Value Added Tax (VAT), and Malaysia should not exempt itself from this world trend.

In its eagerness to collect more revenue, the Government and many economists make the big mistake of refusing to understand Malaysia’s present economic structure.

Two key features are worth noting: More than 60 percent of families receive some form of government aid, in particular BR1M (1Malaysia People’s Assistance); and more than 30 percent of household breadwinners are working in the informal economy, and many more run very small businesses.

The Bottom 60 percent

GST is a regressive tax in that it takes a higher proportion of income from the poor than from the rich. This is an obvious point about the GST, but there are even Federal Ministers who shockingly dispute this fact.

With 60 percent of Malaysian households recognised as not having sufficient income hence warranting some form of aid from the Government, it is incomprehensible that the Government should lament that the tax base is too small, and that only 1 in 10 working Malaysians are paying income taxes.

While there may be tax evasion—and there are sufficient laws in place dealing with such crimes—, the bulk of Malaysians do not pay tax simply because their income places them below the tax thresholds (about RM 2,850 for singles and RM3,100 for those married with no children).

Asking low income people who have never paid tax because they have never earned enough, and who are likely to be burdened with household debts already, to pay GST is an invitation to them to scrutinise Government spending in a way they never did before. Needless to say, this makes them very confounded and unhappy with the Government.

Wrong time

All these come at a wrong time.

The Malaysian economy was essentially export-led up to a decade or so ago. But it is increasingly also dependent on domestic consumption, especially since the Global Financial Crisis in 2008.

Malaysia’s export are mainly to the world’s four major economic powerhouses, namely the United States, Europe, Japan and China. Only the US economy reports some positive news in 2015. In short, the future of exports is no longer rosy for the Malaysian economy.

The debt-fuelled domestic consumption has its limitation. Household debts is already at 86% of GDP, and rising.

Unlike many developed nations that introduced GST to shift the tax burdens from top income earners to the middle class in order to reduce the top tax rates but with no intention to increase the tax collection as a whole, Malaysia’s Government attempts to take in RM15 billion net in new tax revenue via the implementation of GST.

This just means sucking away RM15 billion out of the already highly stressed domestic economy into the Government’s leaky coffers.

The Japanese lesson from 2014 is worth noting. Japan’s sales tax was increased from 5% to 8% in April 2014, and the two subsequent quarters saw sharp downturns.

What tended to follow were more retrenchment, more suicides and more robberies.

Wrong cure

To put it bluntly, one must not look for a cure-all silver bullet to fix multiple economic and fiscal challenges.

The GST is not the marvellous medication that would fix the deficit problem, the shift away from oil revenue dependence, the need to broaden the tax base and the need to curb tax evasion, etc. It is doomed to fail on these scores.

Somehow no one in the Government seems to get it that if the economy shrank, corporate taxes would decline. Or as businesses are forced to absorb all costs for 18 months until June 2016, they would declare smaller profits and hence pay less corporate taxes, not to mention those who will be forced to close down. To the extent these happen, the fiscal position of the government may instead be worsened by the GST over the next two years at least.

Ultimately, hard reforms to rekindle quality growth is what Malaysia needs now.

These are just a layman’s thoughts. But I just wish that there are more sensible minds in the Government and in Malaysia, with macroeconomic training, debating these issues in depth.

*This article was published in MGCC Perspectives, a business magazine of the Malaysian-German Chamber of Commerce and Industry

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