On the other, she has a RM1.5 trillion national debt that must be paid off quickly. The more Malaysia has to repay, interest included, the less it can spend on fulfilling the rakyat’s specific needs.
But here’s the problem: Malaysia just doesn’t earn enough money to meet the rakyat’s goals.
What that means is that the government must raise more funds, and inevitably that is done through taxation.
Cashing in
Of course, taxation is not the only way the government can raise revenue. It can also rely on non-tax revenue.
In Malaysia, the government can also look to returns on investment. For instance, oil dividends from Petronas contribute significantly to government revenue. But the quantum of returns is not always guaranteed.
Furthermore, oil is a volatile commodity: prices fluctuate, meaning how much the government can expect in dividend payouts is also uncertain. It is also in decline due to depletion and a big push towards greener energy.
Taxes, on the other hand, are a more sustainable funding source for the country’s needs.
And that’s exactly what Malaysia’s new taxes – the Low Value Goods Tax (LVGT), High Value Goods Tax (HVGT), Capital Gains Tax (CGT), and a 2% Sales and Services Tax (SST) hike – provide.
Making ends meet
The government projects that the SST increase from 6% to 8%, which took effect on March 1 this year, will add up to RM3 billion to the country’s coffers. Meanwhile, the LVGT, HVGT and CGT are expected to pull in around RM1.7 billion collectively.
Part of these earnings will go towards providing better social services and public goods, like roads, schools and hospitals.
But it should also partly fund cost of living assistance – just as savings from rationalised subsidies will – in line with government pledges to mitigate their effects on vulnerable groups.
Indirect taxes like the consumption-based SST have their benefits. During economic downturns, incomes tend to fall more sharply than spending, potentially shrinking revenue collection from personal income and corporate taxes. In such situations, consumption tax assures the government of a more stable revenue, allowing it to cover the rakyat’s needs come rain or shine.
However, consumption taxes are also regressive: they burden the poor more than the rich, even if, as in Malaysia, necessities like food are tax-exempt to cushion inflation. This is because goods and services take up a bigger chunk of poor and middle-class incomes.
To alleviate the impact of consumption taxes on lower income households, direct cash assistance programmes, such as Sumbangan Tunai Rahmah (STR) and Sumbangan Asas Rahmah (SARA), have been introduced.
Despite this, the World Bank has noted that cash aid in developing countries is usually insufficient to reimburse the low-earners, leaving the poor poorer.
That means subsidies must be targeted at those who really need them. The government’s central database hub, Padu, aims to do this, and ensuring its success is crucial.
Growing the pie
As it is, Malaysians are struggling with the double whammy of a weak ringgit and inflation, making goods and services more expensive.
Using Padu, more needs-based targeted welfare assistance programmes can be channelled to poorer Malaysians to take the sting out of these taxes. But let’s be clear: there is no substitute for creating better paying jobs in the long run.
Incomes in Malaysia must rise. This will not only make consumption taxes less burdensome but can also provide Malaysians with a higher quality of life and put the economy on stronger fiscal footing.
Presently, wages are low, with half of the 6.45 million Malaysians working in formal sectors earning less than RM2,600 per month.
Underemployment is also a problem. Workers are overqualified but underpaid because of a lack of high-skilled, high-paying jobs. About 40% of Malaysian youth are underemployed, with a significant number unable to escape the low-wage trap, according to Khazanah.
Increasing the number of high-skilled Malaysians, and paying them higher wages, will expand the country’s narrow tax base and contribute more revenue that can be channelled back to the people. Over the past 10 years, only 1.3 million Malaysians, representing a mere 4% of the population, contributed 25% of the country’s tax revenue.
The long game
Growing Malaysia’s revenue is critical to delivering development, tackling debt and turning the economy around.
But extra moolah alone will not be enough.
A major reason for Malaysia’s pickle is unsustainable national spending. In 2022, fuel subsidies alone cost RM52 billion and mainly benefited the rich.
The government must trim expenses, reduce wastage, and eradicate leakages and corruption.
It must also show that revenue generated and costs savings are put to good use – by improving public goods, implementing economic reforms to boost confidence in the Malaysian economy, actualising promised foreign direct investment, or incentivising the creation of more productive and higher-paid jobs.
After all, the rakyat’s aversion to paying tax partly stems from public funds being consistently abused.
To its credit, the Madani government plans to address much of the above – including by restructuring government pensions, cutting expenditure, and distributing rationalised subsidies through Padu, and putting in place a progressive wage policy.
But then, preceding administrations have all mouthed the same ideals.
Malaysia has heard enough promises. What it really needs is action and following through.