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