Government Debt – Of Surplus and Deficit

Somehow, the debate regarding government debt is heating up since last week. No surprise there.

The best part of this whole story is, there is a petition, asking for people to ‘crowdfunding’, in order to pay off government debt. The intention is nice. But in reality, it is similar to asking some money from your father to buy a present for his father’s day.

First, let me introduce by how government financing works. For the government to spend, there are few ways:

  1. Through revenue collection – This is straight forward. The government collects money through income taxes, consumption taxes (such as GST), petroleum taxes, and etc. With the money collected, they will use it to spend.
  2. Through debt financing – So the government issues bonds, and banks/corporations/retirement agencies buy those bonds.
  3. Through loans – Similar to how you apply for a housing loans. You go the bank, and apply for that loans. In the end of the day, you will pay the loans, plus interest.

Now. Logically speaking, you would say “we should only spend when you have the money.” I would agree on that statement on certain extent. The reality is, the government financing doesn’t really work that way. The government should keep spending to make sure the economy is functioning. (Read Keynesian Economics).

The next question is, should the government run a fiscal surplus (where they save more than they spend), or fiscal deficit (where they spend more than they save). That goes back to my previous point where the government ‘should keep spending’ to keep the economy running.

In the case of Malaysia, the only time when we had a fiscal surplus was back in the 1994-1998. This was because the country’s economic growth was booming at 9% per annum in the early 1990s. So the need to save more than you consume at this moment is fine, in order to cool down the economy.

Malaysia Government Surplus_DeficitScreen Shot 2018-05-27 at 11.14.13 PM

Theoretically speaking, having a fiscal surplus means the government is holding on to their money, instead of pumping them in into the economy. There are other macro effects on this:

  1. For the government to reach to a fiscal surplus, there are two ways: (i) Higher taxes, or/and (ii) lower spending.
  2. Lower spending – When the government decided to run a fiscal surplus, this could mean the government will hold on to investing in the public segment (trains, highways).
  3. This could dampen growth numbers. If the government doesn’t spend, the economy will slow down.

Having a fiscal surplus is not really a bad situation to be in. Singapore’s fiscal management is good example, where they accumulate surpluses for few years, and then spend it later. This is why I think Singapore’s fiscal spending policy is probably the best system to practice, but I doubt we will use that framework in the future.

One common mistake is that, people feel it is a bad idea for government to borrow. To be frank, government debt is not the same as household debt. Government borrow to fund its investments (which will benefit the economy in the future). Households borrow to fund mortgages, car loans. These are two separate concepts.


GST was not a bad idea. It was a “bad timing”.

It looks like Suadara Lim Guan Eng is ramping up his work, and try to push the SST implementation agenda as soon as possible. Quoting him:

“We want to replace the GST with SST as soon as possible. It will definitely be this year but let us work it out before we give a date.”

I have this feeling that I will be under a lot of heat for saying that GST was not a bad idea. Quite frankly, I kinda like the GST mechanism (ok, let’s admit it, we all hate paying taxes).

Everytime the “Council of Eminent Persons” and the new administration say that they are committed to switch back from GST to SST, this is my initial reaction:


Here is my view on taxation. In my opinion, we (I mean the government) should tax the people based on its efficiency, not productivity. So my theory is, if we draw the tax spectrum, it should look something like this:

Screen Shot 2018-05-21 at 6.30.57 PM

The argument is, if you tax on productivity (corporate income tax, personal income tax), too high, you will discourage companies/person to innovate/work harder to generate more income.

Taxing efficiency means, your tax contributes back to the economy. For example, the land value tax encourages an efficient housing development. (You can YouTube that and understand it yourself).

For consumption tax (like the GST), I would put it in the middle, since it depends on how high the tax rate is implemented.

So, why I like the GST?

Well the idea of GST is, first, to reduce our reliance on oil & gas. Going back to earlier estimates, the current (and the previous) government assumes that oil price this year to be at $52 per barrel, and expected revenue to be RM11bn. Now that oil price has been hovering around at $70-80 per barrel this year, my calculation estimate that we might collect an additional RM5bn.

Second, is to make sure everyone is paying its fair share for the economy. In Malaysia, our working age population is around 21 million of overall 31 million population. And within that 21 million, only 12.5 million are in the formal sector. This means only 40% of the whole population are paying their taxes.

Bare in mind that if you are within those 12.5 million formal workers, and you make RM5,000 and below, you don’t have to pay any tax. On a side note, do remember that basic food items were zero-rated, including onions, rice, few types of sugar, and flour. You can check the list here.

