Replying to what the MoF said last week

Here’s what the Ministry of Finance said last week that made me ponder:

Zero-rating GST on the 1 June 2018 and re-introducing the Sales and Services Tax (SST) on 1 September 2018. This will“return” approximately RM17 billion back to ordinary Malaysians for the rest of the year.

The stabilization of the price of RON95 at RM2.20 per litre and diesel at RM2.18 per liter. This will save Malaysians RM3 billion

A RM700 million Hari Raya special assistance to civil servants (Grade 41 and below) and pensioners.

These 3 measures amounting to RM20.7 billion will provide a significant boost to consumer spending in Malaysia and lead to improved consumer optimism and business profits.

Question 1: Can giving back cash to the people push purchasing power/growth?

All of those numbers provided by the MoF looks huge. But that is just the headline. The reality is, not all of those RM20.7 will be pumped in into the economy. This is because our marginal propensity to consume.

Marginal propensity to consume (MPC) measures the proportion of extra income that is spent on consumption. In the case of Malaysia, our MPC is 0.47. This means that if you get another RM1 as your income, you will only spend RM0.47.

For Malaysia, the MPC for those in the B40 group is much higher compare to M40 and T20. There is no surprise on this, since those in the B40 group usually has limited access to credit. Which is why when they get additional cash, they will spend more.

Let’s do some mathematics here. So if RM20.7 billion is being returned back to the people, multiply that to 0.47.

RM20.7 billion * 0.47 = RM9.4 billion.

This means, only RM9.4bn will be spent.

And how big is RM9.4 billion?

Not that much, it is only 0.72% of our overall GDP, and 1.06% of overall expenditure.

There is still a question on how the SST will be implemented. My view is, price could go higher if they set it back at 10%. This is because manufacturer will push the cost to retailers, and retailers will push the cost to consumers. Unlike GST, both manufacturer and retailer can claim them back. If this happens, it could erode purchasing power.

Question 2: Can RON95 really stay at RM2.20 per litre for the whole year?

Probably no.

First thing first, this “giving cash back to the people” will not sustain in the future.

If the exchange rate stays RM3.96 per US Dollar, and the Brent price stays around $70 per barrel, that means the actual RON95 price should be at RM2.40 per litre. Which means the government is subsidizing 20 cents, or a total of RM540 million of subsidized petrol for the next 6 months.

The government’s fiscal will be under pressure if RON95 stays at RM2.20 throughout the year (because they have to keep subsidizing it).

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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:

giphy

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.