Despite 2 years after the implementation of the Goods and Services Tax, Budget 2018 projects increasing reliance on income taxes

Dato’ Seri Najib Razak proudly announced that the projected budget deficit for 2018 will be 2.8% compared to 3.0% expected for 2017.

However, this target is to be achieved not via more prudent spending but significantly higher government revenue collection.  As previously expressed by the Prime Minister, his administration has been “saved” by the implementation of the Goods & Services Tax (GST).

The GST is expected to contribute RM41.5 billion to the treasury coffers in 2017, and further increase to RM43.8 billion in 2018.  This compares against income from Sales and Services Tax (SST) last collected from Malaysians in 2014 which amounted to RM17.1 billion.

However, despite the massive increase in Government revenues resulting from the GST, there was no reprieve for individual and corporate income tax payers.  In fact, it has become increasingly painful for Malaysian income tax payers.

For individuals, income tax contributions increased by 4.7% from 2015 to 2016.  However, for this year (2017), individual income tax contributions will increase by a massive 9.2% to RM30.1 billion.  For 2018, individual income tax collection for the Government will increase by another 7.1% to RM32.2 billion. This is inspite of the proposed 2% decrease in income tax rates for taxable income up to RM70,000 per annum.

For corporate tax payers, the increase in burden isn’t any less. While corporate taxes dropped by 0.1% from 2015 to 2016, it is expected to increase by 6.6% to RM67.8 billion this year.  Next year, the increase is even more, at a projected 6.9% to RM72.5 billion.

The above increases in individual and corporate income taxes are disproportionately higher than the 4-5% economic growth rates for Malaysia.

The above lends credence to the widespread discontent against the Inland Revenue Board (LHDN) for their heavy-handed tactics in squeezing substantially higher tax contributions from individuals and businesses. Some have even termed LHDN’s tactics as “tax terrorism” by demanding, with hardly any room for negotiation, backdated taxes of up to 10 years.

The above Budget proved that the Najib administration has not seriously implemented policies to impose prudence in spending.  Instead, it is relying almost entirely on increasing taxes to balance its books instead of cutting wastage, eliminating corruption and reducing the cost of government.

As a whole, this is reflected in the significant increase in the Federal Government operating expenditure which is expected to increase by RM14.4 billion 6.5% to RM234.3 billion in 2018.  In contrast, the increase in only by RM9.7 billion or 4.6% in 2017; while in 2016, the operating expenditure actually reduced by 3.1%.

In addition, the operating expenditure as a proportion to total expenditure continued its increase to 83.6%, the highest in Malaysian budget history.

Dato’ Seri Najib Razak’s 2018 budget speech, like the year before, was littered with political sniping and peppered with a litany of election year goodies.  It contained no meaningful reforms in economic policies and institutions to end corruption and wastage.

The 2018 Budget only served to prove the widespread fears that as long as there are no such serious reforms in place, ordinary Malaysians will be forced to bear increasing higher tax contributions – whether it is via the GST, individual or corporate income taxes.

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The single biggest economic challenge which Dato’ Seri Najib Razak must address in the 2018 Budget is rising inflation

We will expect Dato’ Seri Najib Razak to wax lyrical about the higher that expected economic growth as reflected in the recent GDP figures. Bank Negara Malaysia (BNM) said given the strong growth in the first half of 2017 at 5.7%, the economy is expected to expand by more than 4.8% in 2017.

The question must be asked, if Malaysia’s economy is doing so well, why is it that ordinary Malaysians on the streets are feeling so pained?

The answer is obvious.  While the BN leaders sing praises of themselves over their supposed achievements, Malaysia’s inflation rate – which reflects the cost of living in the country, has been hitting record levels unseen since the global financial subprime crisis a decade ago.

Malaysia recorded an inflation of 4.3% year-on-year in September, the highest since March, mainly due to the rise in transportation costs and prices of food and non-alcoholic beverages.