So, if GST was not a bad idea? Then what was wrong with it?

Two words – Bad timing

Malaysia Inflation _ USDMYR

The graph above shows our Ringgit vs the USD. When the implementation of GST took place back in Apr-2015, our Ringgit went up from RM3.67/dollar, to RM4.29/dollar in the end of the year.

This means our imported goods became more expensive.

Malaysia Inflation _ World Food Price

Between late 2016 to early 2017, world food inflation also increased by double digit, averaging at 10.3%

So, where do we go from here?

I propose three solutions:

  1. Keep the GST. Even cutting down the current GST rate from 6% to 3% would be ideal, and the government will still make around RM20bn to RM25bn per year.
  2. Be transparent. I admit, the problem with the GST right now is lack of transparency and there were too many leakages.
  3. Read point number 1. Because we’re going to need it anyway in the future. Our neighbor down South, Singapore, is a perfect example. As their country is ageing and they need more revenue to fund its healthcare and infrastructure, I could understand why they have decided to increase GST up to 9% in 2 years time.

The GDP is rigged?

Someone earlier asked me about the latest comment made by the Prime Minister.

Yesterday when the PM was asked about the growth numbers and financial positions, he replied:

“Regarding the numbers indicating our financial position, I realize many of these figures are false.”

I am sure Department of Statistics Malaysia (DOSM) and Bank Negara Malaysia (BNM) are losing their my mind now. As matter of fact, I think the central bank’s communication department is writing their reply at this moment (They are quite active lately).

Here is what I disagree with Tun M: No I do not think the numbers are rigged, since the methodology DOSM and BNM are compliance with international standards.

Here is what I “kinda” agree with Tun M: The national account is never a good proxy to measure the well being of a country.

Let’s have an overview of Malaysia’s growth last year. Our country’s economy grew to 5.9% on annual basis. Not only us, our neighboring countries including Singapore, Thailand and Indonesia were experiencing the same high growth as well. Thanks to exports.

Because it was driven by exports, you have the right to ask “Well, what does export have anything to do with me?”

The answer is: Depends, if you work for a manufacturing company that exports a lot of its products, there is a big chance you have a big bonus in the end of the year.

The national account (GDP) in my opinion, is never a good measurement, since it only calculates consumption, investment, government spending, and exports.

Did you know, that our spending on weapon system is also calculated into our national account? The best part is, it is calculated as asset. (Read part 3.3.2).

That is Malaysia. If you go to other countries, the UK included prostitution into their account, Italy included drug activity, and our neighbor Singapore included gambling into their national account as well.

I remember a couple of years ago, Ireland growth was up to 20%. Tax haven reasons.

So the debate is, why are we using GDP to calculate growth? If you are an economist, that goes back to your school of thought. John Maynard Keynes that every activities, legal or illegal should be calculated, to get the idea how demand works. My view is, the national account is just a report card that tells us what or how the country is doing. It is never a good proxy to measure the well being of a country.

How do Pakatan Harapan view the economy?

Surprisingly, they have made a detailed calculation, and how they view the economy since last year when the published their own alternative budget. Click here if you want to read it.

In their own alternative budget, there were four sections;

  1. The State of the Economy
  2. Fiscal Projection 2018
  3. Pakatan Harapan policies
  4. Pakatan Harapan 2030: Stories from Malaysian Family.

For simplicity, I will summarize what I found in the first three sections only. The last section is about how they view Malaysia in 2030 (So read it yourself).

If you are too lazy to read, skip all the way down to the TL;DR section.

Part I: The State of the Economy

In the first few paragraphs in this part, Pakatan Harapan pointed out solely on the implementation of the GST on the rising cost of living, inflation, slower income growth and fiscal balances.

To get you the idea, they wrote:

“Despite promises that the spike in inflation from implementing Goods and Services tax (GST) in 2015 would only be temporary and last for a year at most, inflation hit an 8-year high of 5.1% in March 2017, almost two years since the introduction of GST. Indeed, the monthly inflation rate up to August 2017 has averaged 4%. This is almost 2% higher than the 2.1% average monthly inflation rate for 2016.”

PH also mentioned that the situations regarding 1MDB and FELDA were also the reason.

Part II: Fiscal Projection 2018

As promised in their manifesto, PH is committed to abolish GST via zero-rating. PH aim to revert to pre-GST numbers, and expect to see a revenue shortfall of RM25.5bn.

