How the government can increase its revenue over the long term

The government's revenue is currently insufficient to help the people and make the environment greener

Jeyakumar Devaraj hand over this memo to Prime Minister Anwar Ibrahim - THINKLEFT

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The Socialist Party of Malaysia (PSM) understands that Prime Minister Anwar Ibrahim is facing several constraints in implementing programmes to benefit the people.

In the past year, PSM has recommended several programmes to strengthen the social protection net and to restore our country’s environment, including:

  • Introducing a senior citizens’ pension of RM500 per month for all Malaysians aged 65 and above, if they are not government pension recipients
  • Increasing the Ministry of Health’s (MoH) budget in stages to 4% of gross domestic product (GDP) within four years from the current allocation of 2.2% of GDP, so that the ministry can upgrade its services to the people
  • Constructing more People’s House Project (PPR) houses throughout the country so that families from the bottom 20% of households can rent houses at a low cost
  • Allocating RM2bn in funds to help local councils take over the maintenance of low-cost flats. Many of these flats have deteriorated into high-rise ghettoes and these then generate disenchantment and delinquent behaviour
  • Creating ‘green’ jobs, for example, in the electricity generation sector (from sunlight and waste from palm oil mills) and restoring forests that have been heavily logged

We believe the PM agrees in principle with the goals of the programmes listed above but has been advised by economic experts within the government and from outside, that for now, the federal government must clamp down on new expenses to balance the federal budget and bring down the current deficit to 3% of GDP as soon as possible.

These experts emphasise the following:

  • The current deficit of the federal government is about RM100bn1 every year or about 5% of GDP
  • Total federal debt has exceeded RM1tn1 (without taking into account contingent liabilities of RM0.5tn)
  • Debt servicing is now about RM43bn1 per year.
  • If we do not reduce our budget deficit to 3% of GDP soon, international credit rating agencies could reduce the country’s credit status from the current BBB to a lower level. and then the cost of borrowing money will increase
  • There are risks related to efforts to increase tax rates on large corporations or the richest 1% in our country. There’s the possibility that they will move to a neighbouring country and operate from there. The rate of new investments in Malaysia’s economy and the rate of new job creation will decline if this happens

We at PSM accept that the government’s concerns about the budget deficit and national debt situation have legitimate grounds. Malaysia is caught in a situation where the government’s revenue is insufficient to finance the cost of programmes that should be launched to help the people and make the environment greener. But, and this is an important point, this situation was not destined by God. It was created by the neoliberal measures implemented over the past 30 years – which have restricted the government’s ability to manage the national income rationally and fairly.

This memorandum aims to share some recommendations on how the federal government can augment its revenue sustainably. Before going to the recommendations, we would like to share our analysis of Malaysia’s economic situation.

Based on our analysis,

Malaysia is not a poor country

The country’s GDP, in real terms (ie after considering the effects of inflation), has multiplied 24 times in the 50 years between 1970 and 20192.

But the real median wage of a factory worker in 2019 is only 1.4 times more than the median wage of a factory worker in 1970, even though Malaysia’s income per capita has multiplied 7.6 times3 in that 50-year period.

Competition within Asean to attract foreign investment has been detrimental to all Asean countries

The problem of poverty among ordinary workers in a country that has multiplied its GDP stems from our ‘export-led industrialisation’ strategy, in which we market our country as a low-cost production hub in to attract foreign companies to invest in factories in our country.

This strategy was reasonably effective in the 1970s because at that time, the Vietnam War was ongoing, Thailand was a frontline ‘domino’ that was in danger of collapsing, and Indonesia was still recovering from an internal political crisis. Foreign investors did not have many other options. So, the Malaysian authorities could impose certain conditions on them.

But the situation has changed tremendously. Investors have many other options – Thailand, Vietnam, Indonesia, China and several other countries. Because our neighbours in Asean also practise an ‘export-led growth’ strategy and are determined to attract foreign investors, countries in Asean are involved in fierce competition for foreign direct investment (FDI) – and this has triggered a race-to-the-bottom.

