Monday, October 24, 2016

Received 270 billion GST, budget cut become concern

(收270亿却削减预算案消费税去向受关注 )
夏伟文 & 陈子莹 (23 May 2016)

Imagine there is a father who always gives allowance money to his son. Due to his son profuse spending, the son asked for more money from his father. Do you think it is right for the son to ask for more money? Yes, only if the allowance is too little for survival. What make no sense or cause anger is not the demand for extra allowance but the profuse spending.

Applying the story to Goods and Services Tax (GST) issue, the “father” is the citizen. The “son” is the government while the “allowance” is tax. Government has it logic to claim that current base of tax paying citizen is too small. In February 2014, Prime Minister Najib Razak announced that only one out of ten Malaysians pay their taxes. This portion is considered “too little for survival”, especially to rectify decades of budget deficit.

However, what anger the Malaysians is the “profuse spending” of the government. Rampant report of corruption (which is a leakage of fund) and inefficiency in public sector added to call for to stop the wastage first before implement more taxes. Malaysians also worry and sceptical on whether the extra revenue from GST will be wisely used or not.  

 Let’s continue with the father-son-allowance story. After the son get the extra allowance (GST) from the father, the son still not satisfied. Citing that scholarship (oil revenue) has decrease, the son announced reduce caring effort (budget cut) to the father. Will this be acceptable?

In between its implementation on 1st April 2015 to 31st December 2015, over RM27 billions of GST revenue was collected. Surprisingly, this extra revenue is seen as not enough to fight drastic drop of oil revenue due to global oil price slump. In January 2016 during the recalibration of Budget 2016, Prime Minister Najib Razak announced that Malaysia’s oil revenue fell closed to RM14 billion. Simple maths will give you a net RM13 billions from GST extra revenue minus loss of oil revenue. This make extra budget cut not acceptable and sceptical. Where are the revenues from GST?

Brief Recap
From a high of over USD 100 per barrel, crude oil dropped to a low of USD 26 per barrel before rebound to around USD 40 per barrel after Saudi Arabia and Russia co-operate for a supply restriction. Subsequently, government of oil exporting countries include Malaysia announced painful budget cut. Reason given is drastic drop of oil revenue.

In wake of high federal government debt and reduced revenue from Petronas oil loyalty/dividends, Malaysian government adjusted its fiscal policy. Good and Services Tax (GST) was introduced a year ago. Despite some havoc in its initial implementation, GST brought in higher than expected revenue to the government. It also successfully increase tax based (percentage of people paying tax) in Malaysia. Nonetheless, there are some drawbacks. Its implementation is messy and costly. GST burden the low and middle income consumer groups. People still doubt that government will use the extra GST revenue wisely.

Despite many viewed GST as “bad”, it is still a needed long-term fiscal adjustment to increase revenue to eased huge budget deficits and debts. Thus, the “bad” should be restricted to the two things mentioned, namely (i) more tax revenue from GST may encourage more wastage from inefficiency and corruption, and (ii) the extra GST revenue may not be wisely used.

In Malaysia context, some called this twin fiscal adjustments (GST and budget cut) a “needed daring” move in current unfriendly global economic scenario but some criticized it as “wrong desperate” choice. Some think it is a “no choice” for the government. Nonetheless, it is not “my choice” for most consumers. While GST is a “short term pain, long term gain” (if its revenues are utilized wisely), budget cut, especially in education and healthcare sector is reversed – a short term gain but long term pain.

Education and National Productivity
Academician or administrator in Malaysia education sector may have realized the extent of inefficient in our education system. Relatively low world universities ranking and bad Program for International Assessment (PISA) results merely a confirmation of our deteriorating education standard. All these are after decades of efforts, plenty of resources (from budget allocations and private investment) and overwhelming regulations/quality assurance (from Malaysia Qualification Agency, MQA) to boost our education standard.

What will happen if all those mentioned are suddenly reduced due to budget cut with no appropriate fundamental reform? As compare to Budget 2015, Higher Education Ministry suffered budget reduced by RM2.4 billion to RM13.378 billion. Public universities’ funding is to be reduced by RM1.442 billion. Universiti Malaya believed to has the most severe cut of 27.30% while Universiti Utara Malaysia is 19.31%, Universiti Sains Malaysia is 17.14% and Universiti Teknologi Malaysia is 16.53%.

As results from the allocation cut, various public universities in Malaysia have stopped their subscription to journal databases. Both public and private education institutions are also getting less research grants from the government. These greatly hamper research capability for academicians and deprive students of necessary education materials (subscribed online journals and books) and various tools for scientific research.

