Need to adopt a targeted, sustainable approach

BUDGET 2014 will be a difficult one to craft. After a few years of economic uncertainties due to the global economic crisis, and the resulting slower growth, there are a number of issues that the budget needs to grapple with.

The key focus of Budget 2014 will be to keep the rakyat happy, while achieving a better balance of the government coffers. After the downgrading of Malaysia's rating outlook from stable to negative by Fitch Ratings, there is no denying the necessity to increase government revenue while keeping expenditure in check. It is no secret that almost 60% of government revenue still comes from direct taxes. As such, it is timely that the goods and services tax be introduced and subsidy reforms stepped up.

At the same time, a more sustained approach needs to be adopted in dealing with issues faced by the low- and middle-income group.

The government has done a lot in recent years to alleviate the rakyat's burden. The move from indirect measures such as subsidies, to more recent direct measures such as the 1Malaysia People's Aid, or BR1M, handouts to lower-income groups is a bold one.

Despite what the detractors say, handouts are relevant in dealing with the lower-income group issues and have been widely used in many countries. Hence, the expected enhancement in the coming budget would be relevant and timely. The implementation, however, may have to be tightened, particularly in relation to eligibility.

Dealing with issues of the middle income group would require a somewhat different approach.

Today, for instance, an average middle income family of four, making an annual median income of RM60,000, pays 5.4% in income taxes annually and services a housing and car loan at RM28,000 per year.

Meanwhile, past measures have centred around excluding more people (particularly the middle income group) from having to pay income taxes, by raising the minimum threshold. As such, it leaves only one million "eligible" Malaysians to pay tax.

Under the current personal tax system, a single Malaysian taxpayer needs an annual income of at least RM29,775 before taxes kick in.

Widening the tax bands and reducing personal tax rates alone will not sufficiently address the tightening budgets of the struggling middle income group, nor does this help drive desired behaviour such as helping Malaysians get onto the property ladder. There is a need to re-evaluate the approach taken to ensure that overall living standards and quality of life of the rakyat are not compromised.

I think that a balance needs to be struck between simplification (such as excluding people from the tax system completely) and adopting a targeted approach designed to drive outcomes that would benefit the nation.

Instead of raising thresholds, rebates and relief should then be worked into the system to ensure that the people are provided with adequate governmental support when buying a first property, or even using the public transport system.

Soaring property prices in urban areas in recent years have made it almost impossible for an average wage earner to own a decent dwelling or even qualify for low-cost housing.

For first-time house buyers, My First Home Scheme was announced in Budget 2011 to assist those who have just joined the workforce to own their first home. The scheme allows young adults to obtain up to 100% financing from financial institutions towards the purchase of their first house. This can be enhanced to cover first-time house buyers earning household income of less than RM60,000 as compared to the current RM36,000.

In line with a more targeted approach, a direct subsidy for eligible first-time house buyers would be more effective in dealing with the housing issue. This has been successfully implemented in Singapore and Australia.

The government can also look at measures to address the "hidden costs" of property ownership, such as stamp duty and legal costs. An option would be to provide stamp duty relief to all first-home buyers, and capping the relief at a certain amount, instead of limiting relief only to buyers of property of RM400,000 and below.

We are forever playing a catch-up game with living costs, as the prices of necessities are always rising more quickly than wages. As such, it would be timely to remove populist measures such as book vouchers and mobile phone subsidies, and channel funding to basic necessities such as public transport, healthcare and child care.

The government has already taken the first step towards subsidy reforms, by gradually reducing petrol subsidies – the next step would be to improve service levels of public transport to increase public transport utilisation.

While the government has not neglected the needs of the lower- and middle-income groups, I believe a more targeted and sustainable approach is needed going forward, to ensure that public spending is channelled towards key areas which are aimed at improving the overall quality of life for the rakyat as a whole.

It is equally important that all these measures drive behaviour in achieving the desired outcomes. Longer term benefits such as house ownership is more important than short-term relief.

Jagdev Singh is tax leader at PricewaterhouseCoopers Taxation Services Sdn Bhd.