A rethinking of Malaysia’s tax regime and social welfare programmes is overdue, says Stewart Nixon.
KUALA LUMPUR: The resilience of Malaysians faces its sternest test in decades, as pandemic, political and economic threats collide.
A virus resurgence has dealt a fresh blowto confidence, with daily cases reaching pandemic highs and several areas – including Malaysia’s economic heart – back under lockdown.
On the eve of the most important Budget in recent memory, a concerted focus on health and economic policy remains frustratingly overshadowed by the relentless political pantomime.
The emphasis of this Budget and subsequent reforms must be the millions of Malaysians struggling with basic living expenses as movement controls and a contracting global economy deliver the largest unemployment shock in 30 years.
Three-quarters of surveyed Malaysian households receive no insurance payments in the event of job loss, median household incomes have fallen by a third and just 5 per cent of households have savings to last three months, according to an August UNICEF report.
Expenditure on education has dropped 84 per cent in six months and consumption of instant noodles and rice has substituted for fresh fruit. Impoverished households are increasingly dependent on government welfare that is ad hoc and unpredictable.
“God, it’s really hard, we are severely affected. We (old people) went out looking for jobs … Anything that we can do to gain some income … But it’s impossible,” said a 46-year-old online seller quoted in the report.
Increasing social welfare would be a welcome development, but it alone will not compensate for the defunct tax, transfer and social protection approach central to Malaysia’s longer-term struggle to raise living standards and reduce poverty.
The Budget alone won’t solve these concerns but could usefully announce long overdue reform intentions and kickstart the process.
ESCAPING THE LOW-TAX, LOW- PROTECTIONS TRAP
The three-headed crisis has shone the spotlight on years of policy inaction that have left Malaysia’s economy and people needlessly vulnerable.
Malaysia remains trapped in a low-tax, low welfare framework barely sustained by oil revenue and the monopoly profits of government-linked companies.
With a deeply diminished tax base, negligible transfer system and no permanent social protection programme, the cushioning impact of lower tax collections and higher social welfare payments – what economists call “automatic stabilisers” – is extremely low for a country of Malaysia’s development.
The immediate consequence is vulnerable Malaysians living from announcement to announcement as each round of temporary crisis assistance approaches expiry. Hence the great expectations surrounding the Budget.
By way of context, Malaysia’s tax-to-GDP ratio — at 11.5 per cent before the pandemic began — was about a third that of OECD countries average and declining.
The cost of stimulus measures providing individual and company tax relief is driving this lower still, with official second-quarter estimates putting it at just 8.9 per cent. And coverage is incredibly low, with less than 17 per cent of individuals and 5 per cent of companies paying tax.
Pandemic-related tax relief further benefits the wealthy elite, not households in need of aid.
Alongside this, social welfare expenditure has not followed the typical pattern of rising alongside GDP per capita, and on best estimates, compares unfavourably even among regional peers.
While precise and contemporaneous statistics are difficult to calculate, Malaysian federal government expenditure on social expenditure averaged around 2.5 per cent of GDP from 2014 to 2019 compared to an OECD average of 21 per cent.
Social protection programmes supporting job placement and training are equally inadequate and requiring urgent upgrades amid the crisis.
THE GST SHADOW
Before the pandemic struck, similar concerns were expressed, seen in the centrality of rising living costs in political and economic debate.
Rather than addressing more fundamental causes, however, politicians blamed popular scapegoats like the goods and services tax (GST), foreign workers and business profiteering for increasing prices and inadequate wage growth.
The GST – introduced in 2015 as the silver bullet for reduced oil dependency – lasted just three years before its abolition under a freshly sworn-in Pakatan Harapan government.
It was politicised for purportedly regressive impacts that were never analytically substantiated and conceptually debatable given the low 6 per cent rate and extensive exemptions for essential goods and services.
Misperceptions remain alive and well, and feed a broader reluctance to raise and reform taxes.
