By Jason Loh
As it is, Pemerkasa Plus represents only RM5 billion in direct fiscal injection whilst the rest, i.e., RM35 billion are loan moratoriums, loans, waivers, tax exemptions, utilities discounts, etc. It has come to a point where the government is stressing the
challenging fiscal circumstances.
It’s understandable why this is so.
High debt levels make the government of the day vulnerable to political attacks. The previous government made the national debt into a hot issue.
To make the debt and deficit “more manageable”, cutting taxes or a tax revolution should be next on the government’s fiscal agenda.
But firstly, the fiscal constraints can be readily “circumvented” as it’s self-imposed and the government needs only the political will to do so. Raising the debt ceiling to 65 percent doesn’t necessarily means the government will use up the limit. It’d allow some
breathing space so that, if need be, government borrowings can cross the current 60 percent threshold – to perhaps 62 percent at most – to see through the impact of the deficit which is expected to be higher than 6.1 percent anyway.
“Paying down” the debt and reducing the debt ceiling back to 60 percent can take place later as part of the “fiscal consolidation”.
The government can save its fiscal firepower for the next round, e.g., a Pemerkasa Plus 2.0. Or perhaps this can coincide with the lifting of the Emergency supposedly due by August.
In an EMIR Research article entitled, “Alternative avenues to fund the deficit” (Nov 15, 2020), it was stated that “[t]he level of national debt is not necessarily the chief indicator of the government’s ability to repay.
It was also proposed that the government could tap into an overdraft with Bank Negara. This requires amending Section 71 of the Bank Negara Act (2009) to shift from provision of temporary financing to a permanent overdraft facility – mimicking the UK’s Ways and Means (W&M) facility in relation to the Treasury’s account with the Bank of England – and limited to a specified level.
And it was also suggested that the government leverage on its (indirect) ownership of government-linked banks (Maybank, CIMB, and RHB) by borrowing directly at favourable rates, instead of going through the bond market. Another way, not mentioned in the article, for the government to by-pass the debt ceiling is perhaps to utilise our Special Drawing Rights (SDRs) kept with Bank
Negara under the International Monetary Fund (IMF) allocation. SDRs are actually a hangover of the fixed-currency arrangement from the Bretton Woods bygone era to serve as supplementary international reserve asset of a member country.
In addition, we could also borrow additional SDRs from other member countries but via special arrangement(s) involving bond issuance (USD-denominated). Although, it’s preferable to borrow in our currency (since we are our own sovereign issuer with
near zero-risk of default), due to our traditional current account (trade export) surplus, we can more than afford to tap into the foreign exchange currency markets.
The focus of the spending under the SDRs would be specifically geared towards the vaccine rollout to achieve herd immunity and the bolstering of our healthcare services in the fight against Covid-19.
Now on to the tax cuts agenda as part of fiscal policy’s “shifting gear” (as proposed in an EMIR Research article, “Look to digitalisation as new source of revenue”, June 2, 2020).
Fiscal policy can generally be divided into spending and tax cuts. All the while, the focus has been on the former. Now is the time to bring in the latter – by initiating a radical scheme for both corporate and income tax across the board. The timeline could be for two years beginning with fiscal year of 2021-2022 – with a possibility of renewal for one more
This will go beyond Budget 2021’s very modest tax cuts of e.g., by one percent for chargeable income band of RM50,001 to RM70,000 – from 14 percent to 13 percent for the year of assessment 2021.
It doesn’t mean that both debt and deficit levels will not rise. But that there’ll be less stress or pressure – so that levels need not rise higher than if no tax cuts were in place.
Ringgit for ringgit, if the tax cuts amount to RM50 billion per year, for example, then borrowings could be correspondingly less even if this year is higher than the previous.
Specifically, corporate income tax should be reduced from 24 percent to between 18 percent- 20 percent across the board.
The tourism sector should be zero taxed for two years. And the sales and service tax (SST) threshold for tourism operators should be increased from RM500,000 to
RM1.5 million, as recommended by the Malaysia Budget & Business Hotel Association (MyBHA). Income tax should be reduced by 50 percent across the board – which is out of the progressive schedule of 0 percent to 30 percent – except for those earning RM300,001 and above, for example.
Tax cuts would also take into consideration the other impact of Covid-19, namely at the micro-economic level – pay cuts.
Whilst headline inflation is relatively stable (together with underlying inflation) – occasionally “hemmed in” by either deflationary episodes or one-off inflationary spikes which are cost-push in nature (e.g., spike in commodities prices, supply-chain
bottlenecks), the tax cuts would automatically readjust the income brackets of taxpayers in what’s a form of reverse “fiscal drag”.
Tax experts have been calling the government to give tax cuts to the M40 (see “Budget 2021: Tax reduction for M40 timely, yet more could be done”, The Edge, Nov 16, 2020).
At the same time, the government should consider introducing capital gains tax (CGT) – for dividends amounting to RM1 million and above, for example.
The World Economic Forum (WEF)’s “Building Back Broader: Policy Pathways for an Economic Transformation” (June 2021) have recommended shifting the tax burden to the top earners as part of the broader taxation reforms to compensate for what is
a K-recovery, i.e., where recovery has only benefitted certain segments in the economy.
Overall, a tax revolution would not only put more disposable cash in the M40 enabling them to spend more. It’ll also reduce the need to rely on i-Sinar withdrawals from the Employee Provident Fund (EPF). Tax cuts would also ease the cash flow pressure of companies, particularly the small-and-medium sized enterprises (SMEs).
The government’s “main source” of revenue – under the “tax revolution” era – would come from the SST and digital service tax (DST). Towards this end, the government could look for ways to deepen and expand the SST and DST, respectively.
In respect of SST, this would primarily be configurated towards addressing transfer pricing or base erosion, i.e., a form of aggressive tax avoidance by companies (both local and foreign) as well as other forms of tax leakages.
In terms of DST, it could be expanded to capture business to business (B2B) transactions – applying along the entire supply chain (up-, mid- and down-streams) where digital transactions occur – whether domestically or externally.
In addition, the nature of digital services provided should also be redefined and reconceptualised to encompass hardware services, e.g., in Internet of Things (IoT) powered by wireless technology (such as low-powered wide area network/LPWAN) as between vendor (business) and backroom office operations (business), i.e., B2B. This would definitely entail reforming and amending the Service Tax Act (2018).
Government forgoing tax revenue isn’t a problem – as this could be “recouped” later. Taxes can be understood as regulating the dynamics of supply and demand in the economy. When the economy reaches a point of being at risk of “overheating”, the
government can always reintroduce increments a) by a bit more; b) back to the current levels; or c) approximating current levels.