This article first appeared in The Edge Malaysia Weekly, on February 1 - 7, 2016.

There is something in the 1970s hit, Money, Money, Money, by Swedish band Abba that Malaysian households grappling with the rising cost of living can relate to. “I work all night, I work all day to pay the bills I have to pay … still there never seems to be a single penny left for me,” goes the song.

So, the decision by Prime Minister Datuk Seri Najib Razak to “put money back in the hands of consumers”, as some observers say, should come as a big relief to many.

There are two standout growth stimulus measures in the revised Budget 2016. One is to optionally adjust mandatory contributions by private sector employees to the Employees Provident Fund (EPF) with those below 60 to contribute 8% instead of 11% of their monthly income to the retirement fund from March 2016 to December 2017. Employees aged 60 and above can contribute 4%, down from 5.5%, during the period. There are no cuts to the employer’s contribution rates.

Under the other measure, the government will provide a special tax relief of RM2,000 to taxpayers earning RM8,000 and below a month for the year of assessment 2015. This will benefit two million taxpayers but will come at the expense of RM350 million in tax revenue for the government.

The intention here is obvious — to arrest the slide in private consumption. Private consumption, which represented 52.7% of the country’s gross domestic product (GDP) in 2015, is Malaysia’s largest growth engine. Worryingly, the Malaysian Institute of Economic Research’s Consumer Sentiment Index fell to a record low of 63.8 for the third consecutive quarter in 4Q2015, indicating consumers’ growing fear of high prices.

This is a result of government-driven changes, such as the 6% Goods and Services Tax that was implemented last April, tighter lending rules and subsidy rationalisation.

Reducing contributions to the EPF when times are tough is a tried-and-tested method to boost consumption. In 2009 and 2010, faced with a global financial crisis, the Najib administration gave employees the option of reducing their mandatory EPF contribution by 3% in order to increase household disposable income and boost local demand. This time around, the government estimates that a reduction in mandatory EPF contribution will add RM8 billion to the economy through private sector spending. However, this sum can only be achieved if all EPF contributors choose to opt for the scheme.

Moreover, households have been known to prefer retirement savings to extra cash before. In 2009, the EPF reported that only 2.31 million or 43% of its active members opted for the reduced contribution while in the following year, this increased to 2.5 million or 45% of its active members.

Note that those who opted for the reduced EPF contribution would have seen their taxable income increase, possibly leading to a higher income tax charge.

Without the RM2,000 tax relief that was given for year of assessment 2015 (YA2015), those earning RM4,000 a month who opt for the lower EPF contribution of 8% will take home an extra RM120 a month (RM1,440 a year) but could end up paying more personal income tax as the tax bracket could go up to 10% from 5%.  This is assuing the taxpayer only has RM9,000 personal relief and RM3,840 relief for EPF contribution. However, his taxable income will rise from RM33,720 to RM35,160, resulting in an additional tax amount of RM1,830. 

Nevertheless, economists say these short-term measures can reduce the adverse effects of slower consumption, if not boost the economy for the time being.

“The measures should help cushion the economic slowdown, although they might not be able to stimulate economic activity since both consumer and business sentiments are at very low levels,” remarks the MIDF economist.

“However, a prolonged slowdown could see the government having to continue the measures for a longer period as raising the EPF contribution when the economy is still in recovery would be detrimental. For the longer period, it is essential to normalise the EPF contribution or it would harm the income sustainability of future retirees.”

Meanwhile, United Overseas Bank (M) Bhd economist Julia Goh believes the RM2,000 tax relief will have an immediate effect on middle-income earners as it is for the last assessment year (YA2015).

That aside, the circumstances today are different from those in 2009. The Malaysian economy suffered in 2009 when GDP contracted 1.5% in the aftermath of the US subprime mortgage crisis. But it staged a swift recovery in 2010, clocking GDP growth of 7.4%. Consumer sentiment remained intact with the MIER CSI registering healthier readings and workers still looking forward to wage and income growth.

“We also have to bear in mind that household debt is currently at a historical high and household balance sheets are stretched, especially in the low-income group. On that basis, the tax relief and EPF contribution cut announced by the government will provide some relief for those households that need them. It is more about the situation Malaysians are in right now than the economic environment,” explains Nurhisham Hussein, head of economics and capital markets at the EPF.

If this is so, can the government count on households to deliver the much-needed stimulus that the Malaysian economy needs against the backdrop of a higher cost of living?

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