This means PH is expected to collect only RM16.5bn from consumption tax.

In order to balance the budget, PH propose reducing non-essential expenditure items, by trimming budgets of some ministries, specifically the Prime Minister’s Department (PMD). So no more lavish spending here, I assume.

Here is the moment you have been waiting for: Abolishing GST.

As mentioned earlier, PH are expected to collect only RM16.5mn from consumption tax. The loss of RM25.5bn is expected to be in the consumers’ pocket pocket. PH view that by injecting the RM25.5bn into the economy will result three positive fiscal revenue results. So, they made 3 points regarding this:

“Firstly, consumer consumption and business activity will boom, meaning that revenue from Corporate Income Tax (CITA) will rise. With RM25.5bn of additional sales, we estimate this to result in come MYR8.93bn increase in profit before tax. This means that, with the CITA rate currently, at 24%, the elimination of GST will boost additional CITA revenue by RM2.81bn.

Secondly, a consumption boom also means the Rakyat will purchase more goods, including imported goods. We project a conservative 20% spike in consumption, which increases total import and excise duties (for all goods, excluding motor vehicles) by RM0.40bn and RM1.06bn respectively. Hence, total import and excise duties will increase by MYR1.46bn for all goods, excluding motor vehicles.

Thirdly, the consumption of big-ticket items, namely property and cars, is expected to recover and possibly, enjoy a mini pent-up boom. Currently, we are in the most depressed property cycle of the last decade. By driving up overall consumer confidence, we project a modest property boom of 20% in terms of transaction volume. This will result in an extra RM0.30bn in RPGT revenue, bringing total Real Property Gains Tax (RPGT) collection up to RM1.82bn.”

From PH’s point of view, the revenue side the most important element in fiscal policy. PH is aware that Malaysia is too dependent on oil and gas revenue, CITA, and GST.

The best part is this one:

“In the event that the government is not able to achieve a balanced budget, PH will consider other progressive tax policies, including a higher tax rate for richest 10%, a low 10% CGT rate for capital gains, and a 10% inheritance tax policy for assets above RM1mn.”

Here is my view on GST. I somehow, am in favor of keeping the GST, and at least reduce the rate from 3-4%. The idea of implementing GST is to reduce our reliance on oil and gas revenue in the future.

But I welcome the idea of implementing capital gains tax, taxing the top 10%, and inheritance tax in the future, as mentioned by the PH government. (My colleague keeps calling me a socialist for agreeing on this).

In addition to that, I propose PH to look at land value taxes as well.

PH’s view on subsidies

PH view that since Malaysia is an oil producing nation, the people should be given some subsidy. Therefore, the PH government proposed a RM1bn of fuel subsidy. Meaning we could see a RM0.20 reduction of price per liter.

Subsidies will be targeted at the B40 group by limiting subsidies to motorcycles and small cars of 1,000 cc and below. This will be done by targeting mechanism based on IC of the consumer (this does not make sense, to show your IC to the attendant at the gas station).

Even though the idea of reintroducing petrol subsidies could reduce the burden especially for those in the B40, two things I am quite worried here:

  • The introduction of subsidies could encourage people to smuggle petrol across the border
  • The cost of targeting mechanism, where people have to show their IC before filling in petrol could be higher.

PH’s view on BR1M

Surprisingly, PH did see benefits from the BR1M handouts. So they are going to continue this program, with these conditions (But I have this feeling they are going to rebrand the whole program):

  • The recipients of the payments should be employed and stayed employed for at least 3 months.
  • For retirees, and those who cannot work due to disability, these conditions are waived.
  • For a family that receives RM1,200 under BR1M, the head of the family cannot use the money on frivolous and unhealthy goods such as cigarettes and alcohol.

I welcome the idea of making the BR1M program as conditional. To those of you who don’t know the differences between unconditional cast transfer (UCT) and conditional cash transfer (CCT) programs, put it this way:

Unconditional means, if you get the money (after meeting a certain criteria), you are allowed to do whatever you want with the money, no strings attached.

Conditional means, you are eligible to get the money only if you are remain employed, put your child in school, or them vaccinated.

But I do not understand why PH had to say “for a family that receives RM1,200 under BR1M, the head of the family cannot use the money on frivolous and unhealthy goods such as cigarettes and alcohol.”

Numerous studies pointed out those who benefitted from the cash transfer program rarely (like super rarely) use the money for indulgence. Instead, they used the money to put their children in school, and buy healthy food.

