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Saturday, October 11, 2014

Will Budget 2015 take us to high income status in 2020?

Experts say the budget tabled by Prime Minister Datuk Seri Najib Razak in Parliament yesterday may not achieve the twin goals of weaning Malaysians off subsidies and attaining high income status in 2020. – The Malaysian Insider pic by Afif Abd Halim, October 11, 2014.Experts say the budget tabled by Prime Minister Datuk Seri Najib Razak in Parliament yesterday may not achieve the twin goals of weaning Malaysians off subsidies and attaining high income status in 2020. – The Malaysian Insider pic by Afif Abd Halim, October 11, 2014.
Budget 2015 is the turning point to wean Malaysians off subsidies and start the last lap in the race to high income status in 2020.
But experts doubt it will help grow the economy to actually achieve those twin goals since the government’s initiatives may not lead to a stronger industrial base that produces more valuable exports which will lead to higher wages.
Without growth in wages, the experts said, Malaysians will continue to be dependent on cash handouts such as BR1M and subsidies.
Economist Dr Yeah Kim Leng said revenue from GST will enable Putrajaya to fund programmes for low-income groups, such as the People’s Cash Aid Programme (BR1M) and low-cost houses.
“The nett revenue gain in the first few years (from GST) will be small because of the generous off-setting measure,” said Yeah, who is Dean of the School of Business, Malaysia University of Science and Technology (MUST).
“Once the GST system stabilises, it will provide the government with an effective and flexible tool to 'tax and spend' in line with the prevailing economic conditions,” he told The Malaysian Insider in an email.
But the key to making the whole policy work is to spend the money from what is still an unpopular tax, efficiently and effectively, said Yeah. 
In his speech, Prime Minister Datuk Seri Najib Razak said Putrajaya is expected to collect RM23.2 billion from the GST.
But it was reported by Reuters that once exemptions and lost revenue from the old Sales and Services Tax are factored in, the government will only earn RM5.6 billion.
Of that total, RM4.9 billion will be channelled back to the public through programmes, such as BR1M.
However, the whole idea of cash aid is still a problem, said Wan Saiful Wan Jan of the Institute for Democracy and Economic Affairs (Ideas).
In the long term, it still promotes a dependency culture like how addicted the public has been to cheap fuel subsidies that kept petrol prices down but which bred wastefulness.
“The prime minister started off the speech outlining good principles such as cutting the deficit, balancing the budget and reducing subsidies.
“But the second half of the speech was all about handing out more goodies. He missed an opportunity to educate the public on austerity and to reduce the subsidy mentality,” said Wan Saiful, who is chief executive of Ideas.
Institute Rakyat executive director Yin Shao Loong argues that the whole strategy of using GST to fund cash handouts is itself an insidious way of perpetuating the dependence culture.
This is since the GST shifts the burden of paying taxes from the rich to the poor. The proportion of income that goes to paying GST will be larger from the poor than the rich.
“You are also reducing income taxes for the rich so this creates a more unequal society,” said Yin.
“As more of their income goes to paying for GST, the poor will have less and they will have to increasingly depend on handouts.”
Wan Saiful said that the problem of not being able to afford houses or food should be solved by enlarging the economic cake so that Malaysians earn more money.
This then is the second part of the problem: how is the government going to manage the economy so that it will grow more advanced and Malaysians’ wages will grow with it?
One of the budget’s main thrusts was to boost the services sector. It wants the sector to contribute 60% to the economy by 2020 through a slew of initiatives.
These include a RM5 billion allocation to the services sector that will benefit 4,000 small and medium-sized enterprises (SMEs), a RM10 million research scheme and a Services Export Fund totalling RM300 million to help penetrate new markets.
Yeah believes that the shift to services follows the development pattern in advanced countries where services contribute on average 70% to 80% of Gross Domestic Product (GDP).
“Many countries are snared in the 'middle income trap' because of their inability to move to high value, knowledge and skills-intensive services sector.”
Yin, however, argues that services are harder to export compared with high value commodities and pegging the economy to them is unsustainable.
“It is far harder to multiply the service capacity of an individual with technology than it is to multiply the production capacity of manufacturing with technology.
“You will be limited by the quality of human resources, and the problems in our education system and graduate employability have been all too apparent.
“We will have a tougher time generating value-added services, and therefore struggle to produce strong wage increases that can cope with the rising cost of living,” said Yin.
In fact, the countries that Najib mentioned and wanted to emulate in his speech, such as South Korea and Germany, became advanced because of their advanced manufacturing capabilities.
“They learnt to make things better, faster and cheaper.”
Both Yin and Yeah said that a robust manufacturing sector is necessary to nurturing a high value and high wage services sector.
But Yin believes that Putrajaya is unable or unwilling to make the tough choices necessary to develop manufacturing.
“The growth of our manufacturing was stunted by dependence on foreign-direct investment (FDI) that failed to promote widespread innovation, technology development and high wages.”
Without a bold industrial policy that will boost wages, Yin said, the majority of workers may still be struggling to make ends meet come 2020.
- TMI

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