The 2019 first quarter GDP will be out on May 16. Since we live in an age of trigger warning, let us play the game first:
How fast do you think did the Malaysian economy expand in 1Q19 from a year ago?
Slower than 3.6% (17%, 4 Votes)
3.6% - 4.0% (26%, 6 Votes)
4.1% - 4.5% (30%, 7 Votes)
4.6% - 5.0% (26%, 6 Votes)
5.1% - 5.5% (0%, 0 Votes)
Faster than 5.5% (0%, 0 Votes)
Total Voters: 23
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The consensus views are that growth for the quarter will be weak, possibly in the lower half of the 4.0%-5.0% range. Some are even betting on something lower. There are at least two justifications for the pessimism.
One, industrial production grew only 2.7% YoY during the quarter, largely due to contraction in mining production. Supply disruption continued to bedevil the sector after a major incident in Sabah last year. Manufacturing did largely okay, except in February. This leads us to the second factor.
Exports. Exports plunged quite drastically in February and a bit in March. While some of it had to do with supply constraints in the mining sector, manufactured goods exports also dropped, which indicated weakness in external demand. The country until recently had benefited from the trade war through trade diversion and business relocation. This could be seen from FDI and trade data. But prolonged and wider trade war would slow the expansion of global trade volume, possibly to a point where trade diversion would not overcome effects from slower trade growth. If the February and March export trend continues (exports for the quarter was down and in fact, so did export volume) in the second quarter, that might indicate we have reached that point where positive trade relocation factor is giving way to volume growth slowdown. The the escalating China and the US trade conflict is very likely the one major contributing factor to Bank Negara Malaysia cutting its policy rate by 25 basis point rate last week.
These two trends could hit the domestic economy in terms of employment. But so far, employment statistics have been going strong. It has not budged from 3.3% and anecdotally, there has been no story of widespread layoffs caused by weakened domestic and external demand. There were layoffs, but those appear directly induced by government policy, not demand per se. For instance, the non-renewal of contracts for political appointees and other politically-linked projects, which are not quite demand-driven.
There are complaints of economic slowdown among the public and in the media for awhile now, but again, that has not quite affected employment statistics by one bit. This makes the slowdown in the past few quarters puzzling to me. A pure supply-driven slowdown could explain this and there were supply problems. It is also possible that firms are hoarding labor supply, with a view of better economic performance in the near future.
From pure GDP growth statistics perspective, there might be some good news. Net exports might be doing better, or more accurately, external demand is doing better than domestic demand. Export volume index fell 2.2% YoY for the first quarter; import volume dropped 3.1%. The usual goods exports decreased 0.7% versus import drop of 2.5%. This could boost the GDP growth up by way of net exports, even if it is just math at work. If the actual GDP growth does surprise the market on the upside, I think it would come from here.
The downside is, the import volume drop suggests private consumption growth had slowed down. After all, imports are just a reflection of domestic demand. But to be honest, the consumption growth in the past several quarters have been extraordinarily high due to the changes in the tax regime. Such growth should decelerate and we would only see a “normal” growth rate for consumption in the fourth quarter of this year once the tax factor has been equalized across the relevant period (This of course is purely from year-on-year perspective and this is where quarter-on-quarter calculation offers a quicker and a better way of measuring changes).
As for government spending, it should be on the recovery mode and I think the worst should be behind us (or nearby, if it is not behind). As for gross fixed capital formation, I would want to say the same thing, but I really do not know.
When the Malaysian consumer price index dipped 0.7% an 0.4% year-on-year in January and February this year, there were hysterical claims that Malaysia was experiencing deflation, never mind that deflation is characterized as persistent decline in prices rather than temporary dip. And never mind that the bad deflation is one associated with decline in demand, rather than supply-driven, which was what the dips in January and February of weighted average consumer prices were.
Just for context, the prices for January and February were heavily affected by the drop in retail petrol prices, on the back of the shift from GST to SST. But by March and April, retail petrol prices were on the way up and for RON95 and diesel, it hit the ceiling set by the government. RON97 continues to be on the prices as crude prices now soars to above $70 per barrel.
Additionally, we know when inflation would stabilize as we know when retail petrol and diesel prices were stabilized. Given the structural changes and its effect on year-on-year calculation, year-on-year and headline figures should not be the focus at the moment.