According to the latest the consumer price index (CPI) released by the Statistics Department on Friday, transportation segment increased 15.8% on costlier fuel while the food and non-alcoholic drinks group rose 4.6%.

To put the above figures in context – despite GST’s implementation in April 2015 which resulted in a spike in inflation, the CPI had only increased to 2.1%.  In 2016, the inflation rate continued remained persistent at 2.1%.

Back then, the BN Ministers argued that the rising inflation was only a temporary “one-off”, and assured that the inflation rate will decline after a year or so after the implementation of the GST.  However, the CPI not only remained stubborn, it has accelerated to 4% year to date in 2017 demonstrating how wrong the BN administration have been.

In fact, Malaysia is currently suffering from negative real interest rates.  A survey of the local banks would show that they are only paying up to interests of 3.05% for 1-month fixed deposits.  If one keeps cash in a current or savings account as most Malaysians do, the gap would be even bigger.

This means our hard-earned savings kept in the banks are worth less tomorrow than they are worth today.

Hence not only Malaysians have gotten markedly poorer globally as a result of the massive depreciation of the ringgit over the past 4 years, our wealth is shrinking even in local ringgit terms.

Hence, the single biggest economic threat which must be addressed in the 2018 Budget to be announced on Friday this week is Malaysia’s inflation rate.  If Dato’ Seri Najib Razak decides to gloss over the issue by pulling the wool over the people’s eyes in an election year, the consequences for the people will be dire as Malaysians will be faced with even higher cost of living expenses in an environment of stagnant wages and rising unemployment, especially among youths.

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Najib’s admission that the Government would be dysfunctional if not for GST is a direct admission of Barisan Nasional's dismal failure in financial management

The Prime Minister, Dato’ Seri Najib Razak told the crowd at the TN50 dialogue with women yesterday that without the GST the Government would have collapsed financially, and hence Malaysians should be thankful that the he has implemented the GST.

"I am not kidding you, I am not fooling you. I am the minister of finance, I know if we minus RM42 billion from the country's revenue, you will be in a standstill and the government will be dysfunctional.

Dato’ Seri Najib further added, “You can only spend whatever money you have. You will be in deep trouble if you have to borrow money from 'Ah Long' (loan sharks).”

The Prime Minister could not be more wrong on two counts.

Firstly, why is it that a country like Malaysia which is blessed and rich with income from natural resources suddenly so desperately dependent on GST revenue after 60 years of independence?

Without the GST, Federal Government revenue has increased consistently from RM123.5 billion in 2006 to RM185.4 billion (2011) to RM219.1 billion in 2015.  The above represents a 77.4% increase in revenue in the 10 years before the GST was implement, or an annual compounded growth rate of 6.5% - well above the average annual GDP growth rate.

If during those years, the BN government has consistently boasted of strong economic growth and development – why is Dato’ Seri Najib now crying out loud that the Malaysian government would suddenly collapse without the GST?

The above itself debunked the Prime Minister’s second claim that we “will be in deep trouble if [we] have to borrow money from ‘Ah Long’.

The very reason why the BN government is forced to implement the GST today to collect more taxes is precisely because we have indeed borrowed heavily over the past decade.

Our Federal Government debt has increased from RM306.4 billion in 2008 to RM655.7 billion by the end of 2016.  Hence the government’s debt increase of 114% far outstrips the revenue increase of 77%!

In the language of the Prime Minister, it is precisely because the reckless BN government has borrowed from the Ah Longs that Malaysians are now forced to bear the heavy burden of the GST.
The next question to ask is, why has the BN government borrowed so much and where have all the money gone?

The answer is simple – waste, corruption and kleptocracy in the BN administration as epitomised by the 1MDB scandal which will cost the Malaysian tax-payers at least RM42 billion.  While 1MDB headlines the extent of the graft and abuse of power in the Najib-led government, it is by no means the only significant scandal under the BN administration.  Annual Auditor-General reports over the past decades lay bare the malaise in the entire government machinery with nausea-inducing details of leakages, mismanagement and misappropriation.

