Because this entry is long, I will say it upfront: the diversification of 2015-2018 at its core was due to:
- Collapse in crude oil price, with Brent dropping from around $110 per barrel in early 2015 to about $40 per barrel by late December 2015. Half of the reduction in petroleum share of government revenue was due to the drop in petroleum prices, not GST.
- Higher taxes. The other half was due to higher taxes that came in the form of GST. Here, it is crucial to understand the difference between GST as a taxation system and the rates imposed. It is not GST per se that helped with the diversification. It was the higher tax rate. Indeed, the same could be imposed with SST with changes in tax rates.
Now…
The TL;DR version
Now that crude oil prices have collapsed, there are growing public concerns over the state of government revenue and louder talks for revenue diversification. Some groups have blamed the state that the government finds itself in now on the abolition of the GST.
They cite the 2015-2018 revenue diversification trend when the GST was in force, and the increased petroleum revenue share in 2018-2019 when the GST was no longer in place, as proofs that GST helped with diversification. And from there, their policy recommendation is clear: bring the GST back.
But such blaming and policy recommendation are simplistic. They breeze through the logic behind it without close inspection, and ending up misreading history and the factors at play. Needless to say, the policy recommendation problematic, at least it is made without eyes wide open.
Their logic is largely driven by reading the following chart while ignoring all the context:
A simple reading with GST firmly in mind (GST was introduced in 2015 to replace SST) would suggest GST was entirely responsible for the government’s reduced reliance on petroleum income, hence diversification of income. This is indeed the claim made.
But there were more than GST at play and the full context needs to be assess properly instead of being lazily stated via tweets.
Let us go through these two items in greater detail.
1: Falling share of petroleum income was due to fall crude oil prices
The first thing we need to realize is that the so-called diversification achieved in 2015 was in large part due to the drastic collapse of crude oil prices.
The best way to prove this is to go back to the 2015 Budget that provided a clearer picture how GST was supposed to diversify government revenue:
To do this, we need a 2-step comparison.
First, we need to compare the actual 2014 revenue share versus the budgeted 2015 revenue share to truly understand how much GST (we deal with the per se rationale in the next section) was planned to contribute to diversification. One as to remember that the 2015 Budget and all of its documents were prepared and released before the crude oil price dropped in a spectacular fashion by more than halving in less than 10 months.
Second, we need to compare the budgeted 2015 revenue share versus the 2015 actual revenue share. This will allow us to see how much of the diversification was due to collapse in crude oil prices, instead of GST per se.
To make it clearly, below is the items that need to be compared:
- Actual 2014 revenue share
- Budgeted 2015 revenue share
- Actual 2015 revenue share
First comparison. Judging from difference between actual 2014 revenue share and the 2015 budgeted figures, the plan was to diversify away from petroleum revenue by 4.3 percentage points (30.0% minus 25.7%). But remember, the collapse of crude oil prices had not been accounted for the 2015 budget. The assumed average Brent crude oil prices for 2015 made by the Najib administration was $105 per barrel, a start difference from the actual average price of $53 per barrel.
Second comparison. The drastic drop in petroleum prices put the 2015 Budget out of whack. So, instead contributing 25.7% of total government revenue, petroleum income share went down to 21.5% instead. (BN supporters had wrongfully claimed that the reduction of petroleum contribution from 30.0% to 21.5% had all been due to GST.) But as you can see, about half of that reduction was due to petroleum price collapse and nothing to do with GST. Meanwhile, SST/GST share grew above projection only because petroleum revenue fell. To double down on the argument, the 2015 actual total government revenue fell to 0.7%. That was how much petroleum was important to the government, even with GST in place.
The point here is that, collapse in petroleum price had a bigger role that many GST proponents cared to admit. In fact, many denied it altogether.
The oil prices slowly improved over the years, and you could see this in the increase in petroleum share in 2017 relative to 2016.
2: Higher tax, not GST per se, helped diversification
Now that we have determined that half of the reduction of petroleum contribution to government revenue from 2014 to 2015 was due to the collapsing petroleum prices instead of anything to do GST, we now can move on to the second point. That is, it was higher tax rate that helped the diversification, not GST per se.
This is a corollary from the old fact that we know and released by the previous government. That is, 4% of GST was equivalent to the current level of SST. With the GST introduced at 6%, this suggests that there was an effective 2 percentage points increase in consumption tax rate. It does not matter what form the tax hike came in, but the switch from SST and GST involved a tax hike worth 2 percentage point.
Indeed, the same increase in indirect tax revenue could be achieved with a hike in SST rates. There is always an equivalence between SST and GST.
Conclusion
So as you can see, stripped down to the very components of the revenue diversification of 2015, it was not the GST per se that contributed to it. Half of the diversification was purely due to collapse on petroleum prices and the rest very likely due to tax hike, and not the GST itself.
And this before accounting for refunds that were unpaid, which points to the fact that the GST net collection was lower than whatever reported under the cash-basis format that the government used.
Before I end, I would like state that I am pro-GST. I made this clear when reviewing Pakatan Harapan’s 2018 manifesto. And in fact, to accommodate the anti-GST sentiment (really, anti-tax hike sentiment) I had proposed that the GST rate be reduced to 4% from 6%. But the abolition promise was hard to overturn, and it was the price to pay for institutional reforms Malaysia badly needed after years of abuse.