Accompanying this are flawed arguments that Malaysians are not prosperous enough to pay tax. These are oft-repeated to protect the interests of wealthy individuals and businesses, thwarting reforms to tax and redistribution policies that could genuinely improve living standards.
Past governments have allowed critics to control debate by failing to offer a compelling and comprehensive alternative narrative. The crisis provides a potential circuit-breaker to develop a better approach.
ADDRESSING TAX SYSTEM FAILINGS
A revitalised tax and transfer framework should target a higher total collection and greater progressivity.
Concessions for businesses – including generous incentives for foreign investors – should have shorter durations and be limited to activities generating skilled jobs and higher value-added industries.
If 95 per cent of companies aren’t paying tax, then revenue is being lost on activities with low public benefit.
Individual income taxes are also extraordinarily low in terms of rates and coverage. The median and mean wage earners face pre-deduction income tax bills of just 1.46 and 2.31 per cent of wages respectively, though neither actually pays anything after transfers.
The equivalent tax rates for Poland – developmentally among the most comparable countries to Malaysia – are 16.4 and 17.4 per cent respectively.
By using tax rates alone (without credits or transfers) to create progressivity, the low rates equally benefit the rich, which together with a generous top tax bracket, mean high-income earners pay far too little.
Middle- and high-income earners need to contribute to the tax base and at higher rates, with transfers increasing redistribution to low-income earners.
Despite the tarnished reputation, consumption taxes like the GST must also play a greater role. Consumption taxes are simple, efficient and more easily levied on mobile and informal populations.
Vast numbers of undocumented migrants, international visitors and cross-strait workers in ordinary times are not captured by income taxation but would be taxed on purchases.
Appropriately targeted exemptions based on a low-income consumption bundle or means-tested refunds can alleviate regressivity concerns.
Beyond these core pillars, a comprehensive tax reform agenda should consider lightly taxed areas like property and inheritance.
The social contract between government and taxpayers also needs improvement. People become more willing taxpayers when they are confident that the government is acting in their best interests – efficiently, transparently and corruption-free.
Explicitly linking taxes to spending programmes that improve living standards – including through simple leaflets depicting where their taxes go – has worked well in other countries.
ENSURING SOCIAL PROTECTION
A comprehensive social protection and welfare system is among the most important programmes to be funded.
Political expediency, rather than poverty alleviation, has underpinned broad-based welfare payments in recent years, while existing support for the genuinely needy is insufficient and poorly coordinated across ministries.
The pandemic response has boosted cash support for households and provided wage subsidies to discourage job losses, which were later supplemented with funds for worker retraining and redeployment.
These measures are essential quick fixes but no substitute for a better designed and permanent system.
Two distinct but related objectives need to be addressed. The first is to provide ongoing income support to those experiencing or at risk of poverty. Transfers to low-income earners can be supplemented by social protection policies to achieve this.
The second is to provide a safety net for the temporarily unemployed, comprising immediate income support and assistance towards retraining and redeployment.
Both are essential to reduce the risk of unemployment shocks and improve the functioning of labour markets, as pandemic lockdowns have made clear.
Yet, monthly Social Welfare Department aid payments have stayed unchanged for about a decade, eroding what families who receive the monthly RM300 (US$72) can afford.
“There are bills to settle like rent, utilities, children’s education and household expenditure, all of which put us in a tight spot”, said Papamah, a widow interviewed by the New Straits Times in September.
“This is also one of the many reasons why some parents do not send their children to even government schools as they are simply unable to afford it,” she shared.
The desperate state of the tax and social protection system was not caused by the crisis but a longer-term paradox that has now been brutally exposed owing to COVID-19.
A thorough rethink of the contribution taxes, transfers and social protection make has never been more critical to Malaysia’s continued development, and that rethinking to support a more prosperous post-crisis recovery must happen now.
By : Stewart Nixon – CNA