Pakatan Harapan's pledges won't derail Malaysian economy's growth trajectory

PETALING JAYA: With Pakatan Harapan (PH) vowing to abolish the Goods & Services Tax (GST) after its historic win in the 14th general election (GE) on Wednesday, economists do not foresee Malaysia sidetracking from its robust gross domestic product (GDP) growth trajectory and opine that prudent government spending could make up for the loss of tax revenue.
PH leader Tun Dr Mahathir Mohamad said in a press conference today that GST, which was introduced by the past administration, will be abolished, and the Sales and Services Tax (SST) will be reinstated.
Mahathir was sworn in as Malaysia’s 7th prime minister tonight, his second time in office. He was the country’s 4th prime minister from 1981 to 2003.
Speaking to SunBiz in the wake of PH’s election victory, Sunway University Business School Professor of Economics Dr Yeah Kim Leng said the abolishment of GST coupled with the scrapping of toll charges will spur private consumption, disposable income and consumer spending, as consumers will be left with additional money to spend, a boon for gross domestic product (GDP) growth.
He projects the measures to move GDP either up or down by between 0.5% and 1%.
“It depends on the policy changes. If GST is abolished, first of course it will increase the disposable income of consumers and in turn their spending, which will boost the economy.
“However, we need to see whether there will be any cutbacks in government spending or if they will be able to find additional sources of revenue to offset the reduction in GST revenue for the government,” Yeah said.
He acknowledged that the abolishment of GST will reduce the government’s flexibility in raising revenue, which in turn leaves less room for reduction of corporate and income taxes.
Meanwhile, with the abolishment of toll collections, PH may be confronted with expenses in the form of compensations to concessionaires, which may impede its spending resources.
However, Yeah said in view of the economy maintaining its robust growth trajectory, it will provide PH with the flexibility of combining and reallocating resources.
The government collected around RM17.2 billion in SST in 2014, while GST collection hit RM44 billion in 2017.
To bridge the gap, Yeah said, there is a need to diversify income streams as well as implement cutbacks in government spending by preventing leakages and wastage.
“Possible revenue sources will be of course Petronas dividend with higher oil prices … in fact, a couple of additional billions coming from Petronas.The other is privatisation, for instance, sale of government assets,” he said.
While acknowledging that privatisation has its pros and cons, he said it could be one of the ways to raise revenue without affecting service to the people.
Yeah noted that the immediate effect that could spring from reviews of mega projects may also result in spending efficiency and reduction in leakages and wastages.
“So it all depends on to what extent … so there are long-term and short-term effects, like for example, if cutting back on the ECRL, the immediate effect is of course reduced investment spending,” he said, referring to the East Coast Rail Line.
Meanwhile, Malaysian Institute of Economic Research senior research fellow Dr Shankaran Nambiar said the economy is likely to maintain its growth trajectory.
“There might be initial hiccups, but as the months progress and as a more solid framework is laid out, confidence will be restored. I think the economy will probably do as well as it did last year, which was 5.9% (growth). I am looking at 5.6-5.8% at the least,” he said.
“Overall, the concerns that plagued the economy in the last few years will be remedied and more confidence will be generated. That’s the promise that has brought PH to power and I am sure Mahathir is set to achieve that,” he added.
Meanwhile, on capital outflows, Yeah said short-term capital outflows are likely to be volatile on the back of political uncertainties but it is unlikely to be a going concern.
“These are so called ‘hot money’ at this juncture I feel there will be some major reaction … some pullout because of political uncertainty but I think we should not be overly concern about inflows and outflows, because this is something every country with open capital markets will experience,” he said.
“The more important focus should be on building the resilience of the economy, and that means attracting long-term capital flows and foreign direct investments rather than be concerned about short-term outflows.”