Part III: Pakatan Harapan Policies

Other than what I had mentioned abobe, the Pakatan Harapan also focus on fiscal, monetary and other economic policies addressing cost of living, wages and employment, education, women empowerment, Bumiputera empowerment, Malaysian Indian B40, and Chinese New Villages. So you can get the idea what they are going to do from now on.

So, here is their view on megainfra projects.

  • Regarding the Pan Borneo Highway, the PH government believed the project has never been completed for these two factors: corruption and the lack of funds. From here, the PH will allocate up to 30% of the federal development expenditure for Sabah and Sarawak.
  • On the East Coast Railway Project (ECRL), PH government will ask China to put the project on hold and allow them to study the project, whether it as a potential economic multiplier. This is because they are not convinced that the cost up to RM60-70bn. With that kind of money, they said it is better to investment on highways in the East Coast.
  • For the High Speed Rail (HSR), the PH government again raised the issue regarding the RM75bn price tag. PH acknowledges connecting Kunming to Singapore for the advancement of the ASEAN region, therefore PH will priorities the connection between Kunming-Bangkok-Kuala Lumpur line, instead of Kuala Lumpur-Singapore line.

Okay. Let’s see who is in charge here. Tun Mahathir and Tun Daim (since he is in the Council of Elders. Clearly some has been binge-watching Lord of the Rings), are definitely pro-air transportation.

Tun Daim himself said this:

“Is it necessary at this stage to have the ECRL or travel by train to Singapore? What would happen to our MAS, or AirAsia and Malindo? People would use the train instead of our airlines.”

“If we think logically, who wants to spend 14 hours on a train from Kota Bharu, Kelantan to Port Klang, Selangor compared to approximately 30 minutes by flight?”

Tun Mahathir also said:

“(For example) if I can go to Singapore in 90 minutes (by the HSR), why would I want to wait in the airport for 45 minutes and then take another train? I might as well take the HSR. So what’s going to happen to our airline industry? Did they (the federal government) think about it? Have they studied what would happen to our airlines?”

So, you draw your own conclusions on what will happen to these megaprojects.

The TL;DR thread:

I somehow have doubts abolishing GST and replacing SST will do the trick for PH. I won’t mind if they cut GST to 3 or 4%.

There are other channels we can collect taxes from. PH mentioned capital gains taxes, and inheritance taxes. I would like to propose another one which is more efficient: Land value taxes.

I welcome reforms on BR1M. To be exact, I prefer it to be a conditional cash transfer.

Tun M and Tun Daim are pro-air transportation, not really a huge fan on trains.

Bye GST! Hello SST! (Possible?!)

First of all, congratulations and job well done to “Parti Merah” for winning the election yesterday. It was truly unexpected.

To “Parti Biru”, let this be a wake up call. This won’t be the end of the day. In five years, if “Parti Merah” can’t get the job done, we’ll choose you guys.

Anyways, talking about “Parti Merah”, I am sure a lot of you guys wondering when (or how soon) that they are going to abolish GST.

Is it doable?

Yes it is doable. Only with these conditions:

First of all, I want to show you few figures. The first one is the government revenue since the past few years.

Malaysia Government RevenueScreen Shot 2018-05-10 at 7.38.07 PM

Source: Ministry of Finance

So, since 2016, the government was able to collect at least RM40bn from GST. Holding everything else constant, this gives the government an extra of RM20bn – RM30bn of revenue per year.

Assuming the government does switch back to SST, the maximum they could collect could be around RM20bn. (The maximum they have ever collected was RM17bn, back in 2014 as shown above. But for simplicity, let’s assume RM20bn).

This means, switching back to SST could reduce the government’s revenue around RM20bn – RM30bn, as mentioned above.

But, here’s the tricky part. If the government is about to lose this amount of money, which part will be affected? Then we need to look at the government’s operating expenditure.

Malaysia Government Operating ExpenditureScreen Shot 2018-05-10 at 7.46.39 PM

Source: Ministry of Finance

Here is ANOTHER tricky part. Looking back at “Parti Merah’s” manifesto, they have promised to reintroduce subsidy for petrol. This means the spending for subsidies (referring to the figure above) could jump up. According to this article, the government spent around RM10bn to RM20bn for subsidy.

So, there are few options from here:

  1. Restructure the whole operational expenditure budget. For example, take RM10bn from x, and throw it to y. Or,
  2. Increase tax somewhere else. Either income or from corporate.



Don’t let me start about BR1M.