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Economics Politics & government

[2948] Government money is best used for actual spending and investing, not replenishing EPF savings

National Union of Bank Employees (Nube), the banking union in Malaysia, wants the government to “return monies withdrawn by B40 and M40 members under the Covid-19 relief package.”[1] I take that as demanding the government to directly replenish EPF contributors’ savings that were depleted by government Covid-19 withdrawal programs. The news report does not mention when the union spokesperson wants the replenishing to happen, but I assume as soon as possible.

For the uninitiated, the Employees Provident Fund (EPF) is a compulsory retirement scheme for private sector workers.

I disagree with the withdrawal EPF schemes, and along with many others, instead have advocated for the government to raise its borrowing and commit to greater spending instead in order to provide greater assistance.[2] But the government was too worried about its fiscal deficit, too fresh to learn all the economic levers it had, and too desperate to find ways to relieve the spending pressures they felt. Among the chaos, they heard Najib Razak’s bad advice and took it.

But it is done now. A mistake has been made. While too many EPF contributors find their account depleted as a result, the overall economic circumstances have changed. During the pandemic, we needed economic programs guaranteeing everybody a certain level of welfare, particularly when a significant part of the economy was shutdown. With the private sector disabled so thoroughly, it was the responsibility of the government to secure everybody’s basic needs. It was a hibernation policy: lockdown and government assistance.

Now that the economy is back operating albeit weakly, priorities have changed. We need to strengthen the economy. Instead of hibernating, we need more spending and investing by the both the public and the private sectors.

This of course assumes we will not make any more mistake on the health front. While there is a real room for optimism going forward, with vaccination rate running high, and that we know more about the virus, after the government’s naïve V-shape recovery blunder, we can never be too careful.

Having the government replenishing EPF savings, especially if immediately or the near future, runs contrary to current priority of economic recovery: pushing for greater spending, investing in capacity building, and simultaneously creating jobs.

Why?

Because putting government revenue (or borrowing or both, since the government unlikely to enjoy any kind of fiscal surplus) into EPF savings would store the money into passive activity for an extended period of time (due to the nature of the scheme, which savings could only be withdrawn at retirement age under normal circumstances; for the macro-inclined, you would remember S=I, but here I would argue S=aI where a<1 since EPF typically invest in equities and debt, and not directly, and if directly definitely in the very minority, into new productive assets like factories and infrastructure). It would go into the financial market, but that is not the most productive of all options available out there. In other words, the act of replenishing will take a lot of steam needed to power the recovery.

And it is worth remembering that economy in 2021 will be smaller than it was in 2019: recovery is not complete. This is an important point because it has long-term repercussion on the economy.

To illustrate the point, it is good to go back to the 1998 during the Asian Financial Crisis. The Malaysian economy only truly recovered from the 1990s crisis by mid-2010s: actual GDP only surpassed the what-if-there-was-no-1990s-crisis GDP around 2015-2016. To put it differently, actual GDP level only surpassed the pre-crisis level around 2014. That is close to 20 years of lost potential.

Actual GDP vs hypothetical pre-AFC growth trend

For 2021, we are still both below pre-crisis level and trend.

For fear of losing more potential, we need to focus on spending and investing. Having the government correcting their EPF mistake by replenishing the accounts will heighten the risk of us losing potential.

The replenishing size, and in turn, potential loss from the replenishing policy, is not small. A report from the Finance Ministry shows the cumulative EPF withdrawal under the 3 programs (i-Lestari, i-Sinar and i-Citra) was RM90.3 billion as of early October 2021. More has been approved but yet to be withdrawn. Replenishing it as soon as possible would take at least RM90.3 billion off the economy in terms of spending and investment, ignoring any multiplier effect.[3] To put the number in perspective, that is nearly 30% of what the government plans to spend in 2022 and in fact, RM15 billion bigger than the government’s development allocation. Even by spreading the replenishment over 2 or 3 years, such policy would take so much money from most parts of the economy, and into the finance industry that will eventually manage those money.

But that does not mean there is no other way of replenishing it. Two ways I can think of are:

  • Tiering the dividend, which those with the least savings getting the highest rate. I have suggested tiering because, but it was primarily made out of realization the wrong people are given the incentive to save, and so, disincentive to spend and invest.
  • Increasing employers’ mandatory contribution. This will increase cost of doing business, but the government, while not doing enough, did a lot for businesses. Perhaps, it is time for businesses to play their role here.

Both however will be a slow replenishing process. Furthermore, increased mandatory contribution, for instance, might reduce take home pay as employers recalibrate their wage structure.

Another way by way of indirect replenishing is to make something like a senior citizen cash transfer bonus, payable by the government upon a person’s retirement, on top of existing cash transfer programs. But done together with dividend tiering, increased contribution and perhaps other ways too, this could reduce the size of the program, while pushing it far enough into the future.

