Monday, May 03, 2010

GST Cure For Widening Deficit?

It came as no surprise when Professor Danny Quah, based at the London School of Economics claimed that Malaysia's sovereign debt is teethering towards the Greek abyss where our debt to GDP ratio will hit 70% by 2015 and may accelerate further to levels beyond 100% by 2020.

As it is, our debt has ballooned from RM242 billion in 2004 to RM363 billion in 2009, a sharp increase of 49.7%. This is despite the fact that over the same period, due to high oil prices, Petronas contributed RM217 billion to the state coffers.

It is hence important that this blatant abuse and mismanagement of government finances be rectified to ensure a sustainable future for the Malaysian economy and prevent a collapse like that suffered in Portugal, Iceland, Greece and Spain (PIGS).

What is however, completely shocking and unbelievably naïve is for the member of the National Economic Action Council (NEAC) is his prescription that the implementation of a new Goods and Services Tax (GST) “is something we desperately need because the traditional steady sources of revenue are literally drying up”.

Professor Danny Quah also said that “with a narrow tax revenue base, Malaysia has no choice but to implement the GST as a long-term solution, with a view to gradually raising the rate.”

The deterioration of Malaysian public finances is painful, but to prescribe GST as the ultimate cure is like prescribing Panadol to the patient who suffers from cancer.

Professor Danny Quah failed to emphasize the major cause for the current state of public finances today. Corruption has become increasingly rampant with Malaysia slipping down the Transparency International's Corruption Perception Index from 33rd globally in 2003 to a shameful 56th in 2009.

Corruption coupled with blatant wastage and inefficiencies created by rent-seeking and patronage, such as privatising profitable government owned entities at rock-bottom prices to cronies, the granting of licences and concessionaires to parties with vested interest without any form or tender or competition have led to billions siphoned from the Government. Such contracts have continued extensively under Datuk Seri Najib Abdul Razak's regime as

a RM628 million contract was awarded to Naza TTDI to build Malaysia's largest exhibition and convention centre in exchange for a piece of land valued as much as RM1.5 billion,
a 20-year interest free loan of RM320 million extended to a private concession company SYABAS Sdn Bhd,
an opaque 3,000 acres Sg Buloh prime land development project which is expected to be awarded to Malaysian Resources Corporation Bhd (MRCB), via a Government joint venture with the Employees Provident Fund (EPF) and
a RM8 billion intent by the government to purchase 257 armoured personnel carriers from DRB Hicom Bhd for the astronomical amount of RM31 million each

Failure by the government to put in place good governance policies such as open and transparent tenders, curbing corruption, rent-seeking and patronage will cripple our public finances regardless of wheter GST is implemented or not.

To put it simply, if there's a hole in the pocket, and you are short of cash, no matter how much money you beg from the streets to squeeze into the pockets, you'd still lose all the money with the hole only getting bigger.

It isn't rocket science to solve our public finance problems, and it certainly doesn't take an economist from LSE to prescribe panadol to solve our cancer. To solve our public finance crisis, the Government just needs to plug the massive leaks by mending the big hole in the pocket.

The problem with our economy is hence the complete lack of political will by the Najib administration to be completely transparent, be ruthless in fighting corruption and eliminating political patronage and to uphold the principles of open tenders via merit and competition despite Najib's pledges to the contrary under the New Economic Model (NEM).

GST will on the other hand just give additional funds to refill the coffers of the Government and the BN leaders to enrich themselves, at the expense of the rakyat at large.
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