This article first appeared in The Edge Financial Daily on October 30, 2017

KUALA LUMPUR: Budget 2018 has been touted by many as inclusive, credit-supportive and encouraging for Malaysia’s economic growth. But an economist says the expansive budget will bring along a costlier economy.

“What I notice is that if you’re not going to increase borrowings or taxes, the targets will be achievable mostly through inflated tax revenue,” said independent economist Dr Suresh Kumar.

The economy, said Suresh, has benefited from the depreciated ringgit. “In the case of Malaysia, while core inflation is pretty much stable, the weaker exchange rate has played a part in artificially inducing the expansion of tax revenue,” he said.

“It is not wrong in terms of economic policy,” he said at the Post-Budget 2018 Dialogue organised by Universiti Malaya over the weekend. “The excess cash from the inflated economy has indeed gone back to the economy in the form of benefits such as those that have been announced.”

“But the key here is once the ringgit strengthens, the inflated tax revenue will then become a lot lower. You may not be able to hit the deficit or balance the budget in the next five years if the trend continues,” added Suresh.

The inflation expectations, he said, are further multiplied by the implementation of the goods and services tax (GST). “There is a spillover effect. For example, logistics companies may apply GST across the board for their distributed goods, even if some of them are zero-rated items.

“The tax multiplier is one reason why inflation expectations on the ground and the actual inflation diverge very significantly,” said the economist.

Suresh said government can try to reverse the impact by focusing on adopting a strong currency policy. “Countries that implement GST across the board, such as Singapore, tend to lean towards stronger currency to help maintain purchasing power, among others.

“Otherwise it is just going to stay inflated, with growth in ringgit terms that will be costly and unsustainable,” he added.

To be fair, the government has introduced a host of measures — including improving Malaysia’s credit rating — to boost market confidence and address the weakening ringgit. After hitting a multi-year low of 4.4938 against the US dollar on Jan 3 this year, the ringgit has appreciated, closing at 4.2420 last Friday.

Gross domestic product (GDP) adjusted with purchasing power parity (PPP) in US dollar is another meaningful method to gauge the standard of living. Under this term, Malaysia’s GDP per capita posted a healthy increase at US$27,681 in 2016, from US$19,448 back in 2009.

However, PricewaterhouseCoopers in its “The World in 2050” report projected that Malaysia’s GDP growth in PPP terms is expected to climb only three spots to 24th in 2050, from 27th place in 2014. In comparison, more than half of the top 10 economies will be from emerging economies come 2050.

Meanwhile, Moody’s Investors Service analyst Anushka Shah said in a statement that the credit-supportive Budget 2018 lacks major fiscal and revenue reforms, and its success will be highly dependent on a projection of rising GST collection.

MIDF chief economist Dr Kamaruddin Mohd Nor is, however, optimistic about the tax collection. “Based on the current momentum, I think it (projected collection) is realistic to achieve,” he told the Universiti Malaya post-budget dialogue.

Kamaruddin said despite the 2% income tax reduction for low- and medium-income earners, income tax collection is expected to increase to RM32 billion this year as increasing wages push more people to higher tax brackets — a phenomenon also contributed by inflation.

MIDF also revised its GST collection projection lower to RM43.8 billion in 2018 with the narrower tax base. “But it is still higher than the RM41.5 billion forecast for 2017. This is based on the assumption of 5% GDP growth this year. Year-on-year, consumption is still in an increasing pattern.

The smaller GST tax base is hoped to positively impact living costs, and indirectly improve private spending, said Kamaruddin. “The increase in zero-rated items is also expected to produce a multiplier effect on improving consumer confidence,” he said.