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New Straits Times
07-07-2025
- Business
- New Straits Times
Economist: SST reform may be unpopular, but it's what Malaysia needs
KUALA LUMPUR: The government's decision to expand its Sales and Service Tax (SST) this month should not be viewed as merely a tax hike, but rather as a critical step toward long-term fiscal sustainability, according to economist Dr Goh Lim Thye. This, he said, is especially relevant given Malaysia's low tax-to-gross domestic product (GDP) ratio, which limits the government's ability to sustainably fund development and social protection. "Though not without flaws, the policy represents an important step in Malaysia's broader effort to strengthen fiscal stability and could deliver long-term benefits if implemented thoughtfully and fairly," Goh wrote in a commentary. The revised SST, implemented on July 1, includes an increase in the service tax rate from six to eight per cent for selected sectors and an expanded list of taxable services, such as private clubs, karaoke centres and professional services. Essential services including food and beverage, telecommunications, logistics and parking are excluded. Goh noted that Malaysia's tax-to-GDP ratio stood at just 13.2 per cent as of the third quarter of 2024 — significantly below Thailand's 16 per cent and far below the Organisation for Economic Co-operation and Development average of over 30 per cent. He said the 2025 Budget estimates an additional RM5 billion in revenue from newly included taxable items, helping to close the fiscal gap. With national debt standing at RM1.22 trillion, or about 63 per cent of GDP as of April 2024, the government has also targeted a reduction in the fiscal deficit from five per cent in 2023 to 3.8 per cent by 2025. "Enhancing domestic revenue mobilisation is not a policy choice but a necessity for fiscal resilience," he said. To cushion the impact, the government has exempted daily essentials such as rice, vegetables, fish, eggs and selected imported fruits like apples and oranges from the expanded sales tax. It also raised the SST registration threshold for financial and rental services from RM500,000 to RM1 million, a move expected to shield many micro and small businesses. Still, Goh acknowledged that indirect taxes tend to be regressive, as lower-income households spend a larger share of their income on consumption. To address this, he recommended that part of the revenue be reinvested into targeted assistance such as cash transfer schemes, expanded subsidies for food and transport, and better access to public healthcare. Goh added that if additional SST revenue is effectively deployed, it could help reduce the deficit and enhance Malaysia's sovereign credit outlook and investor confidence. He also pointed out that fiscal strength was one reason Malaysia climbed 11 spots to 23rd in the 2025 IMD World Competitiveness Rankin, its highest placement since 2020. "A stronger tax structure that supports reduced fiscal deficits and sustainable debt management sends a positive signal to investors and rating agencies," he said. Malaysia's SST reform is not occurring in isolation. Other countries have adopted similar moves. Singapore increased its Goods and Services Tax (GST) to nine per cent in January 2024, while Indonesia raised its Value Added Tax from 10 to 11 per cent in 2022 and may increase it further to 12 per cent. New Zealand runs a 15 per cent GST with minimal exemptions, offsetting the burden through targeted welfare transfers and a progressive income tax system. Goh said such examples show that consumption taxes can be sustainable when embedded within a broader framework of redistribution and transparency. He also noted that the government's reversal on taxing beauty services and certain fruits, following public backlash, highlights the importance of better communication and stakeholder engagement. "Economic policy, particularly one that affects consumer behaviour and firm-level pricing decisions, must be grounded in transparent consultation," he wrote. Ultimately, he said the SST expansion should be seen not as an endpoint, but as a step toward fiscal maturity and resilience, if supported by broader reforms and visible, equitable public spending.
