Budget 2025: Was it Just “Song and Dance”?

When the unity government was formed post-2022 general election, the first window of opportunity for reforms was presented when the government tabled Budget 2024. While some new taxes were announced and a move to address Malaysia’s subsidy problem was also made, more concrete measures were required. 

In this Budget, the FM has suggested top-tier households are those in the top 15% (T15)! The government proposed a two-tier pricing mechanism whereby 85% of households will continue to enjoy the subsidised RON95 at RM2.05, while the T15s will pay market prices.

 

Source: https://www.malaysianwireless.com

Many questions have been raised on the implementation. Some households may hit T15 with a larger share of working adults in one household while in some households, the T15 may represented by just a sole breadwinner or even by a smaller household size.

Post-budget, many comments have been made that the T15 category will be fine-tuned to include actual expenditure patterns of households.

Attempting to differentiate and ensure only the real B85 will enjoy the fuel subsidies is futile as it will only complicate matters and backfire on the government. Either we float the RON95 price or we don’t! If we float, then the cash transfers to B40 is higher. That seems a simpler solution to remove subsidies and RON95 is floated progressively over a period of 12-18 months.

On minimum wage, a two-tier increase in minimum wage with the first increase to RM1,700 effective 2025 and RM2,000 with effect from January 2026 would have been better. That would also address Malaysia’s low-wage structure and be on course in achieving the income share of gross domestic product (GDP) to 45% set under the Madani Economy framework. “Heavy” resistance will be seen by SMEs and others who view this as added costs with no measurable improvement in productivity. It may also lead to higher inflation.

The 2% tax on dividend income in excess of RM100,000 is perhaps a “testing the water” initiative. While this opens up potential higher rates, wider scope and lower threshold levels in the future, the move, seen in isolation, is not significant.

Even if an individual earns RM10mil in divided income, the tax is less than RM200,000, while those who have a portfolio of RM2.5mil in investments and earning some RM125,000 in dividends (assuming a dividend rate), will only pay some RM500 in tax, which is clearly not material as it is only 0.4% of total dividend income. This is clearly targeted towards individuals with a valuable portfolio and likely enjoyed by households in the T15 category.

After falling to 10.9% in 2020, tax revenue to GDP ratio rose to 12.6% in 2023 and is expected to fall to 12.4% this year. The Government could have created a bi-partisan, private sector driven tax reform committee to examine existing piecemeal efforts with a more comprehensive tax framework with growth and inequality addressed. That could have presented a longer-term strategy to reduce debts, improve implementation and create greater efficiencies. Alas, our FM is more into “song and dance” than in substance!

Reference:

Budget 2025 – a missed opportunity, Pankaj C. Kumar, The Star, 26 October 2024

Trump’s Tariffs: Who Benefits?

Tariffs have emerged as one of the key points in America’s 2024 Presidential race. Trump’s plan is to have at least 10% duties on all imports. Harris has said this is a “national sales tax” which will send inflation soaring and cost each American family thousands of dollars. 

The benefits of tariffs are uneven. Because a tariff is a tax, the government will see increased revenue as imports enter the domestic market. Domestic industries also benefit from a reduction in competition, since import prices are artificially inflated. 

Unfortunately for consumers—both individual consumers and businesses—higher import prices mean higher prices for goods. If the price of steel is inflated due to tariffs, individual consumers pay more for products using steel, and businesses pay more for steel that they use to make goods. In short, tariffs and trade barriers tend to be pro-producer and anti-consumer.

The effect of tariffs and trade barriers on businesses, consumers, and the government shifts over time. In the short run, higher prices for goods can reduce consumption by individual consumers and by businesses. During this period, some businesses will profit, and the government will see an increase in revenue from duties. 

Source: https://en.wikipedia.org

 In the long term, these businesses may see a decline in efficiency due to a lack of competition, and may also see a reduction in profits due to the emergence of substitutes for their products. For the government, the long-term effect of subsidies is an increase in the demand for public services, since increased prices, especially in foodstuffs, leave less disposable income. 

Tariffs increase the prices of imported goods. Because of this, domestic producers are not forced to reduce their prices from increased competition, and domestic consumers are left paying higher prices as a result. Tariffs also reduce efficiencies by allowing companies that would not exist in a more competitive market to remain open. 

The role tariffs play in international trade has declined in modern times. One of the primary reasons for the decline is the introduction of international organizations designed to improve free trade, such as the World Trade Organization (WTO). 

Such organizations make it more difficult for a country to levy tariffs and taxes on imported goods and can reduce the likelihood of retaliatory taxes. Because of this, countries have shifted to non-tariff barriers, such as quotas and export restraints.

Organizations like the WTO attempt to reduce production and consumption distortions created by tariffs. These distortions are the result of domestic producers making goods due to inflated prices, and consumers purchasing fewer goods because prices have increased. 

