Judicious government spending

In the past, the Government has always countered the adverse effects of an external slowdown through countercyclical measures. It cannot continue these countercyclical measures indefinitely without putting a strain on its finances.

Malaysia needs to adopt a two-pronged strategy to contain the growth of development and operating expenditure. (i) public spending should be carried out carefully and selectively and the allocation to each ministry needs to be tied to spending efficiency and (ii) further restraint in operating expenditure (OE) is critical, especially for supplies and services as well as administration expenses, which account for 19.8% of total OE.

Fiscal deficit is projected at 4% of GDP in 2009.

The Government will remain in a fiscal deficit for the remaining years of the 9MP.

The fiscal deficit was brought down from 5.3% of GDP in 2002 to 3.2% of GDP in 2007 but is projected to widen to be 3.5% to 4% in 2008-09, reflecting largely higher operating and development expenditure.

Malaysia is going to tolerate for a couple more years deficit budget spending, which has been the case since 1998.

Drawing from the policymakers’ comments in recent weeks, we gather that national socio-economic programmes and people-centric projects will be accorded top priority.

Spending focus will be on the food security programme, housing, utilities and transportation, healthcare, education and human capital development.

Broad outline of measures and strategies

Provide partial relief measures to ease the burden of rising costs on the household and business sectors.

(i) Lower the Employees Provident Fund contribution rate by 2% (to 9% from 11% currently) for a period of 12 months on a voluntary basis.

(ii) Reduce the road tax for personal and commercial vehicles.

(iii) Reduce personal income tax rates by 1% to 2%.

The Ministry of Finance appears to apprehend the need for a reduction in personal income tax as the starting point for taxable income is already high.

An unmarried individual needs to pay income tax only if the monthly income is above RM2,950 while a married worker is subject to tax only if the income is above RM3,200. Of the 10.5 million workers, only one million pay tax. Of the figure, only 31,000 individuals are taxed at the top marginal rate of 28%.

We argue that the lowering of marginal tax rates would reward greater work efforts, boost productivity and retain talent.

Income tax collection from individuals amounted to RM11.7bil in 2007 or 8.3% of total federal revenue. Hence, a one to two percentage point reduction in the marginal tax rate would result in revenue loss of RM420mil to RM840mil per year.

(iv) As an alternative to (iii), increase the tax relief for taxpayer and child, or allowances for education and medical expenses.

(v) Provide direct financial assistance in the form of food and transport vouchers for the targeted poor households, which did not benefit at all from the cash rebates of RM150 to RM625 for motorists and car owners.

Price stabilisation and moderating price pressures

It is necessary to encourage greater competition in domestic production and further liberalisation of imports, including licensing and permits to increase local supplies and restrain price increases.

The Government has lifted the price controls on cement and steel while reducing import duties to increase supply and help stabilise building material prices.

Nevertheless, building material prices are still soaring and the construction industry has to bear the escalating costs of construction, ranging from 20% to 30%.

It is proposed that the import duty, sales tax and excise duties on the following items be reviewed:

(i) Food items which include vegetables, spices, meat and margarine

(ii) Inputs which are used in the agriculture sector such as fertilisers, inputs used in the construction sector such as heavy equipment and inputs used for the manufactured of food items

(iii) Household items

(iv) Widen the list of price-controlled items for a stipulated period.