This brings the inevitable conclusion that while the GST might rescue the BN administration for the time-being, it merely papers over the symptoms of the cancer afflicting our country.  Until such a time where the brazen culture of waste, corruption and kleptocracy is eradicated from the Malaysian government, no matter how much new taxes revenue the GST (or any other new taxes) generate, it will never be enough.

As the Malay proverb goes, “besar periuk, lagi besar keraknya”.

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Budget 2017 proved that the Government is not only running out of cash, but the situation will only deteriorate further, making 2017 possibly one of the worst years for ordinary Malaysians

Federal Government failed to meet 2016 revenue targets

Last year, Dato’ Seri Najib Razak announced in his budget that the Government expected to collect RM225.7 billion of revenue for 2016. However, the 2016 revenue has now been revised to RM212.6 billion based on the latest estimates.  That represents a very substantial 5.8% or RM13.1 billion shortfall for 2016.

To put things into perspective, and to highlight the severity of situation, more often than not in the past, the Government will collect more than they projected. 

The shortfall has in turn caused lower than projected operating and development expenditure.  The Government now estimates 2016 operating expenditure to drop from RM215.2 billion to RM207.1 billion, while development expenditure will drop from RM50 billion to only RM45 billion.

For example, this is the reason why we are seeing a substantial shortfall in health expenditure, resulting in shortages of reagents for conducting critical blood tests as well as increase in cost of medication for the man on the street.

The ability of the Federal Government to allocate the already limited operating expenditure budget is further constricted by Emoluments and Debt Servicing

In fact, it will only get worse in 2017 as the sins of the past catch up with the Government of the day.

The increasing size of the civil service has ensured that the “Emolument” payments for 2016 has increased by RM3.8 billion to RM73.9 billion despite the RM8 billion decline in operating expenses.  For 2017, the Government has further projected that emoluments will increase further by at least RM3.6 billion.  In the meantime, pension contributions, or “Retirement Charges” will also increase substantially from RM19.0 billion in 2016 to RM21.8 billion in 2017.

In addition, the annual “Debt Service Charges” – the instalments and repayments the Government has to pay for loans taken in the past – has increased significantly.  For 2016, it is estimated at RM26.6 billion or a RM2.36 billion hike from 2015.  For the next year in 2017, the amount would further increase to RM28.9 billion.  This is as a result of the Government’s reckless ramping up of Federal Government debt over the past decade on the back of high oil prices.

The twin increases in emoluments & retirement charges and debt service charges in the context of constricted revenue and operating expenditure would only mean less funds for other crucial expenses.

“Subsidies and social assistance” has already been reduced from RM39.7 billion in 2014 to RM27.3 billion (2015) to an estimated RM24.6 billion (2016).  It will be further reduced to RM22.4 billion in 2017.

There will also be less money for medicine supplies, housing, scholarships and other forms of educational support.

Federal Government is overly optimistic on its 2017 revenue projections

Finally, the only reason the Government was still able to project a “moderate” 3% budget deficit for 2017 was by giving an optimistic projection in its tax revenues.  Despite a significant drop in the estimated Petroleum Income Tax (PITA) from RM11.6 billion in 2015 to RM8.5 billion in 2016, the Government is assuming higher oil prices and demand for 2017 to collect RM10.6 billion.

The Government also assumes an increase in Corporate Income Tax (CITA) despite no corresponding assumption in a higher economic growth rate. CITA actually declined marginally in 2016 to RM63.2 billion from RM63.7 billion in 2015.  However in 2017, the Government has inextricably projected that it would receive RM69.2 billion.

Similarly, despite a declining trend of Goods and Services Tax (GST) collection in the recent quarters, the Government is still projecting an increase in collections of GST from RM38.5 billion in 2016 to RM40 billion in 2017.

