This article first appeared in The Edge Malaysia Weekly on November 7, 2022 - November 13, 2022
CURRENTLY, my business has a moderate growth rate. The main issues restricting our growth at the moment are the lack of affordable manpower, skyrocketing costs and an unstable supply chain,” says Fatin Rasyiqa Mustaza, founder and CEO of Chunky Foods Sdn Bhd, a manufacturer and supplier of health food based in Sri Rampai, Kuala Lumpur.
“These issues restrict our potential and widen our business risk factors,” she tells The Edge. Fatin is a voter in the Segambut parliamentary constituency.
The campaign period for the 15th general election (GE15) started officially with the nomination of the candidates on Saturday, but it cannot overshadow the everyday issues that the people face.
“The top priority would be socioeconomic well-being, which is rapidly deteriorating,” says Imran Nurginias, chief economist at BIMB Securities. “Therefore, expect the government to implement policies that include helping people ride through the high cost of living due to rising inflation.”
The new government is expected to calibrate macroeconomic policies to ensure strong growth, says Imran, with continued targeted policy support in the near term, while preserving policy space to respond to downside risks and to accelerate structural reforms.
The expectation that the new government will focus on macroeconomic policies will include a relook at Budget 2023, which was tabled just prior to the dissolution of parliament. This is because the budget was not passed by the House and does not bind the next government.
“Macroeconomic policies should be calibrated to address the sizeable economic slack, high uncertainty and medium-term scarring, while preserving policy space, given pandemic-related risks and development spending needs,” says Imran.
In the real economy, this translates into tough times as consumers cut back on spending.
“My dental clinic’s performance is going down because of the tough economic condition that has been affecting most businesses. It creates a chain reaction, as when people’s budgets are tight and spending priorities have shifted,” says Dr Farhan Razak, director and principal dentist at Zen Dental Clinic in Lembah Pantai.
Farhan is a voter in Marang, Terengganu.
“I hope the new government can provide some kind of subsidy for the people to seek health treatment from private clinics, so that middle-income people can opt to go to private clinics while having to spend less.
“Not every single treatment can be done at government clinics and hospitals, as there are limited treatment options for dental health and, of course, there is the long waiting time,” says Farhan.
The rising cost of living has eaten into the people’s spending power, leading them to reprioritise their spending. For private dentists such as Farhan, this has meant falling income as people tighten their belts and put off optional dental care. Those in the low-income group feel the pain more. They are finding it difficult to make ends meet, as things are becoming increasingly pricier.
Therefore, the new government ought to make it a priority to address the issue of high inflation and high cost of living, says Lee Heng Guie, executive director at the Socio-Economic Research Centre of the Association of Chinese Chambers of Commerce and Industry.
“[The new government should prioritise] measures to mitigate the impact of rising prices and high cost of living on vulnerable households. These include reviewing the effectiveness of current price controls to balance as well as protect the interests of consumers and businesses,” he says.
Malaysia’s consumer price index (CPI) remained at the elevated level of 4.5% year on year in September, although this was slightly lower than the 4.7% seen in August. While this is quite benign compared with the global level, most people still feel the pinch.
BIMB Securities’ Imran says temporary additional fiscal support, combined with a further easing of the monetary policy stance, could be considered if downside risks materialise for the economy.
Last Thursday, Bank Negara Malaysia raised its overnight policy rate for the fourth time this year by another 25 basis points, to 2.75%. Cumulatively, the central bank has raised its policy rate by a total of 100bps this year, to mitigate the impact of high inflation brought about by the supply chain disruption as well as a strong US dollar.
Malaysia is indeed hooked on subsidies, which have kept the prices of essentials low, compared with the global level. The impact of rising crude oil prices in the first half of the year was mitigated by the large subsidies that the government had maintained to limit the cost of fuel.
However, as the need for spending builds up in areas such as upgrading both urban and rural infrastructure as well as investments in talent development, healthcare, new technologies, grants for small and medium enterprises (SMEs) and other priority areas, a relook at the subsidy system is becoming more pressing.
In Budget 2023, the previous government had allocated a budget of RM42 billion for subsidy and social assistance, compared with the allocation of RM58.9 billion in Budget 2022. When the budget was tabled in early October, however, the government stated that it had already spent RM77 billion for subsidies and social assistance for the year.
Imran adds that the government should also look at improving the targeted fiscal support focused on the vulnerable and hard-hit sectors as the output gap continues to close, followed by gradual fiscal consolidation.
“Commitment to fiscal sustainability backed by a medium-term revenue strategy and the Fiscal Responsibility Act is much welcomed. Fiscal policy support should continue to be nimble, with a focus on buttressing the recovery, preventing further scarring and protecting the most vulnerable.
“Over the medium term, fiscal consolidation should be growth-friendly and backed by robust governance and anti-corruption measures to support sound public financial management,” he says in a written response to questions from The Edge.
For Lee of SERC, subsidies come with a large “opportunity cost” to society, since they reduce the fiscal capacity, as the huge financial resources spent on subsidies divert the budget allocation from other sectors such as education, healthcare, infrastructure and housing.