Since the 1930s, many developed countries have reduced tariffs and trade barriers, which has improved global integration and brought about globalization. Multilateral agreements between governments increase the likelihood of tariff reduction, while enforcement of binding agreements reduces uncertainty. 

So, tariffs are a short-term solution for an immediate industry or trade problem. It is not a long-term panacea. Why? They create inefficiencies and attract retaliatory tariffs, and no-one wins in this game. If Trump wins, our exports - palm oil and electronic goods are going to be hit! Can we survive?

 

Reference:

The basics of tariffs and trade barriers, Brent Radcliffe, Investopedia, updated 26 June 2024

I Am Not Responsible…

This delightful “not responsible” piece was by former MP, Tony Pua, which I reproduce below (with slight amendments):

I'm not responsible for sacking my Deputy PM to cover up 1MDB.

I'm not responsible for sacking the Attorney-General to cover up 1MDB.

I'm not responsible for sacking the MACC Chief and Special Branch Chief to cover up 1MDB.

I'm not responsible for installing a stooge as the PAC Chairman to cover up 1MDB.

I'm not responsible for US$27mil 22-carat pink diamond my beautiful wife purchased (and many more millions in jewellery and luxury goods). (Where is it hidden by the way?)

I'm not responsible for issuing secret RM3bil govt guarantee letter to raise bonds for 1MDB.

I'm not responsible for paying extortionary fees to Goldman Sachs to raise bonds for 1MDB.

I'm not responsible for negotiating  lopsided super over-priced deals with Chinese companies to cover up 1MDB debts.

I'm not responsible for going after and persecuting 1MDB whistle-blowers to cover up 1MDB.

I have already paid my political price. It’s not fair for me to legally responsible for any of the above.

I just have to say I'm sorry for being the most gullible PM of Malaysia and trusted the wrong parties who cheated Malaysians of tens of billions of ringgit.

I should not be sitting in prison, even though I benefited immensely from the 1MDB largesse, in cash and in kind.

It's not my fault. Really.

And I am now looking forward to “house arrest” in a luxurious estate of my choice. I intend to help recover the lost funds by producing a TV program like the Kardashians!

Reference:

Facebook, Tony Pua, 25 October 2024

To Cut Petrol Subsidy?

 

Malaysia will have to unwind blanket state support for its most widely used gasoline by this year for the government to meet its own subsidy spending target, said the World Bank. The government is set to save about RM7.9 billion (US$1.8 billion) this year from the subsidy reforms it has already announced. It is still short of its aim to cut subsidies and social assistance programmes by RM11.5 billion in 2024. The Prime Minister has promised to replace broad subsidies with targeted assistance. This is to narrow the 2024 budget deficit to 4.3% of gross domestic product (GDP), from 5% in 2023.

 

Source: https://en.wikipedia.org

A timeline for the RON95 gasoline subsidy cuts has not been specified. Malaysia currently absorbs much of the price of fuel and cooking oil for its population, a move that was estimated to cost RM81 billion last year.

Malaysia is not collecting enough revenue to meet its spending needs, at some point, the government will have to contend with reintroducing the goods and services tax to tackle this, according to World Bank’s leading economist. A combination of progressive taxes, well-targeted subsidies, and adequate cash transfers can collectively benefit low-income groups while improving fiscal space to finance Malaysia’s longer-term spending needs, according to the World Bank.

It is quite easy to remove subsidies but quite painful for the B40 and M40. No matter what is said about the cash transfers, inflation will balloon! That’s a tax on the poor! You got to reduce subsidies in phases over a 3-year period. It is like an addiction, you do it gradually or the impact will be “cold turkey”. (Although Turkey may need it!)

Reference:

Malaysia must cut petrol subsidy to meet budget aim, says World Bank, Bloomberg/FMT, 8 October 2024

 

Happy Deepavali!

 

Does the Top 1pct of the Population Own 50pct of Wealth?

An axiom quoted often is that one percent of the world owns 50 percent of the wealth. It holds enormous policy implications, for both the world and Malaysia. At the most basic level, it means a considerable adjustment in wages. And it needs a major reform that will tax the rich at much higher levels than they have been used to.

 Oxfam, which works with 21 NGOs that have partners in over 90 countries, accepts and promotes this axiom. In a briefing paper titled “Survival of the richest: How we must tax the super-rich now to fight inequality”, it said the richest one percent hold 45.6 percent of global wealth, while the poorest half of the world has just 0.75 percent.  

Source: https://www.wikiimpact.com

 Since 2020, the richest one percent have captured almost two-thirds of all new wealth – nearly twice as much money as the bottom 99 percent of the world’s population. The gap is widening. 

A deeper dive reveals the following: 

· Billionaire fortunes are increasing by US$2.7 billion a day, even as inflation outpaces the wages of at least 1.7 billion workers, more than the population of India.