Free Malaysia Today
11-06-2025
- Business
- Free Malaysia Today
National debt manageable amid reforms, says economist
While Malaysia's debt has soared to RM1.22 trillion, an economist believes it will not threaten future prosperity. (AP pic) PETALING JAYA : Malaysia's elevated national debt does not pose a threat to the country's prosperity as its strong fundamentals enable the government to service the debt, said an economist. Universiti Malaya (UM) senior economics lecturer Goh Lim Thye said the national debt, which stood at RM1.22 trillion and 63% of gross domestic product (GDP) as of April 2024, warrants careful management but 'is not inherently a threat to future prosperity'. Goh Lim Thye. 'In assessing debt sustainability, economists focus less on the absolute size of the debt and more on the country's ability to service it over time without compromising growth or triggering financial instability,' he told FMT. In Malaysia's case, he said, the country still enjoys substantial fiscal capacity, a diversified economic base, and continued access to domestic and international capital markets. More importantly, international institutions continue to signal confidence in Malaysia's fundamentals, he said. 'All three major credit rating agencies — Standard & Poor's, Moody's and Fitch Ratings — have reaffirmed Malaysia's investment-grade ratings in 2024,' said Goh, who is deputy dean (development) at UM's faculty of business and economics. 'These ratings send an important message to the global investment community: Malaysia's fiscal position is being managed prudently, and the government is making steady progress on necessary reforms,' he added. Praise from the IMF The government's fiscal reform initiatives have also been given a positive assessment by the International Monetary Fund (IMF). In its March report following consultations with Malaysian authorities last December, the IMF welcomed the government's commitment to fiscal consolidation and the 'historic enactment' of the Public Finance and Fiscal Responsibility Act (FRA). 'Current policies are focused on rebuilding fiscal buffers, augmenting growth potential, and strengthening social protection while preserving macroeconomic and financial stability. 'The landmark FRA, enacted in 2023, aims to strengthen fiscal management and governance,' it said. The IMF said Malaysia's favorable economic conditions provide a window of opportunity to build macroeconomic policy buffers and accelerate structural reforms. The agency noted that under the Madani Economy, the government has developed a set of policy frameworks that focus on increasing incomes, addressing climate change, promoting digitalisation, and enhancing governance. Fiscal and structural reforms Imran Yusof. MIDF Amanah Investment Bank head of research Imran Yusof agrees that the government's on-going fiscal and structural reforms will provide a good buffer and improve on the debt position. 'We believe (the government) is on the right track to ensure that we can get a higher surplus and lower the fiscal deficit,' he said. The administration's fiscal consolidation efforts are already bearing fruit, with the fiscal deficit on a steady decline since the unity government took power in late 2022. It outperformed its fiscal deficit target of 4.3% in 2024, achieving a reduction to 4.1% of GDP from 5% in 2023. It is projecting a further drop in the deficit to 3.8% in 2025. A fiscal deficit occurs when a government's total expenditure exceeds its income, excluding borrowings. The declining fiscal deficit is on the back of a steady reduction in new government borrowings, dropping to RM75 billion in 2024 from RM93 billion in 2023. In 2022, the previous administration borrowed RM100 billion. On the national debt, Imran opined it is more contextual to look at it from a debt-to-GDP ratio perspective rather than the absolute amount. He noted that as long as there is a budget deficit then the national debt level will continue to grow. 'However, Malaysia has always practised a balanced operating budget, and the deficit is caused by development expenditure, which is akin to investment for the country's economic growth.' He explained the development expenditure, which is sourced through borrowings, is to ensure the economy continues growing or that economic shocks are not too detrimental to the rakyat's livelihood. 'Therefore, as long as nominal GDP continues to grow, then we expect the debt levels to be manageable,' he said. Inherited legacy problem Goh said the elevated national debt is not a reflection of any mismanagement on the part of the current administration, but rather 'a complex inheritance of crisis-related and structural factors'. 'The current debt burden is largely the result of legacy factors and extraordinary crisis-related spending,' he explained. This includes the then government's Covid-19 pandemic response, unfavourable pre-pandemic fiscal trends, and legacy financial mismanagement such as the 1MDB debacle. The Covid-19 pandemic response ramped up the national debt as the Perikatan Nasional-led government deployed over RM530 billion in stimulus and recovery packages, of which over RM100 billion came in direct fiscal injections, from 2020 to 2022. 'These measures were critical to preserve livelihoods, safeguard SMEs, and prevent economic collapse, but came at a huge cost to public finances,' he said. Goh also said the 1MDB scandal added long-term debt obligations and contingent liabilities on the government. 'While direct liabilities have been partly resolved, the broader fiscal implications — including lower investor trust and opportunity costs – persist today. 'The question now is how to restore resilience, and early signs suggest the government is taking meaningful steps in that direction,' he added.
Malay Mail
22-05-2025
- Business
- Malay Mail
Malaysia's fuel subsidies waste billions and worsen inequality, economists warn
KUALA LUMPUR, May 22 — Universal fuel subsidies have long helped Malaysians cope with the rising cost of living, but economists now warn that blanket subsidies may be doing more harm than good. While they reduce costs for consumers, such subsidies often lead to overconsumption, smuggling, and a disproportionate benefit to higher-income groups. 'There is a tipping point, and we are already beyond that point,' economist Geoffrey Williams, who supports a move towards targeted subsidies, said in a Free Malaysia Today report. He said this occurs when inequality grows and the cost of subsidies outweighs their intended social impact. Economist Madeline Berma said subsidies are not inherently flawed but often miss their intended targets, with wealthier Malaysians enjoying most of the benefits. 'They're poorly targeted; the wealthier groups, not the vulnerable ones, are absorbing a big chunk of the benefits,' she said. She praised efforts such as the Budi Madani programme, which the finance ministry said saved more than RM7 billion by reducing leakages and diesel smuggling. Universiti Malaya economist Goh Lim Thye highlighted that nearly 40 per cent of the RON95 subsidy, valued at RM8 billion, benefits the richest 15 per cent of the population and foreign nationals. 'Money lost to leakages and inefficiency could have gone into healthcare, digital infrastructure, or climate resilience — it's not just inefficient, it's unfair,' Goh said. Williams warned that prolonged subsidy protection can harm Malaysia's long-term economic competitiveness, while Madeline cautioned that failure to act now could hurt investor confidence and the country's fiscal credibility.
