Bracing for tough times

HARD times beckon as Malaysians usher in a year of price hikes in less than two weeks.

Undoubtedly, we will all feel a tad poorer, as our discretionary spending power gets squeezed by the increase in prices of some basic items such as fuel, sugar, electricity, and possibly, highway toll rates. Although we have been told that some of us, in particular those who belong to the low-income group, would be spared from the direct impact of the price hikes, it is unlikely that anyone could escape the spill-over effects of higher costs of basic items.

And businesses, some of which are already struggling to survive in the present challenging environment, will definitely come under heavy pressure because of the price increases.

Understandably, the rakyat is upset, and some corporations, nervous.

But given the country’s economy in its present state, it is hard for policymakers not to embark on painful reforms to strengthen the country’s economic resilience. And as experts see it, there is no point in delaying what needs to be done eventually.

The longer we delay, the more drastic and even more painful adjustments await us on the day of reckoning.

Why subsidy rationalisation

Subsidy rationalisation is just one of the necessary measures needed to reinforce the country’s fiscal position and ensure economic sustainability. The grossly misunderstood goods and services tax, or GST, is another.

Clearly, the Government’s decision to scale back subsidies is an unpalatable development to consumers and businesses, as the move will result in higher prices. But economists say it is the right thing to do so.

The Government spends tens of billions of ringgit on subsidies each year.

The problem with the existing subsidy scheme in Malaysia is the “blanket” approach, under which, everyone – from the poor and low-income group to the filthy rich tycoons in the country – could enjoy the benefit.

In fact, under the existing subsidy scheme, it is the rich who are seemingly benefiting more than the poor.

The current subsidy scheme is obviously a flawed and inefficient model, hence the need to move away from the existing “blanket” to a “targeted” approach.

A “targeted” scheme will ensure that the subsidies provided by the Government will really go into benefiting the poor and low-income group. This is after all the reason that we have subsidies in the first place.

Rising prices

To be fair, rising prices and high inflationary pressure have been a global phenomenon in recent years, as global commodity and food prices have been on a rising trend in tandem with the recovery of the global economy from the devastating 2008/09 financial crisis.

Yet, for years, Malaysia has been relatively shielded compared with its neighbours, thanks to the various forms of subsidies and price-control measures that exist in the country, which have helped to somewhat minimise the impact of rising global prices.

According to the recently tabled Budget 2014, the Government aims to gradually scale back subsidies to a total of RM39.4bil next year from the estimated RM47bil in 2013. Some of the monies saved would be channelled to other form of programmes to benefit those who really deserve to be helped financially.

Among the affected items under the ongoing subsidy rationalisation scheme thus far are petrol, sugar and electricity.

In September, the Government announced subsidy reduction for fuel, resulting in prices of RON95 petrol and diesel to increase by 20 sen to RM2.10 and RM2 per litre respectively. A month later, the 34-sen-per-kg subsidy for sugar was abolished, resulting in the price of domestic refined sugar increasing to RM2.84 per kg.

Early this month, the Government announced that the average electricity tariffs in Peninsular Malaysia, Sabah and Labuan would be raised by 15% to 38.54 sen/kWh and 34.52 sen/kWh respectively, effective Jan 1, as it scales back subsidies for the power sector.

More rounds of subsidy rationalisation are only to be expected in the months ahead as the Government consolidates its expenditure.

“We need to bite the bullet now, otherwise it is the future generation that will have to pay for our present ‘comfort’,” an analyst explains.

But with so many price adjustments kicking in within such a short time, one can’t blame the public for finding it difficult to accept.

“We acknowledge it is difficult to accept; but we have to do it now because the window for us to implement structural reforms is getting increasingly smaller,” a government official tells StarBizWeek.

“This is a tough balancing act… but someone has got to do it,” he says.

But that does not mean the Government couldn’t care less about the impact of these fiscal reforms on the low-income and underprivileged groups.

In the pipeline are what the Government calls “offset packages” which come in the form of direct income support such as the Bantuan Rakyat 1Malaysia, or BR1M, which has now been expanded to include those earning less than RM4,000 per month. Previously, only households earning less than RM3,000 per month were eligible for BR1M.

In increasing electricity tariffs, the Government has taken careful measure to ensure households who consume less than 300kWh per month (this encompasses 70% of households in the country) will not see any change in their electricity bills.

On the burdensome and controversial toll-rate hike, which has yet to be confirmed, the Government says the plan is to save the amount of compensation that has to be paid to private toll operators and channel the funds to build better infrastructure in the rural areas to lift the living standards of the poor.

