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Friday, November 1, 2013

Policies to shape resilient economy

Publication: NST
Date of publication: Oct 29, 2013
Section heading: Main Section
Page number: 018
Byline / Author: By Dr Irwan Shah Zainal Abidin

THE Goods and Services Tax (GST) will not create inflation as it is not an extra tax but a replacement of the Sales and Services Tax (SST).

The 2014 Budget, announced by the prime minister last Friday, is a turning-point as far as fiscal consolidation is concerned.

It provides a clear signal that the prospects of managing the fiscal and debt problems lies in the estimated increase in revenue by 1.7 per cent this year, expected reduction in deficit to 3.5 per cent next year, and the introduction of the GST at six per cent to be implemented in 2015.

Two factors -- improving economic resiliency and realising the aspiration of becoming a developed high-income nation -- has forced the government to minimise goodies, handouts and other populist measures.

It is a tough but well thought out Budget. In economic literature, an economy is said to be resilient when, among others, it has the ability to quickly recover from both internal and external shocks.

This can be "cultivated" through policies which address issues such as macroeconomic fundamentals, fiscal and debt quandary, market efficiency, education system, good governance, political, security as well as social development.

The Malaysian economy certainly has some resiliency, but it needs to be strengthened further to cushion the unfavourable international conditions. This is noticeably manifested in the strategies, measures and programmes spelled out in the Budget, especially the implementation of GST, which will be effective from April 1, 2015.

Although GST is a regressive tax, the fact that it has been modified through the imposition of zero-rated and exempted items, makes it not only a proportional tax, but also progressive. GST will not only diminish fiscal deficit and public debt, but also reduce the government's expenditure on oil and gas, which accounts for around 40 per cent of total revenue.

Even if prices rice because of GST, it is expected to be a one-off increase. This is not inflation as inflation means a continuous rise in the aggregate price level, measured by the Consumer Price Index (CPI). Furthermore, many items in the CPI are zero-rated and exempted under the GST.

While structural reforms in the form of GST and reduction in sugar subsidy is highly commendable, other areas, such as improving good governance, managing household debt and enhancing market efficiency, seem to be insufficient.

One of the main enabling factors to the resiliency of an economy is good governance. The 2012 Auditor-General's Report has exposed wastage and leakages of public funds.

It is yet to be seen how the establishment of the special committee, new ways of auditing projects and introduction of the outcome-based budgeting (OBB) can efficiently manage public accounts.

It is also important to note that the government has approved two supplementary budgets to cover budget shortfalls yearly since 2009. In an economy which is not in recession, this practice of easily approving supplementary budgets is unnatural and shows lack of fiscal discipline.

To overcome this, the OBB system should be extended not only at the ministry level, but also to government short-term development plans, which include the Budget itself, and Malaysia's five-year economic plan.

Other measures include the open tender system, which could taper the wastage and leakages better than the present system as it will promote transparency and accountability.

Since the global recession began in 2007, world financial markets have been plagued with uncertainty. As a result, the global economy is projected to grow at a slower pace of 2.9 per cent this year.

Since then, the Malaysian growth model has been skewed more towards domestic demand. The sustainability of growth in private consumption has now been tempered with rising household debt, which is among the highest in the region.

The increase in Real Property Gains Tax to 30 per cent for properties sold within the first three years is a step in the right direction.

But it is important to highlight that this is specifically meant to manage the rise of house prices. Because of land scarcity and a larger population, real estate prices cannot be reduced. But what can be reduced in the short and medium term is the price of cars.

The 2014 Budget should have set the tone to the much awaited revision of the National Automotive Policy, which will be unveiled soon.

Reducing car prices is one of the important aspects in managing the rising household debt. Other measures include reforming the labour market, which can significantly boost wage rates.

The influx of unskilled workers and brain drain are the main causes of a stagnant wage rate.

As Malaysia marches towards greater regionalisation, such as being involved in negotiations for multinational trade agreements such as the Trans-Pacific Partnership Agreement, the Comprehensive Regional Economic Partnership, and soon to be part of the Asean economic integration effort under the Asean Economic Community, measures on providing a conducive environment towards this end is crucial.

One important aspect is the liberalisation of certain strategic sectors such as services and industry. Although the services sector blueprint has been announced in the Budget, strategies and measure in the blueprint should not just stop at developing certain sub-sectors, but also on liberalising them.

Dr Irwan Shah Zainal Abidin, senior lecturer, School of Economics, Finance and Banking,Universiti Utara Malaysia, Kedah

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