Anyway, the March numbers that will the out tomorrow should reflect this, as has been highlighted as early as January. And so…
How do you think did the consumer price index change in March 2019?
I first began supporting Ajax in the late 1990s after watching Edwin van der Sar playing for the team. I do not remember when exactly, but possibly after finding out Ajax won the 1995 European Cup.
That team was a magical one. Marc Overmars. The de Boer brothers. Nwankwo Kanu. Jari Litmanen. Clarence Seedorf. Danny Blind.
As a teenager, I kept drawing Ajax’s Dutchman logo on my belongings. Pencil case, exercise books, tabletop. I remembered every line that needed to be drawn. And when I played Championship Manager, I only played Ajax and nothing else.
It has been ups and downs with Ajax. But since the late 1990s in general, until Frank de Boer arrived to manage the team, it is not an exaggeration to say it had been a downhill journey. I have stayed true to the team for all those years, but being dismissed as a has-been second-rated team was an insult I am sure many Ajax fans had to endure.
That is not to say there were no great players during the interim. Rafael van der Vaart. Wesley Sneijder. Luis Suarez. Christian Chivu. John Heitinga. Zlatan Ibrahimovic. The names go on and go. Yet, they could not quite make it super big at Ajax, and Ajax could not hold on to them. There was not enough money to go around. So they went away, doing great things at bigger clubs outside, getting paid multiple times more than what they got in Amsterdam.
But this current team, well…
I watched some ESPN clips commenting about the Ajax-Juventus fixture. All of them were dismissing Ajax with a halfhearted hand wave. “Ajax is good,” they said. “But they lack the experience,” they claimed.
And there was Cristiano Ronaldo.
This team that forced Bayern Munich to work for their one point and embarrassed Real Madrid in Santiago Bernabeu so badly, could not beat Juventus so supreme in the Serie A and so certain to win the Italian League, they believed.
And Ajax, oh well, Ajax is only at the top of the second-rated division, ahead of PSV Eindhoven by only goal difference.
Who is Ajax?
But Ajax has been in a serious rebuilding mode since the early 2010s when several of the 1990s veterans joined the management. There were infighting, but Frank de Boer rebuilt the team. He left in 2016 but he left a great foundation for Ajax to run on that they reached the final of the 2017 Europa Cup, losing to Manchester United after a great run. But well, that is second-rated competition. Who cares?
And now, in 2019 Ajax is in the semifinal after beating Juventus. Do not let anybody say it was luck. It was actually Ajax working brilliantly with confidence and experience.
Recently, there was a column complaining about taxes on the middle class, claiming the middle class is being overtaxed.[1]
The origin of the complaint is easily understood because a slew of measures have been announced by the government. Those new taxes include departure levy and the imposition of sales and service tax on some digital services. These are generally taxes on not-so-basic goods and in more than some instances, arguably luxury goods.
The new taxes are part of the government plan to diversify its revenue and widen its revenue base. These are highly targeted taxes, and it hits specific groups instead of the wider population, which fits the philosophy of the government that is anti-broad base taxes like the GST.
I am not here to debate the philosophy and I take that as a constraint to policymaking. Instead, I am here attempting to explain whether the middle class is overtaxed.
The short answer in this day of too long, didn’t read culture, I would argue, is no.
Here comes the longer answer to a difficult question.
THE STARTING POINT: GOVERNMENT REVENUE AND INTERNATIONAL COMPARISON
It is a difficult question requiring some homework to be done. After thinking about it, I think the best starting point for the discussion is total taxes collected by the government from individual taxpayers. We know this number as it is accessible online from both the Treasury’s and the central bank’s database.
The actual total 2018 revenue figure is not available yet but we know the government has estimated it to be RM236 billion. For 2017, the government collected RM220 billion.
This may look large but in context, it is a very low figure. At about 16% of GDP, it is well below the average for a class of countries that includes Malaysia. Data from the IMF shows that “emerging market and middle-income economies” on average have their government revenue at 27% of GDP. Here for the extra boom: Malaysian government revenue is so low that it is closer to the levels seen among low-income countries that averaged at 15%. In advanced economies, the revenue level is about 36% of GDP.[2]
The low revenue-GDP ratio, and by implication the low tax burden, should give you an idea of how low the tax burden is in Malaysia relative to other countries. It is already a libertarian wet dream.