Less optimistic on current economic scenario plus increase cost due to GST have discouraged business sectors to give funding or sponsorship to private education institutions. Fierce competition in private education sector has driven down profit margin and students’ intake. This may (or already) cause rounds of cost cutting measures from less sponsorship for conference and scholarship to even stop supplying toilet papers!

The government and relevant stakeholder should understand that research and teaching are important source for productivity growth. Productivity is important source for economic growth and sustainability. Economic growths that based on increase in production inputs are not long-lasting. Increase in productivity (technology progress) through education, research and innovation is long-lasting. Asian Miracle during the 1990s is a good lesson to learn.

Asian Miracle Lesson – Perspiration vs. Inspiration
South East Asian and South Korea continuous very high economics growth for years had been dubbed as “Asian Miracle”. However, Paul Krugman (Economic Nobel Prize) revealed that those “miracle” were actually due to rapid increase in population growth. He cautious us that the miracle will not last because total factor productivity (TFP) for those countries has been stagnant or even decline slightly.

The moral of the Krugman story is Asian countries use “perspiration” (hard work) to growth while developed Western countries use “inspiration” (innovation/technology progress/productivity) to growth. Perspiration is not lasting and less impactful. Inspiration needs consistent investments in education, research and development especially in science and technology areas. Not only investment in term of money is important, great political will is also needed in providing resources and fostering the spirit of innovation.

A sudden cut in budget on education sector will deprive needed funding. It also gives bad impression that education is not important in national agenda. Once our momentum towards improve productivity through education, science and technology improvement is stopped, it is hard to kick it back to high speed level – it’s a Newton’s scientific law of moment. Hence, should the government risk of long term pain for short term gain?

Healthcare – Public Amenity vs. Private Initiatives
Healthcare is one of twelve “National Key Economic Areas” (NKEA) in Economic Transformation Plan (ETP). Forty projects are announced and private investments are encouraged to participate and collaborate with public sector. All these plans are announced in September 2010 when oil price was strong while existing debt and continuous budget deficit are still not a big issue.

In January 2016, budget for Health Ministry is expected to be reduced by 10% or between RM250 million to RM300 million. Health Minister is optimistic that budget cut will be counter with increase in efficiency in health sector at various levels. Nonetheless, budget cut in healthcare trigger many alarming questions. For example, will budget cut in healthcare jeopardize or at least delay the ETP progress? Will the citizens, especially those who are depending on public amenity (like public hospital) suffer due to lesser allocation to public healthcare? Can the private sector fill the gaps left void by public amenities? How about the different of cost for healthcare services between public and private providers? All these questions need detail data and information to answers. Ineffective, costly and secretive nature of information regarding public sector hamper debate and discussion to find precise effect and alleviation methods to safeguard public welfare after budget cut.

Nonetheless, one aspect needs serious attention – low expenses on insurance means that dependency on public healthcare or “god blessing for good health” are still crucial. In the United States, the Affordable Care Act (more famously known as “Obama Care”) defines affordable health insurance as cost less than 8% of your annual modified adjusted gross income after subsidies. If their citizen can’t find a plan that will cost less than 8% of their family’s income, they won’t be required to have insurance starting in 2014. However, most Americans shopping in the private market will be able to find an affordable insurance option.

How about Malaysia? Affordable insurance options are widely available. Unfortunately, willingness to spend on insurance is relatively too low as shown in Table 1. Despite increased 1.5 percentage points from 1990 to 2014, Malaysia most insurance expenditure as percentage of Gross National Income (GNI) in 2014 is only 4.4%, which is about half of the standard required by Obama for United States. While there are effort and progress to expand private insurance sector in Malaysia, it take time and changes of Malaysians’ mind-set towards acceptance of insurance as an important element in their life and financial planning. Before we reach United States or developed countries level, budget cut in healthcare most likely will give significant negative impact to its citizens.

Table 1: Insurance Expenditure as percentage of Gross National Income (GNI)
Premium (% of GNI)
Life (% of GNI)
General (% of GNI)


Reform in budgeting strategies has been long overdue. Implementation of GST is a short term pain but promise a healthier fiscal strength to the country. Yet, its implementation is disappointing. Its benefits could be dwarfed by big amount of seemingly unstoppable wastage in government spending. In contrast, government’s response to reduced revenue from global oil price slump by cutting budget is a short term gain but long term pain. This is especially cut in allocation in two critical sectors, namely education and healthcare.

[Chinese version published at 南洋商报经济周刊 Nanyang Press – Business News, page A9 on 18th January 2016. Available online at收270亿却削减预算案br-消费税去向受关注. This English version may be slightly different from the Chinese online/printed newspaper version]

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