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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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:

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.

My thought on Singapore’s Budget 2018

There was no surprise that the Singapore’s government decided to increase its GST rate by 2% to 9%. This is crucial for the government to fund its infrastructure projects (although Mr. Swee Keat did mention that the government needs to tone down its reliances on reserves and revenues), healthcare spending, education, and etc.

This is the common question I found, why don’t the government increase taxes on income and corporate instead?

That could work, but for a country that is heading towards an ageing society, how taxes are collected is tricky. But, at least Singapore had become rich before getting old. Singapore’s corporate income taxes is still the lowest in the region (Hong Kong is even lower) at 17%. If the government increases the tax even by 1%, it could dampen Singapore’s competitiveness in the region. If the government increases the personal income tax, that could erode private consumption.

I welcome the GST hike, but the timing for the increase a little bit…….odd.

Let me quote what the Finance Minister actually said:

The Government plans to raise GST by two percentage points, from 7% to 9%, sometime in the period from 2021 to 2025. The exact timing will depend on the state of the economy, how much our expenditures grow, and how buoyant our existing taxes are. But I expect that we will need to do so earlier rather than later in the period.

  1. Singapore ‘s next general election must be held on/before January 2021. Looking at the pasts GST hikes, they always had an average of 30 months cut-off point.
  2. I am still trying to figure out the actual meaning of the 2nd and 3rd paragraph of the statement.

Screen Shot 2018-02-20 at 12.32.16 AM

Source: Singapore’s MoF

PS: Take note Malaysia. This could be us 10 or 20 years from now. Ageing will be a national topic, and like it or not, tax rate has to increase.