Hafiz Noor Shams. Some rights reserved

[1] — KUALA LUMPUR (Nov 22): The National Union of Bank Employees (NUBE) had on Monday (Nov 22) urged the Employees Provident Fund (EPF) to demand that the government return monies withdrawn by bottom 40% (B40) and middle 40% (M40) segment EPF members to protect their retirement savings at a time when EPF members’ retirement savings have depleted due to Covid-19 pandemic-driven economic challenges. [Shazni Ong. EPF asked by NUBE to demand govt to return monies withdrawn by B40, M40 members during Covid-19. The Edge Markets. November 22 2021.]

[2] — Two experts Malaysiakini spoke to had concerns about allowing such a large number of people to dig into their retirement savings. Instead of tapping into EPF, both opined that the government could have spent more to provide assistance to households amidst the Covid-19 pandemic. Economist Hafiz Noor Shams previously analysed that the government was not spending enough in Budget 2021 to support the economy, by virtue of what he regarded as an overly conservative deficit estimate. [Annabelle Lee. Economists: Why let 8m tap EPF when govt can afford cash assistance?. Malaysiakini. November 27 2020.]

[3]Laporan LAKSANA ke–76. Page 11. Ministry of Finance, Malaysia. November 17 2020.]

Categories
Economics

[2568] Will government revenue fall with tax relief associated with private pension fund?

The Prime Minister finally launched a private pension fund. I am supportive of the idea of private and voluntary pension fund, but I am not going to discuss that here.

What I find interesting rather is that contributors to the private fund are entitled to RM3,000 tax relief in a year. This raises one question: will that lower potential tax revenue for the government significantly in the future?

Consider a person that pays income tax of exactly RM3,000 in a year. Rather than pay that tax, it would be rational for him to put in RM3,000 in the private fund. The money remains his and he may even get extra returns from that. For the government, that is RM3,000 worth of potential revenue loss.

Now, the estimated 2011 income tax revenue derived from individuals was RM20.2 billion according to the Monthly Statistical Bulletin for May published by the Bank Negara.[1] According to a report by the New Straits Times, 2.5 million individuals were expected to file their 2011 taxes.[2] That means on average, a taxpayer paid approximately RM3,628 worth of income tax.

Of course, not everybody paid RM3,628 worth of income tax. According to the 10th Malaysia Plan, about 44% of house household earned less than RM2,5o0. Individuals within these household do not pay income tax. About 76% of household earn less than RM5,000. Households earning less than RM5,000 but more than or equal to RM2,500 may or may not pay income tax depending on who among them work. In short, the distribution of payment from taxpayers are skewed.

It is hard to link the household data to the 2.5 million expected tax filers. First, not all filers pay tax. Second, the household data assume each household has four persons in it. I would assume 2 working adults in the household. But that does not have to be the case in reality and this will affect calculation for income tax paid by the 76% household.

But, if we were to take the average blindly, if we all were rational and optimized our finances, if we were still in 2011 and if the private fund tax relief were in place in 2011, that would suggest that the government would have lost RM7.5 billion worth of income tax revenue. In 2011, the federal government suffered a fiscal deficit of RM42.5 billion, or 4.8% of nominal GDP. Without the RM7.5 billion, the deficit-to-GDP ratio would have been 5.7%.

One could take comfort that 5.7% deficit would be the maximum damage and the actual damage would be lower than that. But would still be higher than the actual 2011 deficit of 4.8% and that is the point.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1] — KUALA LUMPUR: AROUND 2.5 million Malaysians are expected to submit their taxes through e-Filing system this year. Inland Revenue Board public relations officer Masrun Maslim said this was an increase of 28.87 per cent compared with last year. [More taxpayers opting for e-Filing. New Straits Times. March 17 2012]

[2] — See the May 2012 Monthly Statistical Bulletin at Bank Negara Malaysia. Extracted on July 19 2012.

Categories
Economics

[1984] Of inverse relations between safety net and savings

If you think of the exports as the first link in the causal chain, the resulting pile of Chinese savings is the second. Much of this savings has been by the corporate sector, which is subsidized by the government in all sorts of ways (an undervalued currency, low interest rates, cheap energy). The economic boom brought big profits, and companies held on to much of them. The government has also increased its savings in this decade by collecting more taxes and, until the financial crisis, running a budget surplus. And households increased their own savings in the 1990s, in reaction to the dismantling of many bloated state-run companies and the cradle-to-grave benefits, known as the ”iron rice bowl,” they once provided to their workers. When a Chinese citizen is rushed to the hospital after a car accident today, the first stop for the victim’s family is often the cashier’s window. Many hospitals won’t admit patients until they have paid, and many families have no health insurance. Instead, they insure themselves, by saving. [Will China still bankroll us? David Leonhardt. New York Times. May 13 2009]

Leonhardt’s article suggests that lack of social safety net encourages saving. It makes sense.

The reversed relation is interesting: does availability of safety net discourage savings?

Indirectly, this asks how does that affect consumption? Does it increase consumption?

Implicitly, this may suggest that people may be less judicious with their consumption and more happily go into debt to spend with the presence of safety net. This is so when one contrasts the situations without social safety net in China and the availability of one in the United States as described by Leonhardt; massive savings in the former and large debt in the former on individual level, on average.

I really think I want to explore this when I finally get back to school. Ah, approximately 72 days before school begins. I just cannot wait.