This article first appeared in The Edge Malaysia Weekly on April 9, 2018 - April 15, 2018

TOUTED by Prime Minister Datuk Seri Najib Razak as “the savior of the nation’s economy”, the Goods and Services Tax (GST), though unpopular, came in just in time to cushion the impact of the decline in oil-related revenue on government coffers. It was as though someone had a crystal ball.

From US$100 to US$120 during the heyday of 2010 to 2014, oil prices tumbled to as low as US$27.10 on January 20, 2016 before retracing some of those losses. Prices rose above US$70 a barrel in January and March this year and were hovering around US$68 a barrel at the time of writing.

Now that oil prices are up again, can Malaysia do without GST?

The answer would be much simpler if GST was indeed implemented to cushion the decline in revenue due to lower oil prices.

Experts would know that GST had been on the cards for some years but the implementation (likened to political suicide) was only finalised during the tabling of Budget 2014 in late October 2013 when Brent crude oil was US$107 a barrel. The oil producing world had yet to feel the brunt of the US shale revolution.

It was about a year later, in September 2014, that Brent crude slipped below US$100 a barrel and then skidded precipitously to below US$50 a barrel in January 2015.

So, while the implementation of GST was announced when oil prices were still high, it was only on April 1, 2015, that Malaysia started collecting the tax in place of the Sales and Service Tax (SST).

Oil-related revenue, essentially petroleum taxes and Petronas royalties, which made up 30% to 36% of federal government revenue in 2011 to 2014, fell from above RM65 billion (2011 to 2014) to about RM47 billion in 2015. It slipped further to just above RM30 billion in 2016 and 2017, accounting for 14.6% and 14.9% respectively of government revenue.

In 2015, GST revenue (including RM8.26 billion from the last three months of SST collection) was RM35.3 billion or 16.1% of government revenue. That is roughly RM18 billion more than the SST collection of RM17.2 billion (7.8% of government revenue) in 2014 when oil-related revenue contributed RM66 billion or 30% of government revenue.

In 2016, GST collection of RM41.2 billion made up 19.5% of federal government revenue — about RM10 billion more than oil-related revenue. Without GST, the budget deficit ­— or the excess in which the government spends on top of all its revenue — could have been 5% (assuming RM17.2 billion SST) or as much as 6.4% of GDP in 2016 and not 3.1%.

GST collection is projected to rise from RM41.7 billion last year to RM44.03 billion this year, although its contribution is expected to ease slightly from 18.5% to 18.4% with total government revenue projected to rise 6.45% year on year (RM14.5 billion) from RM225.34 billion in 2017 to RM239.86 billion in 2018.

The government’s operating expenditure, however, is expected to rise 6.52% y-o-y from RM219.91 billion to RM234.25 billion. Including development expenditure, the government’s total spending this year is projected to increase by RM14.43 billion y-o-y to RM279.65 billion in 2018 — just below the expected increase in revenue, if spending does not exceed what has been budgeted.

The size of this year’s projected budget deficit is RM39.79 billion, while slightly smaller than last year’s RM39.89 billion, still means that the government plans to spend close to RM40 billion more than what it earns.

That RM39.79 billion projected overspending is just over 90% of the projected GST collection for this year. Then there is the RM6.8 billion projected disbursement of 1Malaysia People’s Aid (BR1M). While subsidies for petrol and sugar have been removed, the government’s subsidies and social assistance bill is projected to increase from RM23.09 billion in 2017 to RM26.54 billion this year.

Similarly, emolument and retirement charges for the 1.6 million civil servants are projected to rise 1.2% y-o-y to RM103.7 billion this year from RM102.45 billion in 2017. It is not immediately certain if the RM1.46 billion required for the additional annual increment for civil servants effective July 1 this year (announced on April 4) has already been budgeted.

Some observers, including opposition leaders, have said Malaysia would not need to have GST if expenditure can be reduced when wastages are cut. They also reckon the government’s tax collection (other than GST) would go up as businesses and individuals make more money.

Yet, healthcare costs and the need to provide a wider safety net for the lower and middle-income group would only increase as the population ages. Malaysia, which has spent more than it earns since 1998, also has to repay RM687 billion of debt — which needs RM30.88 billion to service this year. That excludes the RM227 billion (as at end-September 2017) debt directly guaranteed by the federal government and an unclear amount of debt without direct government guarantees (including that of 1Malaysia Development Bhd).

And that is why GST or another form of SST would likely be a permanent feature of the economy, whatever the oil price may be.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.