GST Could Support Economy, But Not Before In-Depth Impact Study

Ahead of Budget 2023 to be tabled in Parliament on 7 October 2022, the Institute for Democracy and Economic Affairs (IDEAS) has expressed support for the possible reintroduction of the GST in the near future, arguing that it effectively expands the government’s revenue sources. However, the institute has called for an in-depth study to be executed beforehand to identify the appropriate GST rate and how this policy would impact vulnerable households specifically.     

This comes in view of the possible reintroduction of GST which has been signalled by the government amidst global economic uncertainty. The International Monetary Fund has cut its 2022 global GDP growth projection from 3.6% to 3.2%. For 2023, growth is estimated to be at 2.9%. As a small, open economy Malaysia needs to brace itself for the impact of the global recession, as most of the major economies have introduced aggressive monetary tightening policies to keep inflation at bay.

As IDEAS CEO, Dr Tricia Yeoh, points out, “The collection of GST would enable the government to broaden its sources of revenue in the immediate term, amidst the widening budget deficit and the upcoming global recession. There is a consensus that there is room for improvement for the domestic tax base to be widened in Malaysia as only about 55% of the government’s revenue came from direct taxes on average from 2011 to 2020. Comparing the collection between the GST and the SST, in 2017 the GST represented about 23% of the government’s revenue, while the SST only amounted to up to 14% of total government revenue.”

Dr Yeoh emphasised that if a GST rate is introduced at a high initial rate, this may dampen demand further in a recession economy next year, which may have prolonged negative impacts on the growth of the domestic economy. On the other hand, if the rate introduced is too low, it may not have a significant impact in adding onto the Government’s existing revenue.

Director of Research and Director of the Economics and Business Unit, Dr Juita Mohamad, further emphasised that, “In preparation for the possible introduction of the GST, a well planned social protection system needs to be rolled out simultaneously. The in-depth study we propose should also include the impact the possible introduction of GST would have on vulnerable households, so that the existing social protection plan, such as cash transfer programmes, pension schemes and active labour market policies among others can be strengthened and targeted in the immediate term.”

A 2020 study by Bank Negara Malaysia highlighted that the pandemic has shed light on fundamental structural issues related to the existing social protection framework in Malaysia. These issues include fragmented and overlapping programmes, gaps in general coverage, fiscal challenges as well as inadequacy of programmes in addressing socio-economic vulnerabilities.

By addressing these policy gaps swiftly, it would enable the government to protect its population by using its revenue sources efficiently, especially in the times of crises which we have gone through many times before and expect to encounter in the years to come. 

Dr Yeoh concluded, “Apart from expanding the fiscal base for long-term sustainability, the government must also demonstrate its commitments to greater fiscal responsibility and adherence to stringent governance controls through the enactment of the Fiscal Responsibility Act and the Government Procurement Act. With these laws in place, as well as assurances of institutional independence, such measures will ensure proper fiscal discipline, which is what Malaysia needs today.”

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