This article first appeared in The Edge Malaysia Weekly on October 30, 2017 - November 5, 2017
THIS year, the opposition coalition has presented its most comprehensive alternative budget ever — a massive 76-page document that details its ambitions. It makes some pretty big promises on even bigger assumptions. But putting the politics of populism aside, how realistic are these promises, and how much of it is anchored in a sound economic rationale?
Here are four highlights:
1. Abolishing the Goods and Services Tax;
2. Cutting wastage and corruption;
3. Increasing the minimum wage to RM1,500; and
4. The return of subsidies targeted.
Abolishing GST and funding the gap
The first major item of the opposition agenda is their long-time promise to abolish the Goods and Services Tax. The alternative budget argues for a reversion back to the pre-GST system of sales tax and boldly claims it can make up the ensuing estimated deficit of RM25.5 billion (RM42 billion in 2018 GST collection minus RM16.5 billion in pre-GST indirect consumption taxes).
The document makes some rather bold assumptions — that returning RM25.5 billion to consumers would stimulate demand growth by 20%, a number the report believes is conservative.
“The assumption sounds a bit simple, that you can stimulate domestic consumption by removing GST and returning money to the public. Forget about the effect of inflation due to GST. The GST itself is a tool to help the government to collect tax from consumption and to allow it to reduce income tax. This in turn will encourage people to work hard (due to lower tax) and boost economic activities. By removing the GST, it means the government may not be able to reduce income tax and it will discourage people from working hard, as the harder you work, your income rises and the more tax you have to pay. This would contribute to slower economic activities,” an economist at RHB Investment Bank tells The Edge.
In other words, a diversified tax system that relies on income and consumption taxes is superior to one that relies excessively on income tax.
In addition, there is the immediate logistical nightmare of funding the missing RM25.5 billion. The alternative budget claims that the estimated 20% boost in domestic consumption would translate into higher tax collection — from corporate taxes from companies that are making more money, to high real property gains taxes from a 20% increase in property transactions to a 20% rise in automotive sales that will boost excise and import duties.
The trouble is, while RM25.5 billion is a huge hole in the budget, roughly 10.3% of the estimated RM239.86 billion revenue that the government aims to collect in 2018, it is tiny when compared to private consumption.
Private consumption in 2018 is estimated at RM820.97 billion. Even with a generous multiplier of two times, an additional RM51 billion worth of consumption in the economy would only make up a 6.2% boost to domestic consumption.
The RHB economist sheds light on why even this assumption may be flawed — the government ultimately spends the GST collection, which then stimulates the economy anyway.
“When the government collects GST, it spends it. The money could go to the B40 or M40. These groups of people have a high propensity to spend and when they spend, it could fuel economic growth. But when you stop GST collection, there will be a lapse in government spending, hence, B40 and M40’s spending. As you return the money back to the people (no GST collection) not everyone will spend it. Some of it will go into savings. Thus, it could even have the opposite effect of not stimulating the economy,” he adds.
He points out that any lost revenue from the removal of GST has to be made up elsewhere. In other words, the government will have to earn its revenue with other taxes, so the net effect of removing GST is questionable.
“The assumption that the removal of GST can boost domestic consumption by 20% is hard to justify,” he adds.
In fact, the real lynchpin in the alternative budget’s attempt to justify zero GST is blocking RM20 billion worth of wastage and corruption from government spending. While the intention is noble, the feasibility of such a drastic crackdown on corruption is questionable.
“We can’t cut GST overnight,” concedes PKR MP for Kelana Jaya Wong Chen, who stresses that the alternative budget is less prescriptive — it is meant to demonstrate Pakatan Harapan’s ambitions.
“It takes time to abolish a tax regime like the GST. In the meantime, we would be working hard to cut down wastage and corruption. Based on examining past Auditor-General’s Reports, we estimate that wastage and corruption make up 12% to 16% of expenditure, excluding emoluments and interest costs. That is about RM20 billion,” he explains.
A labour flavour
The alternative budget also seems to lean in favour of employees, especially those who earn the least. The most glaring example is the proposed hike in the minimum wage to RM1,500. The alternative budget also proposes empowering trade unions.
