Budget 2020 should focus on tax cuts, aid for the poor
Advertisement
CUTS in income and consumption taxes should be part of the government’s Budget 2020 if it wants to spur the local economy and halt a slowdown, economists said.
Such measures to be among those Pakatan Harapan could unveil in an expansionary budget for 2020 mooted by Finance Minister Lim Guan Eng recently, they said.
Budget 2020 will be tabled on October 11.
An expansionary budget means expanding the supply of money to increase economic activity as it will boost spending by consumers and businesses.
Economists said placing money in the public’s hands through tax cuts to individuals and businesses, along with more cost-of-living aid to low income families, will help Malaysia in a slowing global economy because of the US-China trade war and Brexit.
Otherwise, Malaysia’s export-heavy economy is likely to be hard hit, they said.
Dr Ali Salman, however, cautioned the government against loosening too much of its purse strings and that it should instead focus on delivering a balanced budget.
This is because inefficient government spending leads to an increase in the national deficit, where spending exceeds revenue, he said.
The deficit now is about RM40 billion or 3.3% of gross domestic product (GDP).
An expansionary budget, however, need not lead to runaway spending, said Lee Heng Guie of the Socio-Economic Research Centre (SERC).
“An expansionary budget does not mean that the government will compromise on its fiscal consolidation path. Rather, it will adopt targeted budget policies to sustain domestic investment and demand.”
Dr Yeah Kim Leng, meanwhile, said the trick is for Putrajaya to spend enough to maintain stable growth, full employment and low inflation, while ensuring that the deficit doesn’t rise too much.
“Sustained growth will make it easier for the government to increase revenue and trim its debts,” said Yeah, a senior fellow at the Jeffrey Cheah Institute on Southeast Asia (JCI).
“The challenge is to find the appropriate balance between the spending increase to maintain growth and the rise in deficit and indebtedness that threatens the government’s creditworthiness.”
Loosening the belt
The rationale for an expansionary budget is due to the increased risk of a slowing global economy which will impact on the demand for Malaysian exports and services.
World economic growth will tank if talks fail to resolve the US-China trade war and if the United Kingdom’s exit from the European Union is messy, said Yeah.
“A loosening of the budget will help to counter the ‘paradox of thrift’ when more spending by both the public and private sector is needed to arrest a downward spiral of the economy that will lead to job losses, firm closures, business failures and aborted investments.”
The government’s signal that it is prepared to boost spending despite being limited by the high debts will help shore up consumer and investor confidence, he added.
“The planned increase in public spending will help to cushion the fall in domestic demand. It will alleviate the economic hardships faced by households and businesses due to the economic slowdown or downturn.”
Lee said there could be more goodies in Budget 2020 given that the 2019 was about tightening belts.
“The rakyat and businesses had made sacrifices in Budget 2019. I expect Budget 2020 will be less painful and may roll out some goodies, such as tax reliefs and continued cost-of-living aid (Bantuan Sara Hidup) for the vulnerable group and low- and middle-income households.”
Who benefits?
Lee said the main areas and sectors which the Budget 2020 policies could target are services, agriculture, construction and small and medium businesses.
Specifically the retail and property sub-sectors should get a big focus because they contribute about 55% of GDP, said Yeah.
The most-helpful measures are:
* Cuts in direct and indirect taxes, lower licensing fees, Employee Provident Fund contributions that will boost spending by households and firms.
* Tax breaks to promote entrepreneurship, industrial upgrading, technology adoption and upskilling, healthcare, education and research will have a longer-lasting impact than one-off subsidies and aid.
* Addressing the foreign-worker shortage could re-energise weak investment by private firms.
* Extending the reinvestment allowance for SMEs to encourage new expansion and continued investment.
* Lowering real property gains tax and loosening ownership rules could reduce the numbers of unsold property and help the sector.
Bigger role for private sector
In crafting the budget, Ali of IDEAS said the government should take a step back from business and create space for the private sector to invest.
Public investment in infrastructure projects should be sparing and highly transparent.
“More often, the government selection of projects is influenced by political considerations and as we have seen in the recent past, by dubious motivations,” said Ali.
“It can lead to mal-investment as we witnessed in the case of the auto industry and steel industry in the 1980s, and infrastructure projects in recent past.”
There is also a worry that tax breaks will lead to less revenue for the government, which is already burdened by paying off the high debts inherited from the previous administration.
But Lee said tax cuts also help the economy to grow by getting consumers to spend and business to expand, which, in turn, makes profits and increases tax revenue. – August 5, 2019.