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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