KUALA LUMPUR - Malaysia's new consumption tax is set to rake in an extra RM5.6 billion (S$2.2 billion) next year, but most of it will go towards cash handouts to alleviate rising inflation, raising questions of whether the levy is meant to balance the books or a "fund-raiser" for political handouts.
The government's 2015 Budget will see the goods and services tax (GST) replace the patchy sales and service tax (SST) next April, a move lauded by supporters of the ruling Barisan Nasional (BN) coalition and economists as a "long-term investment" in the country's fiscal health, as it enters its 18th straight year of deficit.
Malaysia is working to end deficit budgets that date back to the 1997 Asian financial crisis and which pushed public debt to RM569 billion, just shy of a self-imposed ceiling of 55 per cent of gross domestic product (GDP).
It expects to report a shortfall of 3.5 per cent of GDP this year, down from 3.9 per cent last year, and an even lower 3 per cent deficit next year.
But some analysts and politicians worry that the lack of structural change - moving up the value chain so that there are better job skills, productivity and wages - may result in a cycle of taxation and cash injections without realising any of the potential gains to the nation's economy.
"This is just political painkiller or morphine without addressing the root problem which is that economic growth is not distributed," Mr Liew Chin Tong, an opposition strategist and lawmaker, told The Sunday Times.
"The fact that the majority of Malaysians receive the cash handout is an acknowledgement that people are not self-sufficient despite healthy GDP numbers."
Prime Minister Najib Razak said in his Budget speech last Friday that the impact of GST - expected to push inflation as high as 5 per cent, three times last year's rate, once combined with subsidy cuts of goods such as fuel, electricity and flour that push up their prices - would be eased with an additional RM4.9 billion in aid.
This amount would mainly go to increasing the 1Malaysia People's Assistance (BR1M) by RM300 - an increase of between 46 per cent and 100 per cent - for the lowest-earning seven million households and individuals, seen by many as a political handout.
"The most difficult issue I had to decide on was how to balance populist policies against those based on economic and financial imperatives," Datuk Seri Najib, in his role as Finance Minister, said last Friday, adding that "what is good for the economy is also good for the people".
But not all observers are convinced that the move of offsetting the new GST with the cash handouts is what the economy needs.
"We want to push the economy into a high-income nation and we need to 'force' people... to 'graduate' from BR1M," Mr Veerinder Singh, chairman of tax consultancy Taxand, told The Sunday Times, adding that he hopes BR1M will not be a continuous feature of budgets.
Many are not optimistic, citing the political difficulty in implementing subsidy cuts, which were put on hold prior to last year's general election.
"For most governments, because GST is an efficient tax, whenever it needs money, the easy way is to raise GST, not cut expenses, which will then lead to a BR1M increase," said opposition MP and economist Ong Kian Ming.
Some see long-term benefits of implementing the GST, however.
Financial firms said that while the GST gains after increased handouts will be only RM690 million, the tax sets the tone for steadier revenue in the future after the government also slashes income tax.
"Revenue from direct taxes is dependent on GDP growth and therefore vulnerable to external factors whereas GST is based on internal consumption, so revenue stream is consistent," said Mr Alan Tan, chief economist for Affin Hwang Capital, an investment bank.
This article was first published on October 12, 2014.
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