Malaysia needs to widen SST coverage to rebuild fiscal buffers — World Bank

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KUALA LUMPUR (Oct 10): The government needs to diversify and increase its revenue resources, including widening coverage of the sales and services tax (SST) to rebuild fiscal buffers, says the World Bank Group.

In its October 2019 edition on the Economic Update for East Asia and the Pacific, themed “Weathering Growing Risks”, released today, the World Bank said exercises towards diversifying revenue resources were needed, as Malaysia’s comparatively high level of government liabilities would continue to exert constraints on fiscal space available in the event of macroeconomic shocks.

Commenting on this, its lead economist in macroeconomics, trade and investment (Malaysia) Richard Record said the challenge of the government now is to widen coverage of the SST.

“With greater coverage, we will see an increase in revenue collection over time,” he told a press conference in conjunction with the launch of the World Bank October 2019 edition of the Economic Update for East Asia and the Pacific here, today.

Record also said the government could introduce more progressive elements in its revenue policies, including a realignment of tax incentives and an expansion of personal income taxes to rebuild fiscal buffers.

Asked if widening the SST coverage would lead to inflation in the country, Record agreed the move could result in an increase in prices over the short term.

“To the extent that when you increase the cost of items, which were previously zero-rated, it could in the short-term increase (goods) prices,” he said.

However, he said the exercise could be implemented when the inflation rate is comparatively low.

“The government can identify those items consumed most by the low income group, and take measures to protect them,” he added.

Data from the World Bank has forecast Malaysia’s Consumer Price Index, the measure of inflation, to grow by 0.8% in 2019 and 1.7% in 2020.

Despite the low consumer price inflation, it said concerns about the rising cost of living persists among the public and government.

“The leading issues are a shortage of affordable housing, the extent of household debt, lagging wages in some sectors, and higher than average food price inflation,” it said.

Meanwhile, the World Bank also expects Malaysia to meet its fiscal deficit target of 3.4% of gross domestic product (GDP) in 2019, supported by monetary measures such as the Overnight Policy Rate (OPR) rate cut by the central bank in May this year.

On economic growth prospects, it said risks to Malaysia’s growth outlook continues to tilt towards the downside, mainly due to the unresolved US-China trade tensions and a maturing global technology cycle, which could weigh on the country’s exports demand in the near term.

Overall, it maintained Malaysia’s GDP growth at 4.6% in 2019, underpinned by the continued robust growth in private consumption, amid stable labour market conditions.

The World Bank notes that weaknesses in the external sector is likely to persist over the near term.

“It will soften global demand for electrical and electronics products and hence, constrain exports growth,” it said.