Tough choices: Malaysia faces tightrope act in upcoming budget

The government’s commitment to fiscal discipline will be tested by Malaysians’ grouses over rising costs of living.

Malaysia Sabah
The Malaysian government is scheduled to present its budget for 2020, which economists expect to provide a slight boost to the economy [File: Bazuki Muhammad/Reuters]

Malaysia‘s cuisine is best known for its spicy, full-flavoured curries and rice dishes. So Annis Iwan’s decision to build a business selling local cheeses might have seemed brave, or even foolhardy, three years ago. But as Malaysians develop a taste for dairy, her homegrown artisanal brand, Milky Whey Cheese, has matured.

Starting with small batches of several kilogrammes a week, Annis now produces about 400kg (882 pounds) a month. And yet, her profits are still not enough to meet the minimum threshold to become a tax-paying business in Malaysia.

“I would love to be making enough money to be within that tax bracket,” Annis tells Al Jazeera in the run-up to Malaysia’s 2020 budget announcement. “But that hasn’t happened yet.”

One of the toughest economic challenges the government of Prime Minister Mahathir Mohamad faces is how to increase the number of people and businesses who pay taxes, the so-called tax base, without hurting the prospects of small enterprises, like Annis’ cheese business. The government needs to boost its revenues to keep a widening budget deficit under control.

According to the government’s SME Corp, an agency that promotes small and medium-sized businesses, such enterprises make up about 90 percent of all Malaysian firms.

In a bid to attract more investment, Malaysia’s government announced shortly after winning last year’s historic election – which saw the National Front coalition removed from power for the first time since independence in 1957 – that it would lower corporate tax rates for small and medium enterprises (SMEs).

Malaysia’s standard corporate tax rate is 24 percent, one percent higher than the Asian average, according to consultants KPMG.

But since last year’s budget, SMEs have been paying 17 percent on profits above 500,000 Malaysian ringgit ($119,445), down one percentage point from the previous year.

The amount of tax revenue the government has sacrificed for this measure is unclear.

“Given the absence of publicly available data on the number of companies that qualify for the concessionary rate, it is difficult to compute the exact cost to the government,” said Amarjeet Singh, EY Asean and Malaysia Tax Leader, in response to Al Jazeera’s questions.

However, he estimates the one percent reduction in the SME tax rate may have cost the government about 1.55 billion ringgit ($370m).

“Given the importance of SMEs to the Malaysian economy, we believe that it is important for the government to continue to support [them],” Singh said.

A broader base

This means the Malaysian government, which has made a commitment to narrow its growing budget deficit, has to look for other ways to fill its pockets, especially as Malaysians are asking it to spend more to help them cope with the rising cost of living and the slowing global economy.

The government will announce its proposed budget for 2020 on 0800 GMT on Friday. 

“That balancing act will be very important. The government needs to be hard-nosed about its priorities and get a grip on the quality of spending,” said Vishnu Varathan, Head of Economics and Strategy at Mizuho bank.

“There’s a conflict between trying to rein in the budget deficit but also to provide a counter-cyclical boost for the economy,” he told Al Jazeera.

Economists say that one way the government can achieve this is to broaden the tax base. In 2018, the newly-elected Pakatan Harapan (Coalition of Hope) introduced a soda tax on carbonated drinks and a tax on digital-streaming services that will be effective from January 2020 onwards.

But a new consumption tax introduced in September 2018, the Sales and Services Tax, is expected to generate less tax revenue than the highly unpopular Goods and Services Tax it replaced.

“A hard relook at the SST is needed – how can the application of that be broadened?” asked Varathan.

Another measure might be to make personal income tax increasingly progressive by raising tax rates for the wealthy, he said.

Meanwhile, any cuts to the corporate tax rate could provide an economic boost, especially as Malaysia tries to draw more foreign investment into the region. The country currently has one of the highest tax rates in the region, while neighbouring Indonesia is preparing to lower theirs.

But given the government’s fiscal deficit target of three percent of gross domestic product (GDP), cutting off this source of income may prove too tough to implement. In fact, economists widely predict that the fiscal deficit may reach 3.2 percent of GDP in 2020 instead.

Standard Chartered, which also predicts the deficit will climb to 3.2 percent, said that it expects the government to focus on reducing expenditures, such as tax incentives, and improving revenue collection, given that the government has said that there are no new tax measures in the 2020 budget.

Lee Heng Guie, executive director of the Socio-economic Research Centre in Kuala Lumpur also believes the government will fall 0.2 percentage points short of its initial deficit target.

“Whether the budget will be bold enough to give corporate income tax a break depends on whether the government can make room for that, as it still wants to keep to the fiscal deficit target,” Lee told Al Jazeera.

Meanwhile, ordinary Malaysians are hoping for budget handouts, as they suffer the squeeze of rising consumer prices and weak wage growth.

A report last year by the Khazanah Research Institute, an arm of Malaysia’s sovereign wealth fund, said that households earning less than 5,000 Malaysian ringgit ($1,194) a month are being forced to buy less food because of rising prices.

Debt reduction or economic boost?

Suraya Zainudin, a 31-year-old freelance writer and blogger, acknowledged that last year’s budget has had minimal effect on her.

“But that’s not necessarily a bad thing. I understood that one of the government’s focus is debt reduction and welfare for [bottom 40 percent of income earners], so I wasn’t expecting much for myself anyway,” she told Al Jazeera.

Malaysian people
Malaysian households earning less than 5,000 ringgit ($1,194) were found to be spending less on food because of rising prices [Samantha Ho/Al Jazeera]

This time around, however, she hopes that gig economy workers like herself and countless others can be given some support.

“Perhaps insurance, or tax benefit, or other types of support can be given,” Suraya said.

For the government to achieve this, economists say it may just have to be smarter with their spending.

So far, lowering ministerial wages is a step in the right direction when it comes to rationalising expenditure, showing that the government is leading by example, Varathan said.

“These can be fine-tuned further. There will be a necessary amount to spend in order to draw further investment, such as having ministers travel to foreign countries or hosting dignitaries.”

“But we must look closely at this to prevent duplication. It’s easier said than done.”

Source: Al Jazeera