That is why we refuse to increase the minimum wage in our country, even though it is clear that RM1,500 is not enough to cover the basic needs of a family.

Competition for foreign investment has also led to a race to the bottom in corporation tax. Thailand has reduced its corporation tax rate to 19% of company profits, and Vietnam to 20%. Malaysia has also lowered the corporation tax rate from 40% of company profits in the 1980s to 24% now. This is one of the main reasons why the ratio of the government’s revenue to GDP has shrunk from 26% in the 1980s to only 15% last year4.

The milking of funds from the low and middle-income groups is completely unfair

The chart below summarises the national income distribution in Malaysia now:

The chart above shows that 44% of the country’s income is earned by the wealthy, who amount to less than 0.1% of the country’s population.

At the same time, 90% of Malaysian families receive only 42% of the national income. And even this 42% is not distributed equally.

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For example, from the chart above, we can calculate that the average income for workers in Malaysia (first row), is as much as RM4,324 per month7.

But according to our Statistics Department, the median salary for workers in the formal sector is only RM2,600 per month8  in March 2023. This means that 50% of workers in the formal private sector receive a monthly salary lower than RM2,600. Only a minority earn a salary that exceeds RM20,000 per month (managers, accountants and professionals).

We are also aware that the income of families from the bottom 40% of households is not enough to cover all their basic needs. That is why the rate of stunting in children aged five and under is currently 20%, which means 20% of Malaysian children are in families that cannot provide them with enough nutrition! The lack of food not only stunts physical growth but also brain development. This blocks the development of their full potential. Shocking and shameful!

This is why PSM rejects any new tax that will burden the common people such as the goods and services tax (GST) or compulsory payment of health insurance (the compulsory social health insurance that is being hinted at in a government white paper on healthcare).

We believe taxes on the richest 10% of our country should be increased, especially taxes on the richest 1%.

Among the tax changes that can be implemented are:

  • Gradually increasing the tax on company profits to 30%
  • Imposing a wealth tax on individuals who have assets exceeding RM500m
  • Imposing a tax on income from investments (capital gains tax)
  • Implementing a tax on carbon emissions that exceed a maximum limit
  • Implementing an inheritance tax
  • Introducing a tax on financial transactions (Tobin tax)

But increasing taxes on the richest strata cannot be implemented at the moment because of the liberalised financial regulations created by several international trade agreements that Malaysia has acceded to.

These agreements have created many opportunities for the richest 5% to avoid paying high taxes. For example, large companies can establish their headquarters in a country where the corporation tax is low and transfer royalties, intellectual property payments, accounting charges and so on to reduce the profit that needs to be reported in the taxation area that has a high tax rate.

Apart from that, the wealthiest individuals and companies can choose to shift their new investments to countries where the tax rate is lower. New factories could be located in Vietnam or Thailand instead of Malaysia, if Malaysia alone increases the corporation tax rate.

So, if we want to ensure that the richest 5% in our country pay reasonable taxes, it is necessary for us to devise a 10-year strategy to enable tax increases on the richest individuals and company.

A 10-year strategy:                                         

Discussions with Asean countries

Considering the facts described above, it is crucial for the Malaysian government to start discussions with neighbouring countries such as Thailand, Vietnam, Indonesia and the Philippines9 to devise a strategy to stop the race to the bottom in corporation tax matters.

We can explain to them that this race puts our countries at a disadvantage: our governments do not get enough revenue and therefore social security and environmental restoration programmes have to be postponed.

We were forced to borrow money, and debt servicing absorbs a significant part of our revenue – about 14% now for Malaysia.

Gross domestic demand growth is impaired because government spending, which is one of the determinants, is shrinking in proportion to GDP. So, it is in the interest of all the Asean countries to bring the race to the bottom to an end.

