Business

Thursday October 22, 2009

Balancing the budget to improve fiscal health

By JENNIFER LOPEZ


BRIDGING the hefty budget deficit – projected at 7.6% of gross domestic product (GDP) for 2009 – is a key concern if the nation is to improve its fiscal health.

As responsible members of the accounting profession, Association of Chartered Certified Accountants (ACCA) members highlighted the need to increase revenue judiciously while enhancing sovereign fiscal discipline in anticipation of Budget 2010.

Given daunting economic conditions, Government revenue this year was forecast to drop to RM160bil from about RM175bil last year, said Second Finance Minister Datuk Seri Ahmad Husni Mohamad Hanadzlah, while in 2010, it would fall even further.

A critical component of Government revenue, gross income tax collection in 2009 may not surpass the RM90.6bil mark recorded last year as the Government expects companies to contribute less in taxes following a slump in exports.

The need to find alternative sources of revenue and tax to finance the budget is urgent since oil and gas reserves are not an inexhaustible resource and the rakyat, especially the middle and professional classes, should not be further burdened.

According to the ACCA survey, which drew responses from 417 members, there are a variety of measures that would be advisable for balancing the budget while getting the economy out of recession and back onto a sustainable growth trajectory.

Notably, 59% of respondents recommended that the Government should increase “sin” and luxury goods tax should money need to be raised further.

For instance, increasing the excise tax on cigarettes could have an indirect-yet-positive effect on healthcare. Healthcare costs for lung and other cancers as a result of smoking or inhaling cigarette smoke costs the Government a hefty sum in terms of funding and allocations, noted one respondent.

Making it more expensive to smoke by imposing radically expensive taxes could curb the habit of smoking among teenagers as well as adult smokers, and perhaps enable budget cuts for healthcare as overall health improves.

Members also favoured the introduction of green taxes. The suggestion of a plastic bag tax was ranked number one among survey respondents for Malaysia to promote sustainable development and green initiatives.

Members also recommended taxing non-environment-friendly practices such as usage of styrofoam containers. Green taxes would also spur technological innovation, said members.

But increasing revenue by raising taxes shouldn’t be the only focus. Members urged the Government to adopt better fiscal discipline as well as to improve implementation and enforcement, similar to the cost-cutting and efficiency measures being implemented across the private sector.

“Ensure efficient and effective Government machinery, cut costs, stop leakages and increase productivity,” said a member.

Government should also enforce the taxes that are already in place, instead of imposing new taxes.

Twenty-seven per cent of the survey respondents believe that the Government should strengthen the implementation of collecting sales and services tax as a way to increase more revenue. As they pointed out, the Government had already got the infrastructure and mechanisms in place.

Members also want the Government to “tighten controls on government spending and to ensure no leakages such as through overpriced projects and inefficient procurement.”

It is heartening to note that the Government has indicated its commitment to fiscal reform. The Government is targeting to lower its budget deficit to below 7.6% of GDP partly by reducing its operating expenditure by 15% next year, according to Husni.

Analysts also observed that the Government was considering a cap on development spending for the 10th Malaysia Plan (2011-2015) to RM180bil. In contrast, development spending in the Ninth Malaysia Plan (2006-2010) is RM200bil, plus an additional RM30bil allocated under the mid-term review in June 2008.

Lastly, 91% of survey respondents agreed that personal tax should be further reduced to boost confidence and encourage spending, which is critical to the retail sector and overall economic growth.

Analysts have recommended the reduction of corporate and personal income tax rates by 1% or 2% to provide a tonic for the economy and bring Malaysia in line with the tax rates of regional hubs like Singapore and Hong Kong.

The Government could compensate for these cuts by widening other taxes like capital gains and inheritance, noted members.

Elsewhere, options of tax deferment, more personal rebates and reliefs are also recommended to introduce a “feel good” factor into the budget, and brand the Government as one that is mindful of the rakyat’s needs.

● Jennifer Lopez is acting country head, ACCA Malaysia.

  • E-mail this story
  • Print this story