It is important to realize that not all of government revenues are collected from individuals. Based on official 2017 figures, I estimate at most 48% were collected from individuals in the form of income tax, consumption tax along with various duties, licenses and fees. This is an upper estimate because it is difficult to know who paid those duties, licenses and fees exactly without delving deeper into the data; it is highly likely a significant portion is paid by companies instead of individuals. This means, total taxes collected from individuals for Malaysia is about 8% of GDP.
This number gives insight to the question of tax burden because government revenue derived from individual taxpayers is the tax burden of the taxpayers. And when government revenue from these sources is low, it suggests the tax burden on individuals is low.
The rest of the revenue comes from companies and other sources like asset sales.
Now here comes the tough part. We need to know who pays the 48%. This is a difficult endeavor to carry out without intense research because there are at least three types of taxes here: income tax, consumption tax and various duties. The nature of the three taxes is quite different from each other, hitting different segments of individual taxpayers.
What we know is that income tax makes up only about a 27% of the estimated revenue derived from individuals. Consumption tax makes up 42% and the rest belongs to a various other duties and fees.
INCOME TAX
The income tax hits only the non-poor. This is easy to determine.
The threshold to pay income tax is so high that only about 2-6 million people pay it out of a population of 32 million, and out of a labor force of 16 million with generally low unemployment rate. Again, this is a very low number and I have written why that is so back in 2017.
And since a person would only be taxed if his or her income is RM2,500 per month or more, (more accurately, RM30,000 or above annually), we know from the 2016 Household Income Survey published by the Department of Statistics that about 23% of individuals in the Malaysian labor force do not need to pay income tax. And with all the exemptions given by the government, this number can easily cover all of those in the bottom 40% income earners and slightly more. This is a theoretical number because not all income earners are registered taxpayers. They are people who should pay tax among the top 60% income earners who do not register as taxpayers.
Nevertheless, we can conclude that a huge chunk of the income taxpayers belong to the middle class (discussion on what is middle class can be complicated but for convenience, let us take it as the next 40% income earners).
Now, is it fair?
The income tax rates in Malaysia are progressive. That means the more you make, the higher your tax rate would be. It might not be as progressive as some people would like but the truth is, the tax rates in Malaysia starts from a very low base and it rises very gradually to cover the whole middle class. So low in fact that it is difficult to say if anybody is overtaxed on this front.
CONSUMPTION TAX AND OTHER TAXES
Consumption tax sweeps a wider segment of the population. The best proof is the that fact the GST generated RM44 billion for the government in 2017 and that was slightly double the RM29 billion individual income tax revenue.
But this government abolished the GST and introduced the SST in 2018. In 2019, the consumption tax is expected to collect only RM22 billion. And not all of the RM22 billon hits the consumers directly because SST is really two separate taxes: sales tax and service tax. For sales tax, it is really more of a production tax than a consumption tax: that means consumers do not bear the full burden of the tax. It is only the service tax that the consumers have to pay in full. Based on previous experience, service tax revenue formed about 40% of total SST, which further shows that the individual consumers do not pay the full RM22 billion.
In short, tax burden on the population as a whole has fallen, including the middle class after the GST-SST shift. To say otherwise is downright false.
Other taxes are quite small and transactions that attracted those taxes or duties happen at a very low frequency.
NEW TAXES
But the question is, would the new tax mitigate the reduced tax burden and in fact increase the tax burden on the middle class?
No.
No because the government has estimated that these new taxes would generate a revenue of about RM5 billion annually. That is considerably less than the RM22 billion drop arising from the GST-SST shift (that is the 2019 SST collection subtracted from the 2017 GST RM44 billion; the drop should be bigger because the GST collection in 2019 should be bigger).
There are plenty of new separate taxes and that creates a negative perception as if the tax burden is increasing on the middle class. But when all of that combined, total new tax collection would not be enough to negate the reduction in tax burden from the GST-SST change. The numbers show it and here is how it would look like in graphics:
As you can see, there is still a net reduction in tax burden after accounting the GST-SST change and the new taxes.
But, still, what about the middle class? How does the so-called middle class benefit?
GOVERNMENT SPENDING ON THE MIDDLE CLASS
But discussion on merely who pays taxes is not wholesome.