All the above goes to prove that the Government is running out of cash very quickly and is struggling to balance its revenue and expenses.  The Government’s excesses of the past – including increasing the civil service hires to reduce graduate unemployment, excessive borrowings to finance inefficiency, corruption and wastages have severely constricted the Government’s ability to allocate expenditure today.  

Hence when the overly optimistic projections in government revenue collection fail to materialise, we can expect 2017 to be a very painful year for ordinary Malaysians. 

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TRX and BM Split Underlines Growing Burden on Tax-Payers

Doesn't Tun Razak Exchange (TRX) and Bandar Malaysia becoming separate entities independent from 1MDB but remaining under the Ministry of Finance merely means the tax-payers will have to buy them out from 1MDB and bailing them out in the process?
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The Second Finance Minister, Datuk Seri Ahmad Husni Hanadzlah announced on Friday that TRX and Bandar Malaysia will be "established as standalone companies, with full autonomy and accountability for their operational and financial performance".
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However he emphasised that "the Ministry of Finance (MoF) will remain a key shareholder in TRX and Bandar Malaysia".

While the statement sounds rather innocuous as we see the disastrous 1MDB suffering from RM42 billion of debt being wound down, what does establishing these 2 properties as "standalone companies" under the MoF actually imply?

‎By the natural logic of the statement, it would mean that the MoF would acquire the shares of the companies owning these assets - KLIFD Sdn Bhd and Bandar Malaysia Sdn Bhd respectively.

On top of that, we are made to understand that the motive behind the action is to relieve 1MDB of its overwhelming debt burden.

If we were to put 2 and 2 together, we can only deduce that the Government will assume the debts arising from these 2 assets, and perhaps even pay 1MDB more based on their revalued and inflated asset prices.

Hence the plan to make TRX and Bandar Malaysia independent entities is in actual fact nothing innocuous at all. Instead it is a blatant attempt to bailout 1MDB with billions of ringgit of tax-payers funds!‎

As at 31 March 2014, the 70 acres Tun Razak Exchange land belonging to KLIFD Sdn Bhd has been revalued to RM2.7 billion. It is uncertain if the land has been pledged as a collateral for any loans taken by its parent companies.

At the same time, the 495 acres Sg Besi military airbase land sold to Bandar Malaysia Sdn Bhd has been revalued to RM4.29 billion while the property has been collateralised for a RM2.4 billion loan . In addition, the Federal Government has also given a guarantee to 1MDB Real Estate Sdn Bhd to raise a RM800 million bond to fund the airbase relocation.

If the Government is to assume all the liabilities of the 2 companies, it would cost us RM3.2 billion, before even taking into consideration other contingent liabilities such as payments to Lembaga Tabung Angkatan Tentera (LTAT) for the RM2.1 billion relocation contract.

However, if the Government is even more generous, the tax-payers might have to fork out a whopping RM7 billion based on the "revalued" asset prices of these properties.

If however the Government decided to acquire TRX and Bandar Malaysia at their revalued asset prices of RM7 billion and still relieve 1MDB of their associated loans of RM3.2 billion, then Malaysians will be forking out a total of RM10.2 billion just for these transactions alone.

Such a move will be a massive travesty because the Federal Government sold these 2 properties to 1MDB for only RM194 million and RM1.69 billion respectively, totalling less than RM1.9 billion.

If we were to pay the inflated RM7 billion or worse, RM10.2 billion to buy back these properties from 1MDB after only selling these land to the company at bargain basement prices less than 4 years ago, it would be nothing short of a daylight robbery.

It would only be fair for MoF to reimburse 1MDB only for the cost which have been incurred for the development of the land, amounting to less than RM200 million to date as well as the cost of the land – RM1.9 billion. Any amounts in excess of the above would mean Malaysians have been cheated into financing and bailing out the misadventures of 1MDB.

We call upon Dato’ Seri Ahmad Husni Hanadzlah to explain transparently how the Government intends to make TRX and Bandar Malaysia separate independent entities owned by the MoF.

