THE eagerly awaited Budget 2024, set to be announced today, is highly anticipated. It is expected to take a comprehensive, multidimensional approach that supports both the industry and consumers without adding to the government’s financial burden.

However, a hasty introduction of policies could exacerbate Malaysia’s high debt and weak economic growth, as highlighted by a World Bank assessment.

In July, Prime Minister Anwar Ibrahim unveiled the New Industrial Master Plan 2030 as a crucial element of the Madani Economy framework. Budget 2024 is expected to fund this plan and steer the country towards new growth. While the targeted action-oriented approach, coupled with support for a progressive wage model (PWM), holds promise, the government’s substantial debt is a concern.

The Finance Ministry’s updates on economic estimates showed that although the federal government debt-to-gross domestic product (GDP) ratio decreased from 63.4% in 2021 to 60.4% in 2022, it remained 8 percentage points higher than pre-pandemic levels. Some stakeholders propose reintroducing the goods and services tax (GST) to boost tax revenue and reduce the fiscal deficit by 50% over a decade, restoring the tax-GDP ratio to 12.8%.

Challenges of funding government spending with GST

While reactivating the GST could alleviate Malaysia’s high government debt, its timing is critical. Reintroducing the GST could harm the economy if done prematurely, posing a dual threat – reducing consumer purchasing power and adversely affecting small and medium enterprises (SMEs).

The GST was initially introduced at a 6% rate in April 2015 and generated RM44 billion in 2017. It was abolished in June 2018 to bolster the purchasing power of lower- and middle-income citizens. Reimposing the GST could substantially raise the cost of goods. While businesses favoured GST for simplifying tax procedures, many encountered issues with receiving government refunds, which increased their costs and led to price hikes.

Given this complex economic situation concerning sustainable government debt and purchasing power, the timing of implementing the PWM and GST is pivotal. Malaysia’s current economic growth is based on stabilising domestic demand since external demand remains low. Therefore, reintroducing the GST could pose significant repercussions given existing supply chain issues and low wages.

Possible solution – timing the policies sequentially

The swift implementation of a PWM followed by a nuanced GST law is a crucial strategy for enhancing domestic demand, tax revenues, and SME growth in Malaysia. However, the lag between the two is of utmost importance.

The successful implementation of PWM would ensure workers receive progressively higher wages, bolstering consumer spending and igniting a series of positive economic effects. As consumers spend more, businesses experience increased sales, leading to higher revenues. In response, these businesses may expand their operations and therefore not only contribute to economic growth, but also generate employment opportunities.

As more people find employment, the cycle of increased consumer spending and business growth will continue, driving further economic expansion. The resulting boost in tax revenues can support public projects and services.

Once a sustained domestic consumption-led growth has been achieved, a well-designed implementation of GST in the following periods would ensure affordability for consumers and lead to higher tax generation.

Further considerations to protect SMEs

Although the PWM would promote consumer spending, it might have a more pronounced impact on SMEs compared with larger corporations. Even when the RM1,500 minimum wage was introduced, some employers claimed they couldn’t meet this requirement. Many businesses legally obligated to pay the new minimum wage since May 2022 have yet to start doing so.

This non-compliance may stem from genuine financial constraints, especially among SMEs. Without adequate financial support for these businesses, which employ 48% of the workforce, they may struggle to afford the increased wages.

Urgent requirement for a new perspective

Any GST reintroduction must be carefully designed to minimise its impact on the underserved community and ensure efficient refund systems for businesses. Malaysians are already grappling with increased housing costs due to the recent rise in the overnight policy rate to 3% by Bank Negara Malaysia, so any plan must account for the ripple effect of this tightening.

The simultaneous implementation of the PWM and the GST carries potential risks. While the PMW aims to enhance the ability to pay, implementing it alongside the GST may counteract its intended benefits and harm SMEs, leading to further economic challenges. – October 13, 2023.

* Deboshree Ghosh is senior lecturer at Taylor’s University’s Faculty of Business and Law.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.