The government had intended to introduce the Fiscal Responsibility Act (FRA) as well as the Medium-Term Revenue Strategy (MTRS) to improve tax collections. But this is now on “pause” because of GE15.
Malaysia has time and again resorted to Petroliam Nasional Bhd (PETRONAS) to rescue the nation. It (Government) is constrained by limited fiscal space to diversify its current base. More developed nations have tax revenues of 15-20% of GDP. Other nations like Denmark, Netherlands or Belgium have tax revenues of 40-45% of GDP. But these are “welfare states”. We are at 11-12%.
The petroleum-related revenue for 2022 surged 80% to RM77.8bil, mainly due to the higher crude oil prices, representing 27.3% of the government’s revenue. For 2023, with the crude oil price estimated at US$90/barrel, the government foresees revenue falling to RM58.9bil or 21.6% of the total revenue, inclusive of RM35bil dividend from PETRONAS. Malaysia needs to move away from being dependent on the national oil corporation. This is unsustainable.
A RM1 tax per litre, assuming RON95 at RM4.80 to RM5 per litre (which is what other South-East Asian nations are pricing) will go a long way to curb wastage, encourage public transport and collect at least RM20bil to RM25bil in indirect taxes. The government can then easily provide about RM8bil to RM10bil for targeted groups that require subsidies via direct cash transfers.
The Budget 2023 alluded to borrowings of almost RM100bil. This is again not sustainable. Between 2021 and 2023, the Government’s borrowings will be close to RM300bil with total debts ballooning to RM1.178 trillion or 64.9% of nominal GDP from 63.0% in 2022. Statutory debt will rise to 62.3% in 2023 from 60.2% in 2022.
As seen in Figure 2, other than direct federal government debts, the government also carries the burden of debts that were previously assumed off-balance sheet. This includes committed guarantees of almost RM200bil, the balance of 1MDB debt of almost RM26bil and liabilities defined under PPP/PFI of RM149.6bil. Taken together, the total government debt in 2022 will increase to RM1.455 trillion, or 85% of nominal GDP. It will rise to RM1.541 trillion next year, or 84.9% of 2023 nominal GDP.
To address our debt problem, it is a simple equation of either boosting our revenue (via higher or new taxes) and cutting down on Operating Expenditure (OE) via leakages. Without new taxes or higher tax rates introduced in this budget, the government is simply kicking the can down the road and delaying the inevitable to a later date and time. Although the budget deficit is expected to be lower at 5.5% in 2023, it is only due to growth in the denominator as the budget deficit for next year remains largely unchanged from this year in absolute terms. Without a proper strategy to increase government revenue and lower OE, the fiscal deficit target of 3.5% by 2025 will be tough to meet as it will require the government to take drastic actions, post-GE15.
The higher debt level also means higher debt service charges for 2023. This is expected to increase to RM46.1bil or 16.9% of revenue, well above the acceptable international standard of 15%. With government debts expected to continue to increase, the government needs to raise revenue stream via new taxes. Higher tax rates – not the Goods and Service Tax (GST), which is seen as a regressive tax and hurts the lower-income group.
What new taxes? There is a range of taxes: from higher tax rates for the top-end (top 10% of taxpayers), windfall tax on energy and banking to forex transaction tax and “exit” tax for remittances. Much more thought needs to be given on new taxes but serious efforts also need to be done on OE. Otherwise, we are perpetually in deficit with inflationary pressures and future generations having to meet the debt obligations of today.
Reference:
Budget 2023 – Much ado about nothing? Pankaj C. Kumar, The Star, 15 October 2022
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