We have to talk about spending as well. At the very 10,000 feet view, the best number to suggest that the government is transferring money to the population or not is the fiscal balance. A surplus would mean on the net, the government takes in money from the population. A deficit means the government gives money away. And the Malaysian government has been experiencing fiscal deficit since the late 1990s.
But what about the middle class? The bottom 40% gets cash transfer and free income-replacement insurance but what about us the middle class?
Apart the subsidized petrol, subsidy for urban highway tolls in terms of compensation from the government to private concessionaires, the subsidized train rides, the subsidized residential electricity use, the subsidized water, subsidized healthcare, subsidized contraceptives, subsidized education, subsided this and subsidized that in the cities with its much better amenities, what else do the middle class get?
Of course, nothing.
I will leave you with a sketch from Monty Python’s Life of Brian.
[1] — I recently cycled 40 minutes in 33-degree weather just to save RM6 on parking when I went to a government clinic to collect my medication. I was a little peeved when the nurse told me that I could only collect two months’ worth instead of the usual three. She gave some excuse about records not tallying if patients are given three months’ supply. I suspect that government health facilities are yet again running low on medical supplies. But coming to the clinic once every two months and paying just RM1 for two packs of oral contraceptives still beats buying them at a pharmacy, where a pack can cost RM27.
So it annoyed me to read that, despite my efforts to save money, the Pakatan Harapan (PH) government is implementing three new taxes that disproportionately hit the middle class – a digital tax, a departure levy, and a tax on sugar-sweetened beverages. [Boo Su-Lyn. The overtaxed middle class. Malay Mail. April 12 2019]
[2] — Note: The IMF puts Malaysia’s revenue/GDP ratio at 20% in 2019 but this does not quite tally with Malaysian data [IMF Data Mapper. Fiscal Monitor. IMF. Accessed April 12 2019]
I am taking a break from reading everything Malaysiana that is related to my book project. And I have finally decided to read Alexander Solzhenitsyn’s For the Good of the Cause that has been resting on my bookshelf for more than a year.
Here is an excerpt which I would like to share.
But the story fell flat. Fyodor did not laugh. Grachikov knew that it was better not to revive war memories. But having started this train of thought, he now recalled what had happened the following day, when his division was suddenly ordered to cross the River Sozh and deploy itself on the other side.
The bridge across the river had been badly damaged. The engineers had repaired it during the night, and Grachikov was posted as the officer in charge of the guard on it. He had instructions that nobody was to be allowed through until the division had crossed over. It was a narrow bridge—the sides had collapsed, the surface was very bumpy, and it was important to keep the traffic moving, because twice already single-engine Junkers had sneaked up on them from behind the trees and dive-bombed the bridge, though so far they had missed. The business of moving the division across, had moved up, but they waited their turn in small pine wood nearby. Suddenly, six covered vehicles—they were brand-new and all alike— drove up to the head of the column and tried to force their way onto the bridge. “St-o-p!” Grachikov shouted furiously at the first driver and ran across to head him off, but he kept going. Grachikov may have reached for his pistol, perhaps he actually did. At that point a middle-aged officer in a cape opened the door of the first truck and shouted just as furiously. “Hey you, Major, come over here!” and with a quick movement of one shoulder he threw back his cape. And Grachikov saw that he was a Lieutenant-General. Grachikov ran up, his heart in his mouth.
“What were you doing with your hand?” the General shouted ominously. “Do you want to be courtmartialed? Let my vehicles through!”
Until the General order his trucks to be let through, Grachikov had been willing to settling things amicably, without raising his voice, and he might even have let them through. But when right and wrong clashed head-on (and wrong is more brazen by its very nature), Grachikov’s legs seemed to become rooted to the ground and he no longer cared what might happen to him. He drew himself up, saluted and announced:
“I shall not let you through, Comrade Lieutenant-General!”
“What the hell…?” The General’s voice rose to a scream and he stepped down onto the running board. “What’s your name?”
“Major Grachikov, Comrade Lieutenant-General. And I’d like to know yours!”
“You’ll be in the stockade by tomorrow!” the General fumed.
“That may be, but today you take your place in the line!” Grachikov shot back and then planted himself right in front of the truck and stood there, knowing that his face and neck were flushed purple, but quite determined not to give in. The General choked with rage, thought for a moment, then slammed the door and turned his six trucks around. [Page 95-96. For the Good of the Cause. Alexander Solzhenitsyn. Sphere Books. 1971]
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