Debt addiction: a time bomb

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In the wake of the tabling of the 12th Malaysian plan (12MP), the next agenda is the presentation of the 2022 budget in just under three weeks.

All eyes are on the Honorable Minister of Finance to present an expansionary budget that reflects the needs of the people, businesses and strategic direction.

Unlike in the past, the Minister was this time forthright about what to expect, anchored on three main themes – recovery, resilience and reform – with the presentation of the 2022 pre-budget report.

As it stands, the government has already planned to raise the statutory debt ceiling to 65% as well as raise the bar of the Covid-19 Fund to RM110bil from RM65bil, with an additional allocation of RM45bil.

To ensure a transparent and accountable process, monitoring and execution in the future, the government is also preparing to table a Fiscal Responsibility Law (FRA), which will first go through a public consultation process to obtain inputs. necessary, not only from stakeholders, but also from the public.

In a ministry statement, the government said it “remains committed to pursuing fiscal consolidation measures guided by the medium-term fiscal framework and supported by the medium-term revenue strategy to broaden the tax base and increase government debt aptitude “.

These are very strong words from the government as it takes the bull by the horns to tackle Malaysia’s twin tax and debt problem.

Higher taxes are a certainty

Let’s face it, none of us want to be taxed more than what we are currently paying. It’s human nature. But as the saying goes, in life there are only two certainties: death and taxes.

Some of us don’t even pay taxes because not only are we under-reporting our income, but at the same time, we benefit from all kinds of tax breaks offered by the government.

Statistics from the Inland Revenue Board (IRB) show that in essence, less than 20% of Malaysians are subject to income tax.

According to data provided in the Ministry’s Fiscal Outlook Report 2020, at the end of 2017, 62.4% out of 1.25 million companies registered with the IRB, only 7.8% are subject to tax.

The report added that only 16.5% of the 15 million workers were subject to personal income tax.

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With Malaysians also experiencing a loss of income due to Covid-19, the national median income for 2020 has now fallen to just RM 2,062 per month, according to the statistics department.

Obviously, half the population is not taxed at all, as the current personal income tax threshold starts at just RM 3,141 per month, based on the net monthly earnings of a taxpayer with a only status.

This amount alone is 52% higher than the median salary of Malaysians in 2020. Even then, tax collection is nothing as only RM1 is deducted for tax purposes based on the deduction schedule. monthly tax 2018.

This suggests that a person with a take-home pay of RM3,141 per month is effectively only paying 0.4% of their annual income in taxes, which barely matches the cost of a cup of coffee at Starbucks.

No wonder Malaysia’s tax revenues are in dire straits when measured against the nation’s economic output.

Graph 1 shows that Malaysia’s current tax revenue as a percentage of GDP even fell below 11% for last year and up to the first half of 2021.

The large budget gap remains a concern

As explained in last week’s debt column, Malaysia has been running a budget deficit since the Asian financial crisis of 1998 and will likely do so until at least 2025, as the government is now forecasting a budget deficit of 3% to 3. , 5. % by then, based on the recently released 12MP.

Under the 12MP, the government is also expected to spend a massive RM400 billion in development spending to take the Malaysian economy to the next level with a projected nominal GDP of RM221 billion by 2025.

Malaysia also expects average monthly household income to rise from RM7,160 to RM10,065 by the end of 12MP, a CAGR of 8.1%, while employee compensation is expected to rise to 40 % by 2025 compared to 37.2% achieved in 2020..

A tall order given that Malaysia has long been stuck in the low-wage structure, mainly due to the inability to tackle income inequality and very low minimum wages of only RM 1,200 per month in the areas urban.

With such ambitious targets, Malaysia will likely continue to borrow to keep its economy functioning, at least for the next four years.

It can be assumed that Malaysia will continue to borrow, if not nearly 100%, at least 90% of its planned development spending under the 12MP.

This will increase the total federal government debt, by an estimated RM984 billion this year, as seen in Table 1, up to 1,300 billion ringgit by 2025, which gives a debt-to-GDP ratio of around 65%. This fiscal gap remains a concern and if not addressed properly it will lead to further deterioration in times to come.

Data for 2021 and 2022 in Table 1 are this author’s estimates and are based on the assumption that nominal GDP growth for 2021 and 2022 will be 6% and 7.5% respectively, while another RM10bil on the increase in RM45bil from the Covid Fund -19 will be used this year, leaving the RM35bil balance for 2022.

In summary, looking at Graph 1 and Table 1Malaysia is fundamentally stuck in an environment of low tax collection and growing debt.

While the new statutory debt ceiling of 65% will likely be maintained in the future, Malaysia urgently needs to tackle the issue of fiscal debt and tax management to get the country back on a sustainable path.

For starters, the government should aim to increase tax revenue as a percentage of GDP to 15% by 2025 and 20% by 2030 to ensure sustainable and responsible fiscal management.

Thus, on the basis of a nominal GDP of 2,021 billion RM in 2025, the taxes collected will then amount to about 303.1 billion RM, almost double what was collected in 2020 for an amount of RM 154.4 billion.

However, of the RM 148.7 billion increase, only RM 58.1 billion or 39% came from tax improvement strategies and new taxes, while the balance of RM 90.6 billion or 61 % is generated by the organic growth of the economy once tax strategies are in place. .

Next week, this column will discuss appropriate fiscal strategies the government should consider to improve its fiscal management.

Failure is not an option, as we have seen how debt-driven growth strategies in the past, although they allow the government to achieve great development, come at a price and that price is a dependency on debt, which can be a time bomb if not well managed.

Pankaj C. Kumar is a longtime investment analyst. The opinions expressed here are those of the author.

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