KUALA LUMPUR (Oct 4): Malaysia could potentially halve its fiscal deficit by gradually restoring its subsidy-to-GDP ratio to a 10-year average of 2.4% and its tax revenue-to-GDP ratio to a 10-year average of 12.8%, if a consumption tax such as the Goods and Services Tax (GST) is implemented, according to Malaysian Rating Corporation Bhd (MARC).

In a statement on Wednesday, the local rating agency said GST is administratively efficient and designed to reduce avenues for tax avoidance and evasion, including from within the informal sector.

It is also a crucial enabler of optimisation with regard to Malaysia's fiscal and debt position, as well as its economic future, MARC said, noting it would also enable the continuation of welfare benefits as it would provide stronger revenue stream.

“While theory asserts that the GST is regressive and places a burden on low-income households, tax sufficiency to sustain Malaysia's extensive social assistance initiatives is of utmost importance.

“These programmes encompass a wide array of subsidies for essentials, including but not limited to food, fuel, electricity, healthcare, housing, and education.

“Therefore, maintaining a robust revenue stream, through mechanisms like the GST, is critical for the continued provision of these crucial welfare benefits to the nation's populace,” it stressed.

MARC highlighted, based on 2022 data from the Organisation of Economic Co-operation and Development (OECD), approximately 174 countries and territories, including many with lower income levels than Malaysia, have adopted the GST or a similar consumption tax model.

The rating agency pointed out that the abolition of the GST in Malaysia in 2018 by the previous government places the country in the minority of those without GST.

“Furthermore, the removal of GST back then has been commonly perceived as a populist action rather than a decision rooted in economic logic, leading to an adverse impact on Malaysia’s policy credibility and stability.

“It is therefore crucial to address and rectify the consequences of this previous policy reversal,” it said.

MARC added that to complement Malaysia's existing social assistance programmes, concerns about the potential impact of GST on low-income households can be alleviated through measures such as targeted exemptions for essential goods and the implementation of a tiered tax rate structure.

MARC stressed that enhancing the sustainability of debt through the raising and broadening of the tax base is a prerequisite to upholding investor confidence in Malaysia's debt markets.

This, in turn, safeguards the nation's prospective capacity to secure funding for vital public services and investments, and mitigates burdening future generations with elevated debt levels and tax obligations, it pointed out.

“Moreover, the trajectory of the Malaysian ringgit is significantly influenced by debt management credibility.

“The preservation of confidence in the capital markets and the stability of the national currency constitute fundamental prerequisites for economic prosperity.

“Without such stability, there exists the potential for distortions in the behaviour of economic agents, thereby inducing a state of cautionary hysteresis,” it highlighted.

MARC also pointed out that Malaysia’s tax revenue-to-GDP ratio has been on a declining trend since 2013, from 15.3% reported in 2013 to 11.7% in 2022.

Contrastingly, peer nations experienced an increase in this ratio from 17.9% to 18.9% during the same period.

“The prospects for fiscal improvement against its peers hinge on the effective execution of government policies.

“Notably, policymakers have expressed intent to curtail subsidies; Malaysia's subsidy-to-GDP ratio reached 3.8% in 2022, compared to the five-year average (2017-2021) of 1.6%.

“Excessive spending on subsidies constrains the government’s capacity to redirect funds to other critical public service areas,” MARC emphasized.

Last month, Deputy Finance Minister Steven Sim said that the time was not right to reintroduce GST as the global economy is still undergoing slow growth and the government needs to consider the effects of reimplementing the GST holistically, not only based on the opinions of certain parties.

“So we have other ways (such as) better fiscal management, taxation system and government procurement.

“We have all these methods, including targeted subsidies. So, with all these methods, we can manage our fiscal needs without resorting to GST for now,” he had said.