· Food and energy companies more than doubled their profits in 2022, paying out US$257 billion to wealthy shareholders while over 800 million people went to bed hungry.

· Only four cents in every dollar of tax revenue comes from wealth taxes.

· Half the world’s billionaires live in countries with no inheritance tax on money they give to their children.

· A tax of up to five percent on the world’s multi-millionaires and billionaires could raise US$1.7 trillion a year, enough to lift two billion people out of poverty and fund a global plan to end hunger.

· Eighty-one billionaires hold more wealth than 50 percent of the world combined.

· Ten billionaires own more than 200 million African women combined.

Each of these bulleted points is outrageous. This situation needs to be rectified. Otherwise, a popular revolution on the ground will happen. 

For comparison, labour’s income share in the European Union’s “Big Four” in 2021, namely Germany (61.4 percent), France (59.8 percent), Spain (59.1 percent) and Italy (58 percent) was much higher, an indication of the long way we have to go in terms of wage reform and giving labour a fairer share of GDP. 

The only way to do this as quickly as possible is to progressively keep increasing wages at a rate that the economy can bear. That will also mean the tough decision of cutting off access to cheap foreign labour. And the people who use this cheap labour will cry out loud. 

The other thing that the government needs to do is increase taxes at the top bracket for those earning billions of ringgits. Why does the marginal rate for these people have to remain at 28 or 30 percent? Why can’t those who earn more than RM5 million a year be taxed 40 percent on the margin? And those who earn above RM10 million annually are taxed 45 percent, and so on. 

As Oxfam points out: “Taxes on the richest used to be much higher. In the United States, the top marginal rate of federal income tax was 91 percent from 1951 to 1963; top inheritance tax rates stood at 77 percent until 1975; and the corporate tax rate averaged just above 50 percent during the 1950s and 1960s. 

The problem with all of this is that, no one nation wants to raise taxes, as they view cutting taxes brings in new investment. So, it has been a race to the bottom. Perhaps, it is time to work together to raise taxes, reduce inequalities and provide a decent standard of living for the B40 and M40.

 

Reference:

Comment: When 1pct of population owns 50pct of wealth, P. Gunasegaram, Malaysiakini, 8 October 2024

More REIT Listings?

 

The local stock exchange could see an increase in Real Estate Investment Trust (REIT) listings. This is a promising opportunity for investors seeking stable and lucrative investments. REITs provide diverse portfolios spanning sectors such as retail, office, industrial, and hospitality, effectively reducing risk and insulating against market volatility in any one sector. Analysts predict that more property developers in Malaysia may turn to REIT listings. 

RHB Research noted that this trend is likely to continue, especially as declining interest rates generally benefit REITs, particularly for companies with a substantial pool of investment properties.  Among the developers eyeing REIT listings are IOI Properties Group Bhd (IOIPG) and SP Setia Bhd.

 

Source: https://en.wikipedia.org

 According to RHB Research, IOIPG has a strong portfolio of retail, hospitality, and office assets valued at around RM20 billion, including properties in Singapore, while SP Setia holds retail and office assets worth about RM1 billion. High-quality asset monetisation through REITs is usually seen positively, with shareholders expected to benefit. Sime Darby Property Bhd is also seen as a strong candidate for a REIT listing. 

Sime Darby Property has built a significant cache of retail assets, including KL East Mall, which now yields 6.5 per cent to 7.0 per cent after three to four years of operation, Senada Mall, set to open in the second half of 2025, and Elmina Lakeside Mall. In the logistics sector, Sime Darby Property's Metrohub in Bandar Bukit Raja is gaining momentum. Metrohub 2 is complete, with tenants Comone Express and JD Logistics occupying 25 per cent of the 800,000 square feet space, with room for expansion. 

Meanwhile, Metrohub 1, expected to complete by the fourth quarter of 2024, has already secured 50 per cent occupancy, covering 1.1 million square feet of net lettable area (NLA). By the first half of 2024, Sime Darby Property had accumulated 7.7 million square feet of NLA in investment properties, two million of which are industrial properties. 

RHB Research valued the company's total assets under management at RM2.6 billion (excluding concessions) as of fiscal year 2023. The completion of the Google Data Centre (DC) in 2026 is expected to further enhance Sime Darby Property's asset portfolio by an additional RM1.5 to RM2 billion. The company's property investment, leisure, and hospitality segments currently generate an annualised revenue of approximately RM220 million, RHB Research said. 

It is good news for retail investors as they have a better opportunity to invest with yields above 6% p.a. This is an attractive option compared to fixed deposits or other fixed income structures. Hopefully, market sentiment continues to improve and create opportunities for REITs.

 

Reference:

More REIT listings anticipated in Malaysia, Sharen Kaur, NST, October 14, 2024