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Friday, November 1, 2013

Despite GST, concerns still over Putrajaya’s spending glut

OCTOBER 26, 2013
Packs of sugar are seen inside a shop in Kuala Lumpur October 25, 2013. — Reuters pic

KUALA LUMPUR, Oct 26 — The government took a firm step towards tackling its chronic deficit by finally announcing a steep Goods and Services Tax (GST) yesterday but its continued profligacy raised concerns that it may just be addressing one half of the problem.

During the tabling of Budget 2014 yesterday, Prime Minister Datuk Seri Najib Razak confirmed speculation of the unpopular consumption tax when he announced its implementation at 6 per cent starting in 2015.

But with expenditure in Budget 2014 weighing in at RM264 billion, Putrajaya showed no signs that it was letting up on its excess spending.

“There is a disconnect between the Budget and promises of economic progress for country. The Budget did not address the main concerns of the public: over wastage of funds, over expenditure, excesses, etc.” said Dr Lim Teck Ghee, chief executive of the Centre for Policy Initiatives think-tank.

“It fails to control excessive expenditure that had not generated productivity and led to wastage.”

DAP lawmaker Tony Pua yesterday noted a tendency for Putrajaya to increase its spending in line with revenue, pointing out that an unforeseen RM14.4 billion surplus in tax collections failed to make a notable dent in the deficit when it should have reduced it to below even the 2015 target.

“Despite collecting the significantly higher than expected revenue, the deficit for 2013 remained at RM39.3 billion. It means that almost every single sen of extra revenue collected by the government is immediately expended, instead of contributing towards reducing our debt,” Pua said in a statement yesterday.

In the Budget announcement yesterday, Putrajaya also announced an increase in the cash handouts via the 1 Malaysia People’s Aid (BR1M) scheme, raising this from RM500 to RM650 for households earning below RM3,000 monthly.

It also lowered the bar for entry to now include families earning up to RM4,000 a month, albeit at a lower payout of RM450. Unmarried individuals earning below RM2,000 will also receive RM300 each, up from RM250 previously.

Yesterday, Lim suggested that a 15 per cent reduction in the size of the bloated civil service may save the country a large part of its operating expenses.

Malaysia’s civil service costs the nation around RM60 billion in wages annually. It the single largest Budget item and accounts for a third of total spending.

“By cutting civil services, the large operating expenditure can be reduced significantly,” Lim said.

Instead, the 1.4 million civil servants each received a half-month bonus or a minimum payment of RM500 under Budget 2014.

But while public reception towards the introduction of the GST has been of dismay, analysts agreed that the introduction of the tax was necessary for the continued health of the country’s finances.

“GST needs to be implemented immediately, not delayed till 2015 as it will widen the government’s revenue base and bring down the large deficit,” Lim said

Maybank Investment Bank Bhd chief economist Suhaimi Ilias described the GST and other cost-cutting measures such as the elimination of price support for sugar in the Budget as indicative of Putrajaya’s determination to implement the reforms demanded of it.

“GST is a real deal given the detailed announcement. Subsidy allocation for 2014 is slashed by over 15 per cent. These reflect major commitments to fiscal reforms,” said Maybank Investment Bank Bhd chief economist Suhaimi Ilias.

Putrajaya came under pressure to address its chronic deficit when ratings firm Fitch downgraded the country’s sovereign debt outlook from “Stable” to “Negative” in July, citing weaker appetite for reforms following Barisan Nasional’s reduced mandate in Election 2013 and poor public finances.

Among the key changes demanded by the ratings firms was for a broadening of the country’s tax base such as via the introduction of the GST.

During his Budget speech yesterday, Najib said the time was right to introduce the tax that was first mooted in 2005 but was put off repeatedly until its announcement yesterday owing to fierce public resistance.

“GST is inevitable if Malaysia is to remain competitive, but it has to be implemented gradually so as not to affect the financial standing of the ordinary people,” Dr Arnold Puyok of Unimas told The Malay Mail Online.

“I think the GST plan announced by the government is reasonable even though it may cause some sections of society to dig deeper into their pockets.”

The GST is a consumption tax, meaning all Malaysians will be taxed according to their level of spending, regardless of income. This differs from income tax that is only applicable after a certain salary level is exceeded.

Malaysia’s proposed GST rate of 6 per cent is the lowest in the region, whereas most countries implement a 10 per cent value added tax (VAT).

The tax was first announced during Budget 2005 and was originally scheduled to be implemented in 2007 before it was deferred.

The GST Bill was then tabled for the first reading in 2009 for implementation in late 2011, but was withdrawn during the second reading in 2010 following fierce public resistance.

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