This article first appeared in The Edge Financial Daily on December 14, 2018

KUALA LUMPUR: The Institute for Democracy and Economic Affairs (Ideas) has warned that the departure levy for all international outbound flights announced in Budget 2019 may reduce the number of tourists coming to Malaysia by over 500,000 in 2020, causing a knock-on impact on the wider economy.

In a brief titled “Potential Deadweight Loss of Departure Levy”, Ideas suggested that a thorough impact assessment should be undertaken before the policy is introduced, to avoid creating a “deadweight loss” whereby more damage is done to the economy by the new levy than the new revenue raised by the government.

It estimated that the new levy will widen the competitiveness gap between Malaysia and other destinations in the region, with the additional charges applied to air travel being 7% to 9 % more than for neighbouring countries — Thailand, Indonesia and Singapore — after the levy is introduced.

“Based on the average expenditure by tourists, this will result in nearly RM1.8 billion less being spent in the Malaysian economy by tourists. Significantly less than the roughly RM400 million that will be raised in government by the levy in 2020,” it projected, based on the expected price increase for short-haul, intra-Asia flights on full-service carriers.

Ideas questioned whether the move would be worth it, considering that the only positive effect of the departure levy is the increased tax revenue, whilst missing out on a portion of tax from reduced tourism and aviation simultaneously.

“With lower tourist arrivals and fewer passengers expected for the future, the aviation sector is facing challenges for future growth. Not only will it limit Malaysia’s aviation industry and the jobs it creates, it will also affect the economy as a whole and its international status as a tourist destination.”

The think tank also highlighted the significance of the air transport sector as it supports wider economic development, including promoting trade and attracting investment. “These benefits could also be undermined by the increased cost of air transport as a result of the new departure levy.”

During the Budget 2019 announcement, the government proposed a fee of RM20 per head for those departing for Asean countries and RM40 for other countries, starting from June 1, 2019.