This article first appeared in The Edge Malaysia Weekly on March 16, 2026 - March 22, 2026

A picture speaks a thousand words. We begin this article with Charts 1 and 2, which underscore two indisputable facts. One, public operating expenditure (opex) is eating up the entire government tax revenue annually — and has been for the past 15 years. With little left over, it means that development expenditure (capex) must be funded entirely with borrowings. Debt compounds. And, two, that has led to rising public debt levels with serious implications for the economy, including spending constraints on critical public services such as healthcare (and, therefore, its outsourcing to the private sector) and limited fiscal headroom during crises. Case in point: The nation breached its parliament-approved statutory debt ceiling of 55% (which has been in place since 2009) during the Covid-19 pandemic. Federal government debt-to-GDP currently stands at 65% (total public sector debt, including government-guaranteed debts, is at a high 86% of GDP). This situation is obviously untenable.

Left unchecked, debt will continue to compound, with debt-servicing costs snowballing. This will eventually lead to a credit-ratings downgrade and higher interest rates. As default risk grows, capital will flee and the currency will depreciate — raising import costs and inflation and, in the process, eroding real incomes. Ultimately, the choice will come down to either a financial and economic crisis or painful austerity, both of which will result in slower economic growth. Against this backdrop, we applaud the Public Finance and Fiscal Responsibility Act 2023, enacted to strengthen fiscal governance. The targets include reducing the fiscal deficit to below 3% and the debt-to-GDP ratio to below 60% within three to five years. But this means that more drastic efforts will have to be undertaken.

For the short term, the government has been cutting back on allocation for development (as a percentage of the annual budget). But this is not sustainable. Cutting investments in infrastructure and public goods and services — such as roads, schools, hospitals, law enforcement, defence and cybersecurity — will negatively impact the nation’s future productivity and economic growth potential. It is like parents saving money by not sending their children to school.

Subsidy rationalisation was the other major thrust. Again, we applaud this. But subsidy rationalisation, we think, has run its course. Blanket diesel subsidy was withdrawn in June 2024 and fuel and electricity subsidies were substantially scaled back for high volume commercial and industrial sectors, though domestic users have largely been spared. Notably, the RON95 petrol subsidy rollback has turned out to be far more muted than earlier proposals — now replaced by the BUDI95 programme, which in fact lowered prices to RM1.99 per litre (from RM2.05 per litre) for Malaysians. The 300-litre monthly quota is sufficient to cover nearly all users.

The revised (lower) electricity tariff structure for households and BUDI95 underscore the reality that further subsidy rationalisation will be extremely difficult to implement politically. This is true of all democracies where elections are held every four to five years, and the next government is decided by popularity. That is why fiscal transfers, more often than not, become entrenched and grow with each election cycle.

Subsidy rationalisation has helped at the margin, with total savings of about RM15.5 billion a year, but far from what is needed to reduce our debts. Case in point: Federal government debt-to-GDP is projected to inch higher in 2026 to 65.8% from 64.3% in 2023. This is due, in large part, to rising emoluments (higher salaries for civil servants) and, especially, pension and gratuities. In fact, government spending on pension is accelerating — and we think this trend will persist (see Chart 3). Given the steep growth in the size of the civil service, doubling between 2000 and 2014, the number of pensioners will continue to increase for at least the next 20 to 25 years. Worse, the cost per pensioner is rising ever faster.

What all this means is that the government must raise tax revenue if it is to meet rising opex and reduce the fiscal deficit and debt-to-GDP. (Oil-related revenue such as dividends from PETRONAS and petroleum taxes are unpredictable and, therefore, not a reliable long-term source.) In short, taxes must go up further. That is a given. The only question is, in what form?

Malaysians have already seen many new and higher taxes over the last few years — such as the 10% low-value goods tax on imports, 10% capital gains tax on disposal of unlisted shares in Malaysian companies, 2% tax on dividend income exceeding RM100,000 and a substantial expansion of the Sales and Service Tax (SST).

Taxing high-income earners and wealth is an extremely popular idea — with the masses, for obvious reasons; with left-leaning economists, as a means to redistribute income and improve equality; and with politicians, since income and wealth are highly concentrated and elections are won through majority votes. Capital gains tax, wealth tax, inheritance and estate tax as well as real property gains tax are common refrains whenever governments talk about raising tax revenue.

