Budget 2024: A Tough Balancing Act?

With few days before Budget 2024, the PM should avoid repeating the same mistake made by former Prime Minister Datuk Seri Najib Razak. The government should not bundle drastic subsidy cuts and tax hikes together in a hasty attempt to lower the country’s fiscal deficits that have prolonged for more than two decades.

The last time this was done under “Najibnomics”, which was implemented through a series of subsidy cuts and the introduction of the goods and services tax (GST), inflation surged to 5.1% and the then ruling Barisan Nasional was rejected by voters. Under Budget 2024, subsidy cuts should be gradual, without pushing up retail prices drastically.

Please refrain from imposing a blanket tax hike on all Top 20% (T20) income earners in the country.

Any effort to raise personal income tax should be focused on the Top 1% or Top 5% ultra-rich group. A T20 taxpayer is defined as anyone earning a minimum monthly income of RM11,000.

The T20 population, which already contributes 85% of the personal income taxes collected in 2022, would also be the first to be affected by subsidy removals. In May, the Deputy Finance Minister reportedly said that the T20 group would no longer enjoy RON95 petrol at RM2.05 per litre, following the implementation of targeted fuel subsidies 2024.

If a sole breadwinner earning RM11,000 in Kuala Lumpur should he or she be subjected to higher taxes and at the same time, no longer qualify for subsidies? What income range would be a better indicator of one’s wealth?

It may be more logical to expect the country’s growing middle class to shoulder more tax responsibilities like in other advanced economies. Malaysia’s low salary levels across various industries would make it difficult to implement. Low salaries are evident even among multinational companies (MNCs) operating in the country.

The low salary dilemma is expected to be remedied with the government’s much-anticipated Progressive Wage Policy and details are expected be announced in the upcoming budget. While the impact of the policy would only be seen in the medium to long-term, it is crucial in the move to raise Malaysians’ purchasing power and their ability to pay higher taxes.

The World Bank and rating agencies have consistently called for a more diversified income base in Malaysia, including the reintroduction of the GST. According to reports, there are slightly more than 1.3 million individual taxpayers out of a population of 33.5 million, representing a mere 4% of the people.

Higher taxes would allow the government to reduce its high dependency on petroleum-related revenue. In 2023, petroleum-related revenue is expected to contribute RM65.2bil or 22.4% of the government’s total revenue (see chart).The fact that a huge chunk of the government’s annual revenue goes towards the payment of debt interest also necessitates higher tax collection. In 2022, the country’s debt service ratio stood at 14% of the national revenue (see chart). This means that for every RM1 government revenue, 14 sen was spent on paying the country’s debt interest – not inclusive of the principal debt amount.

In Asia-Pacific, on average, indirect tax represents 26% of total tax revenue, but in Malaysia, the share is lower at 16% via the sales and service tax (SST). Widening the tax (SST) base is one possibility.

In 2022, the country’s fiscal deficit to GDP was recorded at 5.6%. The government aims to reduce the deficit to a range of 3% to 3.5% by 2025.

Under Budget 2024, the government should ramp up its spending to facilitate greater investments from the private sector, especially domestic investments. The savings from a more prudent expenditure should be channelled to funding important development projects. The recent Mid-Term Review of the 12th Malaysia Plan has raised the expenditure ceiling by RM15bil to RM415bil, to be spent from 2021 to 2025.

Previous governments had spent RM64.3bil in 2021 and RM71.6bil in 2022. This means the government must spend at least RM90bil per year from 2023 to 2025.

Budget 2024 must give importance to states with relatively lower development levels. Increased allocations are needed in building or refurbishing basic infrastructures such as schools and hospitals, as well as in strengthening physical and digital accessibility for the population.

There are several competing forces at work, the PM/FM has to set a clear picture of revenue sources and funding allocations that will best benefit a targeted growth of 4.5-5.0% of GDP.

For 2023, the World Bank estimates for Malaysia is GDP growth of 3.9%. So, the PM/FM has a massive task to generate enthusiasm and positive outcome for 2024.

Reference:

Budget 2024: A tough balancing act for Anwar, Geneshwaran Kana, The Star, 30 September 2023