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Monday, December 23, 2013

Fiscal reforms: Right approach and timing vital

Publication: NST
Date of publication: Dec 19, 2013
Section heading: Business Times
Page number: 012
Byline / Author: By Sulaiman Mahbob

THE question of fiscal reforms has been raised over the past few years.

The government has highlighted the need for fiscal reforms but has postponed undertaking any concrete measures. There have been criticisms because of the perceived delay in carrying out reforms.

There is no need to repeat the reasons why the government has pointed out that the fiscal policy needs to be carried out.

Nevertheless, let me summarise why the fiscal reforms have been awaited.

Firstly, the government has been carrying fiscal deficits for many years. In fact, aside from those years corresponding to the time when Tun Daim Zainuddin was the Minister of Finance, the government has been running fiscal deficits.

Many economists with a Keynesian mind have been dissatisfied with this policy stance. Nevertheless, this is often useful for a developing economy, if done prudently.

In Malaysia, the fiscal deficits were not executed irresponsibly. First, a developing economy that aspires to produce world-class public facilities and infrastructure has to have high government spending.

The airports, public transport facilities and roads, among other things are the pride of the nation. Doubtlessly, our infrastructure is of international standard. This was not the case 20 years ago.

Secondly, we have high operating expenditure in our national accounts and that cannot be reduced without affecting the lives of millions of households.

The government has to finance high quality of education and public healthcare.

Nobody wants Malaysia to follow the American model of education and healthcare where people have to pay for what they use.

We want Malaysia to provide highly subsidised education and healthcare but somebody has to pay for it. We are glad that the government is playing its role in that respect.

Thirdly, it must be emphasised that the Malaysian government debt is financed domestically and not from international sources.

This is a point that many critics forget when they compare Malaysia with Spain and Greece.

Having said that, I do not deny that Malaysia has to narrow its fiscal deficit and the ratio of debt to the gross domestic product. But the government recognises that this has to be done. It is a gradual process and cannot be done immediately.

The government requires revenue to finance expenditure. Over-reliance on a limited number of sources of revenue is not sustainable. The dependence on petroleum as a source of revenue has to be reduced.

The population that pays taxes is narrow and the burden falls on a limited proportion of the population. Therefore, the government has to explore more effective ways of broadening its revenue base.

The strongest critics of the government cannot deny that the goods and services tax (GST) is a very efficient way of collecting taxes.

In many countries it is referred to as the value-added tax (VAT). About 160 countries have introduced the VAT. Different countries have different forms of VAT.

I find it hard to believe that 160 governments can be wrong about this tax system. The efficiency of this system cannot be denied.

My suggestions to the government come from a different angle. First, I think a phased approach is to be recommended. Fiscal reforms are necessary but it should be done step-by-step.

The public should be gradually introduced to fiscal reforms. Subsidy rationalisation, therefore, should be carried out gradually and not in a one-shot way.

Second, I think timing is important. Taxes and subsidy rationalisation should be timed at a time when inflation is not high.

The government passes this criterion. Inflation in Malaysia is currently stable. It is not wise to remove subsidies when the rate of inflation is high. The removal of subsidies may increase inflation rates.

Thirdly, I think that fiscal reforms should not forget other economic objectives. For example, the principle of inclusive development should not be forgotten.

In carrying out its fiscal reforms the government should not forget about the rural and urban poor or groups like single mothers.

A lot of people commented on Fitch's downgrade on Malaysia. My comment is that Fitch may have been impatient in its decision to recommend a downgrade.

The government has laid out a plan to introduce fiscal reforms and this had to be done taking into account the right time and by adopting a phased approach.

The government has its own timetable and wisdom and it should only be expected that it will maintain its momentum, keeping in mind the welfare of the people.

The author ¿ Tan Sri Dr. Sulaiman Mahbob ¿ is the chairman of Malaysian Institute of Economic Research.

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