After achieving the goal of stopping the race to the bottom in corporation tax rates, we can start moving towards increasing corporation tax rates to 30% of profits within five years among Asean countries.

To achieve this goal, Vietnam will need to increase its corporation tax by 2% per year, Thailand by 2.2% per year and Malaysia by 1.2% per year so that we are all at the 30% level after five years.

The Asean trade agreement (Asean FTA) could be modified to reflect the new agreement on corporation taxes, and a penalty could be incurred where tariffs of several percent are imposed on the exports of Asean countries that do not comply with the agreement to gradually increase corporate taxes.

This approach should be brought and discussed with developing countries in Africa, South America and Asia – the “G77” – because they are also experiencing financial problems and insufficient government funds that are even worse than Malaysia’s.

Discussions with the corporate class and billionaires

Asean governments should have a continual dialogue with regional capitalists to convince them that Asean governments are not anti-corporate and explain that efforts to increase corporation taxes are good for the corporate class as well, as it brings several benefits, including:

  • Increasing aggregate demand in all countries that implement it. The increase in gross demand in the Asean region will generate new investment opportunities for corporations
  • Job creation and improvement in social assistance programmes will make our society more harmonious, peaceful and safe. The rich can leave their houses without fear of being mugged or robbed.
  • The dependence of Asean capitalists on the US and European markets can be reduced if the purchasing power among the 650 million people of Asean increases

The steps outlined in the two paragraphs cannot be implemented immediately. It might take several years to negotiate such an agreement.

That is why this effort should be started as soon as possible – because significant increases in the corporation tax, capital gains tax, wealth taxes, the carbon tax and several other taxes cannot be implemented by any Asean country unilaterally. In a globalised world, these taxes need to be imposed simultaneously in several Asean countries to reduce the risk of capital transfer to neighbouring countries.

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While waiting for reforms in the corporate tax system, the Malaysian government could implement the following strategies to increase funds in order to improve our social safety net system.

Strategies that can be implemented now:

1. Subsidy rationalisation

The rationalisation of subsidies for petrol, electric power and cooking oil has the potential to save RM30-40bn per year. But any subsidy reduction should only be done after it has been discussed with the people and in a way that does not burden low and middle-income households.

In general, the approach to reducing subsidies is to let the price of the commodity float according to market forces up to a newly defined ceiling, while transferring some money to the bank accounts of people from the bottom 80% of households to cover the increase in the cost of living caused by the rationalisation policy.

Take petrol for example, the price of the RON95 grade can be allowed to float, with RM3.10 per litre fixed as the ceiling. At the same time, a sum of money is transferred to each car and motorcycle owner in the bottom 40% and middle 40% groups every month with the condition that:

  • the money transfer is only for one car, for one owner, and
  • the amount transferred is RM80 per month for a car and RM30 per month for a motorcycle. (The amount of RM80 is enough to cover the increase in the cost of 80 litres of petrol when the price reaches the ceiling level.)

The number of cars registered under the names of members from the bottom 40% and middle 40% of households is about 10 million10, and the number of motorcycles is also estimated at 10 million10.

Therefore, the amount of money that needs to be transferred to the people’s accounts is about RM10.4bn per year. This is less than the RM30bn10 per year currently used for RON95 subsidy payments.

This proposal should be announced to the public with an explanation of how the savings in petrol subsidies will be used to increase the social safety net assistance for them.

The issues listed below should be discussed among the people through a town hall meeting.

  • Is this RM80 enough for every car owner?
  • how to handle a husband-wife couple where they use two cars but both are registered under the husband’s name?
  • Someone uses a car registered under his or her parent’s name
  • A person who owns a motorcycle and a car
  • People who live in remote areas. Is there a need to transfer a larger amount to them?
  • Similar issues

The issue of petrol price hikes has provoked people’s anger, demonstrations and even the disposal of governments in other countries. So the government should handle this matter wisely. For certain, the opposition will use this issue to criticise the government relentlessly.