Free Malaysia Today
22-05-2025
- Business
- Free Malaysia Today
Failure to curb subsidy leakages risks economic liabilities, says economist
An economist says public distrust of the government is fuelled by leakages, particularly when unqualified recipients benefit from government subsidies. PETALING JAYA : Subsidy leakages severely undermine economic efficiency and fiscal discipline, and if left unchecked, could result in significant liabilities, says an economist. Goh Lim Thye of Universiti Malaya said the short-term consequences of such leakages include direct revenue losses, weakened impact of fiscal transfers and a decline in credibility in public spending. 'In the long-run, these leakages create systemic distortions: they entrench rent-seeking behaviour, reduce incentives for energy efficiency, and delay the necessary shift towards a more targeted, sustainable subsidy framework. 'Without reform, subsidies risk becoming politically entrenched fiscal liabilities rather than tools for equitable development,' he told FMT. Another economist, Madeline Berma of Institut Masa Depan Malaysia, said leakages also fuel public distrust, particularly when unqualified recipients benefit from government subsidies. 'Subsidy leakages can also potentially exacerbate income inequality which also creates opportunities for corruption and rent-seeking behaviour,' she added. She said that while reforms have been implemented, Malaysia is still grappling with leakages and has yet to entirely eliminate them. However, she noted that the government's move to rationalise diesel subsidies in June last year had led to significant decrease in leakages. Earlier this month, the government ended price controls on eggs and reduced subsidies from 10 sen to 5 sen per egg, with full removal set for Aug 1. The agriculture and food security ministry said prolonged price controls and subsidies were unsustainable in the long term for both local egg producers and the country's fiscal health. It said rationalising subsidies was the fairer approach, as subsidies are currently also enjoyed by foreign nationals and high-income groups. 'By resetting the system and using technology to monitor eligible recipients, the government has saved RM7.5 billion without harming those genuinely in need of subsidised diesel,' said economist Geoffrey Williams. He said success in tackling leakages not only saves money for more meaningful public spending, but also eliminates the broader disadvantages of subsidy-related corruption. The funds saved could be redirected to for health services, education, and social protection, encouraging a return of public trust. 'It cuts out all the disadvantages of subsidies and removes market distortions, creating a more competitive, agile and efficient system,' he said.
Free Malaysia Today
22-05-2025
- Business
- Free Malaysia Today
Redirect subsidy reform savings to strengthen federal aid initiatives, says expert
The subsidy for RON95 benefits the richest Malaysians disproportionately. PETALING JAYA : An economist and a consumer group have urged the government to ensure that savings from fuel subsidy rationalisation be used to strengthen federal aid initiatives such as Sumbangan Tunai Rahmah (STR) and Sumbangan Asas Rahmah (Sara). Goh Lim Thye of Universiti Malaya and the Federation of Malaysian Consumers Associations (Fomca) told FMT such reforms are essential and timely given that blanket subsidies tend to benefit high-income households disproportionately. Goh pointed to data shared by Prime Minister Anwar Ibrahim showing that foreign nationals and the richest 15% of Malaysian consumers enjoyed as much as 40%, or RM8 billion, of the RON95 petrol subsidy last year. 'Blanket fuel subsidies are fiscally draining and structurally regressive, especially when higher-income households, who drive more and own multiple vehicles, end up receiving a larger share of government support,' he said. 'To ensure long-term sustainability, Malaysia must move away from untargeted, consumption-based subsidies toward a more needs-based, data-driven social support system,' he added. Finance minister II Amir Hamzah Azizan previously said the government is expected to save between RM7.2 billion and RM7.5 billion annually by introducing targeted diesel subsidies, almost double the initial forecast of RM4 billion. The government rolled out the targeted subsidy for diesel in mid-2024, while the subsidy for RON95 is likely to be rationalised by mid-2025. Goh said that reforming the subsidy system could help preserve public funds for key aid initiatives, including child nutrition, elderly care, and targeted cash assistance such as STR and Sara. 'Savings from such reforms, potentially in the billions, could also be redirected to enhance the depth and coverage of existing safety nets, support rural development, or improve critical services like healthcare and education,' he added. Fomca CEO T Saravanan said subsidy schemes should be implemented with a 'clear, transparent, and fair' targeting mechanism that includes robust monitoring and enforcement to prevent profiteering. 'Subsidy reform is critical for long-term fiscal and social sustainability, but it should be gradual, inclusive, and accompanied by effective communication and engagement with consumers to prevent shocks and negative public sentiment,' he said. Saravanan added that any move to redirect savings must lead to broader coverage and increased payouts in aid programmes to ease cost-of-living pressures. For Goh, the fuel subsidy rationalisation move is ultimately a test of the government's readiness to make difficult choices. 'Accurate targeting (also) depends heavily on reliable and timely socioeconomic data. (Therefore) platforms like the central database hub (Padu) must be updated continuously and verified to avoid exclusion errors,' he said. 'Without that, even well-intentioned redistribution could fail to benefit those most in need, undermining public trust and policy,' Goh added.
