Economist: Reduce dependency on O&G through GST

Published: Thursday July 11, 2013 MYT 5:12:00 PM 

Updated: Thursday July 11, 2013 MYT 5:16:06 PM

KUALA LUMPUR: The government could reduce its dependency on the oil and gas sector by having additional revenue raised through the Goods and Services Tax (GST), says an economist.

RAM Holdings Bhd Group Chief Economist Dr Yeah Kim Leng said the GST would provide the government with greater flexibility to balance its budget as well as to increase spending to stimulate the economy should the need arise.

Revenue from the oil and gas sector currently accounts for 40% of the country's revenue collection, he said.

Yeah said Malaysians could reap the benefits in the form of services including health, security and education, in return for sharing the GST tax burden roughly in proportion to what they spent on.

“The government need not cut back on spending in these areas if additional revenue can be raised through GST. Besides the direct benefits, the indirect, economy-wide benefits of GST are equally important,” he said.

To maintain the current spending level without GST, Yeah said other taxes such as corporate and individual income taxes would have to rise or else the fiscal deficit and debt level would worsen further and put the country at risk from a sudden loss of investor and market confidence.

In the region, Malaysia is among the four countries, apart from Hong Kong, Brunei and Myanmar, that have yet to implement the GST to enhance government revenue.

In a research note recently, RHB Research said the high dependency on oil revenue makes the government vulnerable to the fluctuation of international crude oil prices, which is beyond its control.

“A sudden and significant drop in crude oil prices will likely strain the fiscal position dramatically, as much of the government's expenditure is sticky downward and could not be cut easily,” it said.

In 2009, the government experienced a sharp drop in crude oil price by 38% when oil revenue accounted for close to 40% of its revenue. However, it managed to cushion the impact via the change of tax on petroleum income.

Crude oil price only fell briefly and it bounced back in 2010.

“Nonetheless, the government may not have the luxury, if it happens again. We believe the government needs to make a tough decision to reduce its subsidies to a more sustainable level as in the early 2000s,” added RHB Research – Bernama