We are not opposed to progressive taxation or income redistribution to prevent extreme inequality. Society — everyone: poor, middle-class and rich — benefits from the resulting stability, infrastructure, safety and security. But progressive taxation and income redistribution/transfers work only up to a point. Capital and human capital are not captive assets. Any talk of wealth, estate or inheritance tax, for instance, will surely trigger a capital flight and sharp drop in investments, reminiscent of the long-term economic damage after Malaysia implemented capital controls. We have seen this happen in other countries. The ultra wealthy have teams of financial advisers on their payroll to manage their assets and taxes. Inevitably, it will be the majority of middle- and upper-middle-class households — struggling to build wealth to improve their living standards and for retirement — and not the super-rich who will end up shouldering the tax burden.

As we said, raising taxes on capital and high-income earners is popular. But let us not also forget that excessively high taxes discourage investments and hard work. Fact: Malaysian companies are already paying the highest tax rate in the region. And Malaysian individuals are paying higher tax rates than in Singapore. We bet the tax disparity (besides higher wages and more opportunities) is one of the motivating factors behind the exodus of Malaysian talent to the city state (see Chart 4). In other words, continuously raising taxes on capital and high-income individuals will eventually render the country even less competitive in the region and encourage more brain drain.

The fact is that the number of people currently paying income taxes is too small — only 5.7 million, or 16.2%, of the population. And, according to the World Bank, 80% of personal income taxes are currently shouldered by only 7% to 8% of all workers in Malaysia.

The total number of taxpayers is only one-third of the 17.1 million workers in the nation. In other words, 67% of the people working today are not paying personal income tax. Malaysia’s shadow economy is large — various studies put it at between 20% and 30% of GDP. The government estimated the size of the informal economy at 21% of GDP back in 2020. It is very likely to have grown since then, along with robust growth in the gig economy over the last few years. The tax revenue lost to income under-declaration and tax evasion was estimated at RM70 billion annually. Interestingly, what this also implies is that Malaysians are better off than the official statistics indicate — the median monthly household income of RM7,017 is, in reality, quite likely to be closer to RM8,500. Don’t you ever wonder why there are more private cars on the road than there are workers in the country?

What Malaysia needs to do is bring more people into the tax system. And the best sustainable option is, we believe, a broad-based consumption value-added tax (VAT) or goods and services tax (GST) as it was called in Malaysia. You consume; you pay tax.

As we have explained at length in our article last week (“When the majority votes with the minority’s wallet, capital walks”, The Edge, March 9), everyone needs to have skin in the game to maintain a balance between transfers and incentives. When the majority gets to enjoy benefits paid for by a small minority, of course, the popular vote will go to the leadership that promises ever more. We repeat, redistribution without regard to incentive risks stagnation. It is necessary to balance compassion with competitiveness. The aim is to create equal opportunities, not equal outcomes. Supporting the poor is right. Creating permanent dependency is not.

Why VAT? For one, it is a far more efficient tax system than the existing SST. VAT is a multi-stage tax providing greater transparency, that is, an audit trail on both input and output. The tax paid by the end-consumer is clearly stated. The SST, on the other hand, is a single-stage tax, and its opacity makes it easier for tax evasion. It is also a tax-on-tax in every step in the supply chain, leading to a cascading effect in the final price tag — even if it is not transparent to the consumer. Ironically, it is this very non-transparency that gives consumers the illusion that SST is less painful than GST. It is not.

As we said, SST went through major expansion in 2024 and 2025. It is now applicable to 70% of the services economy — more or less similar to the previous GST regime — and at a higher 8% rate on most taxable services, with selected sectors (F&B, telco and parking) kept at 6%. Recall that the standard rate for GST was 6%. Taxes on most goods are now at 10%, with selected goods at 5%. Yes, many essential basic goods are currently exempted under SST compared to goods that were zero-rated under the old GST. But it is the government’s prerogative to decide on the exemptions. That is to say, GST can also have zero-rating for basic necessities. One of the biggest complaints against GST was the slow refund process. Again, this is administrative and can be easily rectified. It has nothing to do with the efficacy of the system itself.

The fact that VAT is currently used in nearly every nation in the world must tell us something. Chart 5 shows the VAT tax rates implemented by our neighbours, which are more or less similar to Malaysia’s SST rates. And given that VAT results in higher tax collection as a percentage of GDP in these countries, it is highly suggestive that VAT is the more efficient system.

The only reason VAT is not being implemented in Malaysia is that the name “GST” is politically toxic. Well, call it VAT — or any other name for that matter. US President Donald Trump calls it tariffs — companies pay the taxes and pass them on to to consumers via higher prices (that is, by all intents and purposes, a consumption tax) — and sells it as a way to reduce trade deficits and spur domestic investments. We will be happy to help curate a saleable narrative.