Among the approaches that should be taken by the government, is to

  • Separate the rationalisation of diesel11 from the rationalisation of RON95
  • Combine the reduction of RON95 petrol subsidies with a programme that clearly benefits the people, such as a senior citizens’ pension programme or an increase in bus services throughout the country
  • Give the people in all areas the opportunity to give their feedback through town hall meetings. Ideas from the people should be collected and used to fine-tune the proposed petrol subsidy reduction
  • Hold a national referendum and only implement this new scheme if it is approved in this referendum

2. Reduce leakages in government expenditure

It is estimated that between RM20-40bn is lost every year due to corruption, quotations that are too high by crony contractors, the purchase of low-quality or faulty goods, inefficiencies on the part of suppliers and contractors, and so on.

This matter is often reported by the auditor general, but it keeps recurring.

To reduce these leakages, the government officials who manage funds should be made more accountable. The following steps should be implemented:

  • The auditor general’s office should be allocated more staff and funds so that the office can conduct more investigations into government departments at the federal and state levels
  • All ministries and government departments should be required to investigate any weaknesses and leaks identified by the auditor general’s office and institute measures to overcome them. Actions being taken to remedy the situation must be reported to the office, the Malaysian Anti-Corruption Commission, the parliamentary Public Accounts Committee and the chief secretary to the government
  • Action must be taken against officials who have committed wrongdoing, negligence or accepted bribes, depending on the level of wrongdoing. The senior officer in charge of the unit or department where the offence or negligence occurred should have his bonus deducted or denied a salary increase for the year in question. Government regulations should be modified to enable the imposition of these penalties.
  • A special unit should be established under the chief Secretary of the Government to monitor the action being taken in various ministries and departments to ensure that wastage, corruption and inefficiencies are taken seriously by all heads of units and divisions.
  • The laws regarding corruption should be modified such that government officials or politicians can be prosecuted if they cannot explain how they or their families hadaccumulated such a large amount of wealth

3. Debt monetisation

Debt monetisation is a modality of generating funds for the government by borrowing from the national bank itself, and at a very low rate of interest.

Usually, a government borrows money by issuing government bonds. The coupon rate for Malaysian government bonds is about 4.3% per annum and these interest payments (debt servicing) now comes to RM43bn annually.

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If the government sells bonds to the national bank itself with low interest rates, we can obtain some of the funds we need for programmes that benefit the people, without increasing the amount of interest payments.

But this modality has certain problems. One is the possibility that it will cause inflation through an increase in the amount of imported goods.

For example, if the Ministry of Health’s allocation is increased by RM10bn, part of it will be used to buy equipment such as MRI scanners from other countries. Another part will be used to hire new staff.

About 30% of a normal household’s expenditure is spent on imported goods – some types of food, clothes, mobile phones and so on. We estimate that about 40% of any additional government expenditure will be used to buy imported goods.

An increase in imports will lead to more Malaysian currency in the international money markets. This will tend to lead to a decline in the ringgit’s value compared to other currencies12 because the value of the ringgit is determined by the balance between the supply and demand of the ringgit in the currency market.

And when the value of the ringgit declines, the price of imported goods will rise, causing inflation.

Another negative effect of this modality is the possibility that international credit rating agencies will lower the nation’s credit rating. This is a serious matter because it will increase the cost of borrowing funds from international financial institutions. Not only for the government, but also for the private sector that borrows funds amounting to RM80bn per year on average.

PSM’s recommendation is to use debt monetisation cautiously by borrowing an amount equivalent to 1% of the country’s GDP from the national bank for the coming year: 1% of GDP is about RM20bn.

These funds should be used to strengthen the social protection net (perhaps increasing allocations to public health) and to restore our forests.

We estimate that an increase in government spending of RM20bn will lead to an RM8bn increase in imports. This is a small amount compared to Malaysia’s total import value of RM1,000bn in 2022. The risk of this affecting the value of the ringgit is small.