Fiscal reforms needed

The Government has been operating on fiscal deficits for 16 consecutive years now. Accumulated debt is also high at 54.8% of the country’s gross domestic product (GDP), which is only slightly below the self-imposed limit of 55% of GDP.

It is definitely not a sustainable situation for the country.

Fitch Ratings, for one, in July downgraded its outlook for Malaysia from “stable” to “negative”. It has yet to change its stance despite the various reform measures announced in Budget 2014, citing the need to see convincing implementation of the reform measures.

Fitch is one of the Big-Three credit rating agencies, along with Moody’s and Standard & Poor’s (S&P).

On a positive note, Moody’s last month upgraded its sovereign rating outlook for Malaysia from “stable” to “positive” on what it sees as improving prospects for fiscal consolidation and reform in the country. Nevertheless, Moody’s was quick to note that it remained concerned about the risk of a significant deterioration in Malaysia’s debt dynamics.

S&P has a “stable” outlook for Malaysia.

So, why are we bothered about the assessment of these international credit rating agencies?

Well, their ratings could affect a country’s cost of borrowing. The better the ratings from these agencies, the lower the cost of borrowing for a country; likewise, poor ratings will result in higher cost of borrowing, and this could have a detrimental effect on the country’s economic dynamism.

Malaysia is expected to continue running on fiscal deficits for another seven years before achieving a balanced budget by 2020 – which is only possible through structural reforms.

Next year, the country’s fiscal deficit is expected to reduce to 3.5% of GDP from 4% of GDP in 2013. By 2015, the fiscal deficit is expected to improve further to 3% of GDP.

GST – a better tax?

Meanwhile, to broaden the country’s tax base and provide an alternative source of revenue to the Government, GST is an important measure.

The Government has long been dependent on revenue derived from petroleum sources, which is not sustainable, as the natural resource will one day deplete.

What’s important to note is that GST is not a new or additional tax for Malaysia.

It is meant to replace the existing sales and services tax (SST), which has been in place for decades.

Under the existing SST system, consumers have to pay up to 10% of sales tax and 6% of service tax for the goods and services that they consume.

SST will be totally abolished when GST comes into force by April 2015.

GST will be implemented at an initial rate of 6%.

According to Minister in the Prime Minister’s Department Datuk Seri Abdul Wahid Omar, the Government deems the initial GST rate of 6% as reasonable, firstly because it is equivalent to the current average SST rate, and secondly, it is the lowest rate among Asean countries.

On comparison with Singapore, which introduced GST in 1994 at an initial rate of only 3%, Wahid clarifies that the difference is Singapore did not immediately abolish its then-prevailing SST when GST came into force, while Malaysia intends to abolish SST when GST comes into force.

For Singaporeans, they had to pay GST on top of the existing SST when the former system was first introduced. But Malaysians will only be paying GST (without any SST) when the new system kicks in.

The rich pays more

Essentially, GST is a tax on consumption.

It is indirectly a tax on the rich based on the hypothesis that the richer one consumes more and hence the more one will be taxed through GST.

The poor and low-income group, on the other hand, is expected to see minimal impact as essential items such as rice and cooking oil are either zero-rated or exempted from GST. This is based on the assumption that the poor and low-income group can’t possibly afford to buy luxury goods (otherwise they would not be called poor and low-income, no?)

According to economists, GST is an efficient system that can help minimise the effects of tax evasion and avoidance by some segments of society who are actually earning enough to be paying tax.

Truth is, many Malaysians have earnings that do not come solely from their monthly salaries. Some sources of income are not officially traceable or taxable.

Under the present scenario, a middle-income salary earner who faithfully files his tax annually could be paying more tax to the Government than a “rich” individual who may have ways to “under-declare” his or her income or profit.

When GST kicks in, individual taxpayers will be compensated with a reduction in personal income tax by 1%-3% in 2015 as well as a review in the minimum taxable income threshold; while corporate taxpayers see a 1% reduction in tax in 2016.

Painful reforms are necessary – it is akin to paying the price now for a stronger economy in the years to come to benefit the future generation.

But while the Government expects the public to accept short-term pain for long-term gain, it also has to be mindful that it needs to play its part in demonstrating greater resolve to fight corruption and stem the leakages, lest the savings and additional revenue that the country gets through subsidy rationalisation and GST go to waste again.

by cecilia kok, thestar.com.my