Because, mark our words, SST will inevitably be expanded further if the government is to raise more taxes — and likely so in the foreseeable future. A broader based, more efficient VAT would, we think, at least keep the tax rate lower for the people and still collect the same amount of taxes for the government.

Yes, some argue that VAT is a regressive tax. That in itself is not a good reason. For one, so is SST. Plus, adverse impact of VAT on the extreme poor can always be offset by more targeted aid (but, please, not handouts for everyone) and tax rebates and/or zero-rate basic essentials to make VAT a progressive tax.

Let us be crystal clear: We are NOT advocating higher taxes. Raising taxes is not the only solution to reduce the nation’s fiscal deficit and debts. Cutting unnecessary and wasteful spending and enabling investment- and innovation-led growth are by far better ways.

Malaysia has yet to tackle the many leakages in government spending, some of which are routinely flagged in the Auditor General’s yearly reports. And, worse than wasteful, inefficient spending is ineffective spending — for instance, in education.

We would go so far as to argue that many of Malaysia’s blueprints and master plans serve primarily to justify more spending. There is little follow-up public accounting on how the money is spent, the measurable outcomes and benefits, or whether the targets are achieved — and if not, why.

The pushback against higher taxes — VAT, GST or any others — will be far less if people perceive that their hard-earned incomes are spent efficiently and effectively, when they see tangible improvements in infrastructure, in the quality of healthcare and education, a stronger welfare system and social safety net, better jobs creation and so on: in short, value-for-money in government spending. Case in point: People in developed nations pay signifi­cantly higher tax rates and, in countries such as Norway, Australia and Denmark, more than 90% of the population are registered taxpayers. We have written extensively on this subject in a previous article (scan the QR code to read the article “Recalibrate fiscal spending to enable upward mobility through efforts”, The Edge, Aug 11, 2025).

We have stressed, repeatedly, that the government’s sole focus must be on raising productivity. Higher productivity translates into higher wages and incomes, stronger GDP growth and higher returns (profits) for businesses — all of which will lead to more tax revenue for the government.

We end this article with one final picture (see Chart 6). Malaysia’s corporate and personal income taxes as a percentage of GDP have been in decline for the last 10 years, suggesting that profits and income growth have lagged nominal GDP growth.

Here’s the thing: Labour productivity is a mathematical construct — it is GDP divided by the number of employed labour or hours worked. In other words, productivity gains are determined by the structure of the economy (the types of industries and the level of value-added), capital intensity, deployment of technology, human capital development and such. Malaysia’s relatively low productivity and wages have little to do with intelligence, work ethic or other individual behavioural traits; rather, they stem from an economy heavily reliant on commodities, low value-added services and low-skilled manufacturing.

In other words, raising the nation’s productivity and wages requires a structural reform of the entire ecosystem. It requires a free-market environment conducive to private investments, entrepreneurship and innovation. People do not migrate solely to pay lower taxes, but capital and talent will leave when a government’s focus on short-term redistribution comes at the expense of incentives for investment and innovation. Opportunities and rewards must be aligned with merit, not equality of outcomes.

The Malaysian Portfolio was up 0.5% for the week ended March 11, led by gains for United Plantations (+4.8%), Kim Loong Resources (+3.0%) and Malayan Banking (+1.2%). Hong Leong Industries (-2.5%) and LPI Capital (-2.2%) were the two losing stocks last week. Total portfolio returns now stand at 211.3% since inception. This portfolio is outperforming the benchmark FBM KLCI, which is down 6.6% over the same period, by a long, long way.

The Absolute Returns Portfolio also ended higher for the week, up 0.6%. The gains boosted total returns since inception to 39.5%. The top gainers were ChinaAMC Hang Seng Biotech ETF (+6.1%), Alibaba Group Holding (+2.4%) and Ping An – A (+1.6%) while the big losers were Kanzhun (-4.3%) and Ping An – H (-1.7%).

The AI portfolio outperformed both the Malaysian and Absolute Returns portfolios last week, gaining 5.9%. Last week’s gains pared total portfolio loss since inception to just 0.7%. The biggest gainer was Unusual Machines, whose share price surged 35.1%, buoyed in part by interests in defence stocks as war in the Middle East escalates. The drone manufacturer is expected to see robust sales growth as the US Department of War’s Drone Dominance programme gains traction. Marvell Technology

(+15.8%) and Datadog (+7.7%) were the other notable gainers while the top losers were Cadence Design Systems (-3.7%), Minth Group (-2.7%) and Amazon.com (-1.9%).

Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.

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