Apart from the strategies and methods described above, the Malaysian government should continue with its stated intention of  

  • imposing higher taxes on luxury goods. Maybe the certificate of entitlement (COE) system to buy cars with an engine larger than 2 litres could be imposed. (The COE is being used in Singapore.)
  • imposing capital gains tax on investments in companies that are not listed on the Malaysian stock exchange (unlisted companies)

Since these two methods have already been announced by the PM himself, we will not repeat them here.

It is our hope that our recommendations will be taken seriously by the Ministry of Finance and the Economic Planning Unit. We are ready to discuss with any part of the Ministry of Finance or the Economic Planning Unit (EPU) and explain our recommendations in greater detail.

Notes

  1. These figures are quoted from the reports of the Ministry of Finance.
  2. These figures are based on the following facts:

Cumulative inflation 1970 – 2019 = 5.3 times

(Source: www.worlddata.info/asia/malaysia/inflation-rates.php)

GDP in real ringgit value

1970        RM11.829bn (Source: Statistics Department)

2019         RM1,513.2bn = RM285.5bn in 1970 ringgit                                                                                                (RM1,513.2bn divided by 5.3)

RM285.5bn divided by RM11.829bn = 24.14

  1. Total Malaysian population

1970 – 10.31 million (Source: www.macrotrends.net>MYS)

2019 – 32.8 million (Source: Statistics Department)

32.8 million divided by 10.31 million = 3.18

24.14 divided by 3.18 = 7.59

  1. The federal government’s revenue in 2023 is estimated to be RM291.5bn

Malaysia’s GDP in 2023 is estimated to be RM1,930bn (Source: Budget debate in Parliament, 2023)

  1. These figures are regarding Malaysia’s economy including the GDP = RM1,695.2bn in 2022 – Economic Planning Unit, Prime Ministers Department
  1. The figures in the chart below are the estimates of the Biro Kajian Dasar PSM, based on articles in the newspapers and online media.

The figures in the chart above are before government taxes are taken into account. The GDP ratio obtained by the government through direct, indirect taxes, dividends, etc, is about 15%. Most of this amount comes from the top line and the bottom two lines.

  1. 4% of RM1,695bn is RM550bn.

When divided by 10.6 million workers, the monthly income is RM550bn divided by 10.6 million divided by 12 months = RM4,324 per worker per month

  1. National Statistics Department
  1. Malaysia’s competitors for foreign direct investment are Thailand, Vietnam, Indonesia and the Philippines. So an agreement between these five countries could stop the race to the lowest corporation tax rate.
  2. All these figures are the estimates of the Biro Kajian Dasar.
  3. An increase in the price of diesel will trigger inflation because the cost of transportation of goods will go up and the common people will get angry. What can be implemented is to monitor the consumption of diesel by imposing the condition of using a card to buy diesel at a subsidised price so that the amount purchased through each card can be monitored. Parties who buy a lot of diesel to sell in other countries can be identified from the excessive amount they buy.
  4. This problem will be reduced if more countries use this method. This is because an increase in the imports of one country is an increase in the exports of other countries.

The above suggestions were handed over to Prime Minister Anwar Ibrahim by Dr Jeyakumar Devaraj

The views expressed in Aliran's media statements and the NGO statements we have endorsed reflect Aliran's official stand. Views and opinions expressed in other pieces published here do not necessarily reflect Aliran's official position.
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Dr Jeyakumar Devaraj, a long-time Aliran member and contributor, served as Member of Parliament for Sungai Siput from 2008 to 2018. A respiratory physician who was awarded a gold medal for community service, he is also a secretariat member of the Coalition Against Health Care Privatisation and chairperson of the Socialist Party of Malaysia.
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Pat Adam
Pat Adam
18 Oct 2023 4.16pm

why donate rm100million to Gaza when there are poor people in Malaysia

Pat Adam
Pat Adam
18 Oct 2023 4.14pm

all ideas are great , But will the PM take the points seriously