A New Dawn 2018 was the title of the star-studded gathering of corporate Malaysia, bankers, fund managers and analysts who came from near and far and filled-up the conference rooms to the brim, especially when our Prime Minister and the Minister of Finance took stage in the first two sessions of the day. The message was clear, it was telling the investing world what has transpired since May 9 and how the government is managing the various challenges it faces since taking over from the previous ruling party. From the lack of commitment among civil servants to carry out Pakatan Harapan’s promises to financial details as well as putting the house in order in various sectors.
It was a good one-day show organised by the Finance Ministry in collaboration with CIMB, Maybank and RHB. Since GE14 and after the new government was sworn in, we now know that the nation’s debt level is clearly more than what was initially communicated to the market. This I would refer to as our balance sheet issue. Our other issue is our budget deficit level and clearly, although we would likely be able to meet this year’s target of -2-8%, it will likely be a herculean task to achieve the same in 2019, given the RM35bil shortfall due to the GST and income tax refunds. This is our income statement issue. image:
To tackle the balance sheet issue, the government’s plan is to monetise the assets that is has and this includes either landbank, stakes in listed or unlisted companies held directly or via Khazanah Nasional or other GLCs. Whether the listing of our most prized asset, Petronas, is on the cards is left to be seen. Nevertheless, the objective is to bring back our current debt/GDP from the current level by at least 10-11 percentage points, i.e. to the previously self-imposed ceiling of 55%. Given the three-year time frame needed, this entails a reduction of at least RM180bil, i.e. assuming our nominal GDP expands by about 5% p.a. to about RM1,645bil by 2021 while our net government debt rises by about RM40bil p.a. to sustain our budget deficit and potentially to raise another RM35bil one-off in 2019 to return to taxpayers the GST and tax refunds due.
Question is, while the government do have assets it could monetise to raise this RM180bil, what will the government sell to raise the funds required? On the income statement, the government has a new challenge, i.e. to sustain its budget deficit targets despite the shortfall in revenue due to the switch from GST to SST in 2019 and tax measures to boost revenue. What is surprising that if we look back since 2010, the government’s revenue to GDP has been hovering at about 20%, but this slowly declined to 18.9% in 2015 and dropped further to 16.3% in 2017. For 1H of 2018, this figure is now just 15.4%. Clearly, the government’s revenue has not kept up with the growth of the economy itself as there were instances that revenue even fell y-o-y. (see table) Hence, the above chart explains why we need to make more sacrifices as simply the government has not been “taking enough” from us.
In 2017, the government collected some RM220bil, of which, just under 30% was corporate taxes; 20% from GST; 13% individual taxes; and about 10% in government’s own interest and returns from investments. The 20% GST amount will now be reduced by half in 2019 to just 10% of total revenue based on the SST mechanism. I reckon that other than what I had previously written about Inheritance Tax and Capital Gains Tax (StarBiz, July 21), which perhaps could send a wrong signal to Malaysians, or even if at all introduced, it must have a desired effect to be of significance, we need to see how we could widen the tax net to not only to current taxpayers but potential new taxes.
There is no point of introducing a new tax that perhaps contribute less than 1% or 2% of actual Government’s revenue. Looking at the breakdown of the current tax revenue, one cannot deny that the corporate sector, despite being the largest contributor to Government’s revenue, has been well shielded by higher or new taxes. In 2014, tax revenue from corporates grew 12% y-o-y to reach RM65.2bil and since then, the corporate sector’s tax contribution to the federal coffers has been flat.
It fell 2.5% y-o-y in 2015, mainly due to tax breaks granted to companies in lieu of GST. It was relatively unchanged in 2016 before rising just 1.3% in 2017. In the 1H of this year too, the contribution from corporates was weak, rising by just 1.3% y-o-y. Being the largest contributor to the Government’s revenue, the corporate sector perhaps should be taxed more as it is rather surprising that despite the growth in the economy, the corporate sector’s income tax contribution has not grown in tandem. Hence, other than the new taxes that we are talking about, there is indeed room to raise taxes in its current form as the Government should be targeting a revenue of about 19-20% of nominal GDP and not just at about 15% and dwindling. With less than 3 weeks to go before the Finance Minister tables the Budget 2019, which I believe is an eagerly awaited event for the first time in perhaps two decades, the market is now pricing in some of these expectation. Indeed, in the new Malaysia, new taxes will likely be a norm rather than an exception.