“The Malaysian wage share of GDP (2015: 34.8%) is much lower than in more developed countries such as Singapore (43.3%), the UK (49.4%) and the US (53.4%),” notes the alternative budget.
But before employers and business owners are up in arms about the proposal, it is interesting to note that Pakatan Harapan is taking a page from Singapore’s labour market playbook. The alternative budget proposes that the government helps co-pay a portion of the RM500 per month hike in the minimum wage.
“We took a look at income tax data and we estimate that there are about 360,000 people who are earning minimum wage. To fund the co-pay, the government would have to spend about RM1 billion. But we doubled the estimated cost just in case. This way, it will not be overly burdensome on employers,” says Wong.
He explains that the government could start by shouldering 70% of the co-pay and then ease off, giving companies time to adjust.
That said, the stress for companies is not the only thing to consider. Sudden hikes in wages can cause inflation to soar, reducing the value of said wage hike and, in fact, hurting the value of all wages.
“Increasing the minimum wage to RM1,500 would have dire consequences on business cost if productivity cannot be improved. Businesses would suffer, and this would reduce investment. In addition to being inflationary, this could also be a drag on domestic consumption if businesses cannot survive in the medium term,” says the RHB economist.
The alternative budget does not seem to take in the knock-on effects of such measures, but Wong says the removal of GST should be deflationary and offset the shock.
On a side note, the alternative budget also underscores the need to reduce the reliance on foreign workers. By gradually increasing the levy on foreign workers, the budget hopes to reduce the number from an estimated six million currently (legal and illegal) to a more manageable four million.
However, economists say that increasing a levy alone may not be enough to effect structural reforms on the labour market. It may merely drive more legal foreign workers to become illegals, exacerbating the existing problem.
The return of subsidies, freebies
Amid the pressure on the government’s fiscal position, one of the notable achievements of Prime Minister Datuk Seri Najib Razak’s administration has been the gradual phasing out of subsidies.
It was not a popular move but it has arguably helped to reduce inefficiencies and pricing distortions in the country.
The alternative budget, however, hopes to reintroduce some of these subsidies.
The first would be the reintroduction of petrol subsidies. However, it would be targeted at the low-income group. This is not a new idea, and something that the federal government has toyed with in the past.
While it is a promise that is easy to score points with, it is a measure that some have labelled redundant in the past. After all, the government already undertakes targeted cash transfers to the B40. Couldn’t the subsidy merely be transferred in the same manner?
Other subsidies that the opposition are suggesting include RM100 worth of free public transport in the Klang Valley each month to boost adoption by the public. This is arguably a more useful application of subsidies, as it may actually affect transport behaviour.
Of course, this does not come cheap. Based on the estimated 7.2 million people living in the Klang Valley, that works out to RM8.64 billion a year, assuming everyone fully utilises the subsidy.
Another notable subsidy that the opposition is proposing is making access to public universities free. However, this is a measure that has to be studied closely for its cost, Wong says.
“It is something that we want to implement, but it will depend on how much funds we (as a hypothetical government) have. It is not impossible. Public university tuition is already 80% subsidised. Some 300,000 students now pay RM6,000 a year. That’s something we can look at,” he says.
The alternative budget certainly is an interesting document, as it condenses the opposition’s view of what the people want. Reading between the lines, however, it exposes the growing dichotomy in the coalition’s ideology.
The alternative budget looks to make progress on some fronts — addressing income inequality and strengthening workers’ positions at the bargaining table.
As a pre-election manifesto, it is understandably populist but exposes glaring problems in some of the opposition’s oft-repeated promises, like the removal of GST, while undertaking budgetary gymnastics to make the promises seem feasible on paper.
At the same time, the alternative budget is not too different from the government of the day in adopting raced-based affirmative action policies. For the first time, the alternative budget explicitly mentions affirmative action policies that are race-based — for bumiputeras and Indians. This is a notable departure from previous documents that simply focused on the low-income groups that needed such help the most.
To sum it up, it is a document built on a mix of vision and political ambition. But cutting through the complicated math and policies of the alternative budget, Wong has just one thing to add, “Just look at how we have managed to run our states (Selangor and Penang).”
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