This article first appeared in The Edge Malaysia Weekly on January 10, 2022 - January 16, 2022
AS a technocrat, Finance Minister Tengku Datuk Seri Zafrul Aziz knows fiscal reforms are painfully overdue. He felt the financial strain firsthand as the government’s cash needs skyrocketed in the past two years due to the necessary spending to save lives and livelihoods hit by the Covid-19 pandemic.
The ex-investment banker also knows Malaysia — whose direct debt burden will cross the RM1 trillion threshold this year — needs debt to be more productive in order to expand the economic pie and sustain growth towards the desired high-income status.
As it is, interest payments on direct government debt alone take away more than RM18 out of every RM100 the government earns. This and the fact that RM49 out of every RM100 earned goes to paying civil servants’ salaries and public pension obligations are clear signs that the government needs to earn more money.
Speaking to The Edge last Wednesday (Jan 5), Zafrul acknowledges that there may be a need to table a supplementary budget due to the additional operating and development expenditure necessary following the recent floods and for future flood-mitigation programmes.
He is clearly for the reimplementation of the unpopular goods and services tax (GST) or another form of broad-based tax as soon as the economy recovers. The technocrat in him probably envies his counterparts in Singapore, and even Indonesia. Singapore plans to raise its GST from 7% to 9% by 2025 (or as early as later this year) while Indonesia approved the standard value-added tax (VAT) rate in October last year, from 10% to 11% effective April 1, 2022. It will further raise the rate to 12% in January 2025.
“We would have got [an additional] RM20 billion from [GST] at least for a year and RM40 billion for two years. It is a lot of money, which can be utilised for development,” Zafrul laments, referring to the shortfall in government revenue receipts for swapping GST with the current expanded sales and services tax (SST) in 2018.
“Consumption tax, you cannot run away from and is more transparent. On paper, [SST] should be the same. But in reality, it is a different story. We can see a big drop [in collection], but prices didn’t drop for consumers, right?”
According to him, the system is ready to provide targeted aid to the lower-income group to cushion the impact, should GST be reimplemented. Zafrul previously said that GST could be reimplemented within six months if given the green light since it was reduced to zero-rated rather than scrapped.
Zafrul admits, though, that it is much easier for a non-politician like him to say, forget politics and look at the economy.
Yet, that’s precisely what needs to be done if the country wants to restore its coffers post-pandemic to be able to expand its social safety net as the population ages. Malaysia is only eight years away from 2030, when at least 15% of the population will be above the age of 60.
Mindset change needed
With Malaysia being one of the most heavily subsidised nations in the world, Zafrul points out that practising tough love will not be easy, even in a more comfortable political climate. Even the people who can afford to not take blanket subsidies from fuel to electricity and transport costs will baulk if subsidies are suddenly removed. “They can take it [in the purse] but I don’t think their mind can take it,” he says.
“I am supportive of subsidies but it has to be targeted,” Zafrul stresses. Indeed, there are more pressing and productive needs for government money.
The fact that Malaysia was forced to borrow to cover operating expenses during the pandemic is further proof that government expenses need to be revamped alongside the need to broaden the country’s revenue sources. Even before Covid-19 hit, Malaysia already spent close to 99% of its revenue on operating expenses, leaving little choice but to borrow to fund development expenditure. A growing debt burden would further weigh on the country’s capacity to increase the necessary development expenses if government revenue cannot grow in tandem.
The additional revenue streams from a broad-based consumption tax could then pave the way for adjustments on other direct taxes, including lowering the corporate tax rate and allowing more exemptions on personal income tax. Being one of the few countries in this region without a broad-based consumption tax, it is not surprising that Malaysia’s tax collection as a percentage of GDP at 11.9% in 2019 is below the global average of 14.9% and is behind Singapore’s 13.2%, Thailand’s 14.6%, the Philippines’ 14.5% and South Korea’s 15.2%, although it is above Indonesia’s 9.8%, according to World Bank data. The ratio was 15.6% in 2012 but slipped to 11.9% in 2019.
Asked on opportunities to grow or even combine the country’s sovereign wealth funds (SWFs) — Khazanah Nasional Bhd, Kumpulan Wang Persaraan (Diperbadankan) (KWAP) and the National Trust Fund (KWAN) — to supplement the country’s annual budget, Zafrul would only say that there are “definitely economies of scale in the sharing of resources”, but stopped short of saying if he is for such a move.
What’s certain is, if Malaysia intends to grow investment income as a revenue pillar to the national budget — just like how Singapore’s annual budget benefits from net investment returns contribution (NIRC) — and reduce its reliance on dividends from Petroliam Nasional Bhd (Petronas), these SWFs would need sizeable cash infusions. At RM140.8 billion, KWAP is the largest of the three SWFs, whose funds (and assets) actually belong to the government, says Zafrul. KWAN — which had RM20.9 billion at end-2020 before the RM6 billion withdrawal to fund Covid-19 vaccination and related expenses (increased from RM5 billion in December) — should still have RM15 billion.
So, combined, the three SWFs would only be less than a third of the size of the Employees Provident Fund (EPF) — which safeguards RM1 trillion of members’ retirement money, none of which belongs to the federal government. Permodalan Nasional Bhd’s (PNB) funds also do not belong to the government.
Unlike large SWFs abroad, Khazanah — which had a realisable asset value of RM95.3 billion under its commercial fund and RM27.9 billion under its strategic fund at end-2020 — does not receive sizeable or consistent cash inflows from the government to invest and needs to borrow to fund investments.
As KWAN and KWAP are set up under different Acts, any merger would likely need to go through parliament, among other requirements. If indeed government-linked entities are used as avenues of patronage, a merger would likely face fierce opposition, observers note.
In any case, fiscal reforms — both revenue and expenses — need to happen even faster following drawdowns and spending made during the pandemic.
The Fiscal Responsibility Act — which Zafrul says is set to be tabled in parliament once the cabinet approves it before the next parliamentary sitting at the end of February — will help future finance ministers and lawmakers prioritise the many demands on the national budget. That, however, is only a small step towards many tougher real fiscal reforms that are unpopular but need to happen to ensure fiscal sustainability.
The fiscal reforms Zafrul wants to push through, from targeted subsidies and reimplementing the GST to reducing dependence on oil revenue, are not new solutions. The challenge is in the execution.
Economists and pundits do not see any meaningful fiscal reforms taking place ahead of the country’s 15th general election (GE15), which can be delayed until July 2023. Zafrul, however, believes some reforms need not wait until after GE15, especially if the economy rebounds as predicted.
Will the fiscal reforms be allowed to take place quickly because both sides of the political divide will benefit from healthier national coffers, or will politics continue to get in the way?
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