(July 9): Despite Putrajaya's claim that the prices of eight out of 12 categories of goods in the Consumer Price Index (CPI) would decrease after the implementation of the goods and services tax (GST), the prices of all categories have in fact increased, Institut Rakyat said today.
In its analysis of the first 100 days since the GST took effect, the PKR-powered think tank said however that the overall impact of the price increases was offset by the drop in oil prices since the end of last year.
"Thus, while low oil prices have battered Malaysian government revenue and the value of the ringgit, they have effectively spared consumers from a more severe impact following the introduction of GST.
"They have also spared Prime Minister (Datuk Seri) Najib Razak from greater public anger by softening price increases," said Institut Rakyat executive director Yin Shao Loong in a statement today.
According to data obtained from the Department of Statistics, for those earning below RM3,000 per month, inflation was slightly higher than the overall national inflation at 1.0%.
"Inflation patterns in May continued to follow pre-GST patterns for most goods, suggesting that price hikes were 'one off'," Yin said.
"However, given that an undisclosed number of businesses have chosen to temporarily absorb GST for their customers, we can expect a further inflationary bump in the third and fourth quarter of 2015 when they relax their policy."
Besides that, there is expected to be lower growth in domestic demand over the next six months compared to the first half of the year following gloomy economic conditions including the falling ringgit and China’s growing market turmoil.
"With the government now expecting to more than double its GST takings in 2015 to RM50 billion, up from an initial estimate of RM23.2 billion, the greater financial outflow from the private sector may further dampen domestic demand."
Yin said this was because consumers would not receive an increase in their wages that could compensate for the GST anytime soon.
He also said that despite its local unpopularity, the implementation of the GST had been lauded by the World Bank, the International Monetary Fund and the Fitch Ratings Agency.
"These entities have been concerned about the Malaysian government’s revenue base and ability to service its loans, namely Malaysia’s dependency on oil revenues and small income tax base."
The think tank said Prime Minister Datuk Seri Najib Razak and his administration had committed to achieving a "balanced budget" by slashing subsidies and raising government revenue through the GST to bring the budget deficit to zero by 2020.
"The IMF recommends placing the bulk of the burden of financing Najib’s austerity programme on the GST, which means that Malaysian consumers will ultimately foot most of the bill while subsidies evaporate.
"It also means that those consumers who aren’t receiving direct assistance from government – the middle class – will feel greater financial pressure, especially if the government follows the IMF’s suggestion to raise GST above its initial rate of 6%," Yin said.
He also warned that the implementation of the GST in pursuit of a zero deficit could fuel economic dependence on private debt, which could then lead to a financial crisis.
"Household debt in Malaysia is already one of the highest among developing economies at 87.9% of GDP in 2014, and exceeds US household leverage levels according to the McKinsey Global Institute," Yin said.
"Public debt, much maligned, is offset by the central bank’s ability to create money. Households do not have this power and will have to dig into their incomes or savings to pay back debt, lest they default.
"Spent wisely, public debt can generate productive growth that can more than compensate for debt servicing.
"Pursuing the IMF’s prescription of fiscal austerity may back us into a policy corner where we are denied the flexibility offered by public debt tools and forced into dependency on private debt, which carries the risk of financial crisis."
The GST came into effect on April 1, 2015 despite objections, street rallies and calls to scrap the plan, including from former prime minister Tun Dr Mahathir Mohamad.
However, economists and tax experts have warned that a government backtrack on the GST would spell disaster for the nation’s already ailing economy.
Experts say the implementation of GST is long overdue – only two million out of a population of 28 million currently pay income tax – and the increased federal revenue will help to ease growing government debt. – The Malaysian Insider