Tony Pua

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An Easy Way Out - PM Shifts Blame of GST-Hiked Prices on Traders

Dato’ Seri Najib Razak should stop being a hypocrite blaming petty traders for unscrupulously raising prices when his administration backed the single biggest profiteering exercise by the mobile telecommunication companies.

Bernama reported yesterday that Dato’ Seri Najib Razak blamed “the action of some traders who exploited the goods and services tax (GST) has burdened the people when the tax system was implemented last April 1”.

He said the traders should have reduced prices after the sales and services tax (SST) was abolished but they did not do so and instead took the opportunity to raise prices by 6% using GST as an excuse. He said,

"The GST issue is caused by traders, these traders are evil, they are not responsible, not the government, we have other policies. When traders exploit the situation, the people blame the government and prime minister."

"We have abolished SST of 10%, 5%, some people do not know about SST before, the problem (abolition) is, it should have reduced prices but another 6% is added, this is the cause."

"If want to be angry, get angry with the traders, they must be blamed because they do not have compassion to think about the people's interest."

The Prime Minister is being a complete hypocrite by shifting the entire blame of the substantial price hikes after the implementation of the GST on the traders, and traders only.

Pakatan Rakyat has repeatedly warned prior to the implementation of the GST that the BN administration was living in cuckoo-land to actually believe that the prices will fall post-GST. Then, the Finance Ministers and their deputies continued to dismiss the simple established economic fact that “price are sticky downwards”. Any Economics student would have been able to educate these Ministers on the simple dictum.

However, the Najib administration has believed that they could defy gravity and chose to proceed with the implementation of the GST. Dato’ Seri Najib Razak even had the audacity to claim in is 2015 Budget Speech that

"Of the 944 goods and services in the basket of goods of the CPI, the prices of 532 items or 56% are expected to reduce up to 4.1%... Meanwhile, about 354 goods and services may experience some price increase but less than 5.8%."

It is hence no surprise that the Prime Minister, who is also the Finance Minister, looks like a complete fool today.

What is even more galling is the sheer hypocrisy of the attempt to shift the blame on the petty traders when it is his administration which is endorsing the single biggest profiteering exercise by the multi-billion ringgit telecommunications industry.

On Tuesday last week, the Communications and Multimedia Minister, Datuk Seri Ahmad Shabery Cheek repeated his defence in Parliament for these companies to raise tariffs by 6% with the switch from the SST to GST.

Prepaid mobile users no longer receive RM10 of airtime for each RM10 purchase despite a 6% SST being imposed. Instead today, they will enjoy only RM9.43 of call services for every RM10 paid after the switch to the 6% GST.

The Minister isn’t only supporting a industry-wide profiteering exercise, he is endorsing their anti-competitive behaviour as these companies colluded to implement a uniform and concurrent 6% price hike.

Hence the Najib government has betrayed the rakyat’s interest in favour of even more profit for the already highly profitable telecommunication companies. Last year, despite absorbing the 6% service tax, Maxis Communications, Digi Telecommunications and Celcom Axiata made pre-tax profits of RM2.44 billion, RM2.65 billion and RM3.1 billion respectively in 2014.

In total, they collected RM12.8 billion in prepaid mobile services revenue for the year. Why is the BN Government helping these highly profitable companies make an additional estimated RM770 million in profits? These numbers doesn’t even include the multi-million ringgit revenue and profits made by other mobile virtual network operators (MVNO) in the country like U-Mobile, Tune Talk and XOX.

While the Ministry of Domestic Trade attempts to punish the restaurants raising the prices of roti canai by 30 sen, the Najib Government embraces the RM770 million windfall profits for the mobile telcos. There can be no bigger unscrupulous profiteering exercise in the country today as a result of the GST implementation and Dato’ Seri Najib Razak chooses to be a blatant hypocrite to fully endorse the burden to be placed on the man-on-the-street.



Tony Pua

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