He says, however, that shifting from a universal-access subsidy programme to a targeted one requires a comprehensive and transparent mechanism with clear objectives to identify poor households and deliver benefits.
For example, the subsidy could be channelled by social category through targeted cash or near-cash transfers, such as limiting benefits to the poor, children or pensioners, or to households in certain geographical regions.
“Coupons can be allocated to allow targeted households to consume a certain ‘lifeline’ amount of subsidised food or fuel products. Social safety nets are more cost-effective and have a much more profound impact than generalised price subsidies,” Lee adds. At the same time, the new government must also engage in a transparent and extensive communication exercise to explain why the country has to shift from product subsidies to targeted households, and how the resources saved from a universal subsidy programme will be redeployed for other priority spending such as investment in infrastructure, funding pensions, providing a better healthcare and education system, or helping combat climate change, says Lee.
“A well-handled removal of subsidies replaced by better targeted social spending for poor and vulnerable households, plugging leakages and wastage, and making productive investments can promote sustainable fiscal management and equitable outcomes.”
Malaysia is not short of plans for targetted subsidies. The critical factor is a strong political will to execute the plan, as taking away subsidies is bound to be an unpopular measure. This is likely to be a suicidal career move for politicians.
Responsible fiscal management also means reforms on the taxation system. Malaysia’s tax revenues have been on a decline, and the pandemic highlighted the need for revenue mobilisation, says Imran.
“Policy reforms that increase the efficiency and equity of the tax system without imposing a higher average tax burden should be front-loaded to support the expansionary fiscal stance. Once the recovery is entrenched, tax policy options that can be taken up include reinstatement of the Goods and Services Tax (GST),” he says.
According to the Organisation for Economic Cooperation and Development (OECD), the ratio of Malaysia’s tax revenue to its gross domestic product, at 11.4% in 2020, is below the Asia-Pacific average of 19.1%, and OECD average of 33.5%.
Malaysia’s ratio is lower than its peers’ such as Thailand’s 16.5%, the Philippines’ 17.8%, China’s 20.1% and Vietnam’s 22.7%. It has also decreased over time, from 14.8% in 2007, with the highest being 16.1% in 2012.
Malaysia’s tax revenue is also very much concentrated on corporate income tax, from which the government derived 39% of its tax revenue, followed by 28% from consumption taxes and 24% from personal income tax.
These three largest components of tax revenue contributed 91% of the government’s tax revenue in 2020.
No one likes taxes, be it the haves or the have-nots. Ironically, the GST was a topic of public contention at the time of GE14. The delay in refunds aggravated the problem and removal of the GST then was the opposition’s promise to voters.
Undoubtedly, the new government needs the right tactic to raise taxes to boost the nation’s coffers while retaining its popularity.
The new government should also ensure the implementation of the 12th Malaysia Plan (12MP) and focus on boosting labour productivity, enhancing the digital and green economies, and strengthening fiscal governance while promoting inclusive growth and job creation, says Imran.
At the same time, the new government should also enhance the business environment, says Lee. Reviving and sustaining both domestic and foreign investment is crucial to driving high levels of private investment to boost economic growth and create better paying jobs, he says.
“Domestic SMEs have to be facilitated and given sufficient financial assistance to transform into competitive business enterprises in domestic and international markets,” he adds.
To attract investments, the government has to enhance public delivery services and efficiency, reduce regulatory and compliance costs, as well as enhance the competitive tax regime and cost of doing business, says Lee.
He adds: “With the geopolitical fragmentation and the strained US-China relations in trade and technology, Malaysia has to enhance its investment climate backed by favourable incentives and policies to attract the reshoring of production bases.
“The government has to provide clear strategies for all key economic segments and industries, both vertically and horizontally.”
The new government must also address a major issue that has been plaguing many industries in the country, from small eateries to giant plantation groups — the shortage of workers. This is because the shortage of workers, especially foreigners, has stifled the growth of the economy.
“The recruitment process and arrivals of foreign workers must be expedited,” says Lee.
At the same time, the quality of reskilling and upskilling of local workers as well as training programmes should be prioritised to narrow the skills mismatch in the labour market, he adds.
The development programmes must also focus on job creation and skills for youth and promoting an entrepreneurial culture, he says.
Lee adds that the new government must also look at productivity-linked wages for employees, enhance technical and vocational education and training (TVET) for future jobs, as well as support investment in skills, lifelong learning and reforming the apprenticeship programme.
He advocates for more flexible training, greater investment and innovation in key areas of lifelong learning.
Dangling carrots to incentivise locals to take up jobs that have been performed by foreign workers over the past two decades could be a way to address the labour shortage while keeping the jobless rate low.
Furthermore, an overhaul of the foreign worker recruitment system is a crucial step towards enabling effective measures that will reduce the nation’s dependency on foreign labour.
Realistically, it is impossible to do away with foreign labour. So, it is time for the new government to map out a sustainable plan for the allocation of foreign labour.
See also ‘Must-win seats for the main coalitions’ on next page
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