Welfare and progressive economy based on macroeconomic fundamentals



BUDGET 2022 was in many ways the one that tried to impress as a prihatin (caring) and indeed the needs and concerns of the rakyat were largely taken into account. This was particularly relevant with regard to social assistance – as there was no slack in the provision of distributions or cash transfers.

Under Strategy 1: “Restore Lives and Livelihoods”, Bantuan Keluarga Malaysia (BKM) will be introduced to improve Bantuan Prihatin Rakyat (BPR) as its amount is a little higher (2,000 RM versus 1,800 RM) and coverage is more targeted. (for example, an additional aid of RM 500 to single-parent households).

The government also takes the issue of social protection seriously. The 2022 budget will extend the beneficiaries of the i-Saraan scheme, intended for the self-employed and those who do not earn a regular income, to save for their retirement through EPF contributions. The government will now also pay a minimum of 15% of contributions to a maximum of RM250 per year for people aged 55 to 60.

Under Strategy 4: “Support the delivery of public services”, special financial assistance of RM700 will be provided to 1.3 million civil servants at level 56 and below. And one million public sector retirees will receive 350 RM.

But the government’s efforts to ensure fair tax treatment have fallen short of expectations because they are too modest and lack the requisite political and bureaucratic courage.

The announcement of the 33% “prosperity tax” for the next taxable income to RM100 million, as well as the increase in the stamp duty on contractual notes for trading of shares listed at 0.15%, against 0.1% and the concomitant removal of the RM200 cap triggered a wave of selling pressure when the exchange reopened on November 1.

As a result, Bursa’s market value of the stock market cap was wiped out to the tune of

RM 33.8 billion, although the FBM (FTSE Bursa Malaysia) KLCI (Kuala Lumpur Composite Index) fell only 2%. The downtrend should be short lived.

Would the imposition of a capital gains tax (CGT) – of a more progressive and equitable nature – have precipitated a similar result?

Most likely maybe, but with a certain threshold in place, the market would eventually come to terms with it even if CGT were to be permanent.

According to “Insight – The Impact of the Introduction of Capital Gains Tax to M’sia” by consultant Harvindar Singh of Harvey & Associates (The Star, February 3, 2021), the Vietnamese stock market has increased by 14% last year despite a CGT tax.

As an effective anti-speculative tool, CGT can help stabilize prices (minimize fluctuations) especially with respect to “penny stocks” (stocks priced between RM1.50 and RM1.00 RM and less).

Now, are we proud if Bursa Malaysia is better known for its speculative gambling activities?

In addition, the CGT would offset the liberal availability of margin financing facilities (i.e. borrowing from a broker or bank to buy shares) which could lead to a “sell off” result. forced ‘- market volatility.

Forced selling, of course, can have a potentially similar ripple effect to a “boom and bust” phenomenon, including just as critically on lending banks. Think about nonperforming loans (NPLs) and “toxic” assets.

As in the case of regulated short selling (RSS) mentioned in the EMIR Research article, “Budget 2022 & 12MP – debt ceiling, exceptional income and capital gains taxes” (October 13, 2021), the CGT can also help supplement existing measures to reduce exposure to margin call risk (i.e. top up accounts when stocks fall in value).

In fact, precisely for the above reasons, CGT would also conform to Islamic values, let alone those of other dominant religions.

It should be noted that the 2022 budget did not mention the reintroduction of the goods and services tax (GST). This would be awkward when the goal is to fill cash gaps and fund social assistance – because it means that the re-taxation comes at a time when the B40 segment has not declined but has increased with the inclusion of 20 % of households in M40.

That is, the GST should not be imposed when the burden falls on the shoulder of a growing B40 population whose purchasing power has been severely eroded over the years and made worse by Covid-19 .

Thus, the GST could only return when more people integrate the M40 as an anchor of the middle class, reflecting the increase in purchasing power as a whole.

On the revenue side, the 2022 budget projects that revenue is expected to increase by 5.9% to RM 234 billion “in line with a better economic outlook”, according to the 2022 fiscal outlook and federal government revenue estimates / FO 2022 (p.142).

Income tax alone is expected to make up 37.5% of the 2022 budget (p.102).

With such a figure slightly less than half of the sources of overall budget allocation, income tax (individual, company, oil, withholding tax, etc.) should bear a heavy financial burden.

But is such a projection realistic – given an environment of declining profits during lockdowns and therefore any profit that will need to be offset by cash flow constraints?

Borrowing and the “use” (sale, lease, etc.) of government assets are only expected to represent 29.5% of the 2022 budget. This means that a large part of the borrowings will be used for debt refinancing.

In Section 4: OF 2022 Debt Management, “… (Total gross federal government borrowing is expected to register RM 210.8 billion or 13.9% of GDP in 2021 … 110, 4 billion RM (will be deployed) for principal repayments while (only 98.8 billion RM is intended for deficit financing) (p.163).

Debt refinancing is, of course, standard practice in fiscal policy. And EMIR Research has always advocated that the government budget is not like a household. Any constraint is self-imposed.

Having said that, we also recognize that there are limits due to the position of our currency, in particular. We certainly don’t want to put ourselves in a situation where currency speculators can smell blood.

To this end, we caution the government on the current extent of its debt refinancing arrangements and urge that a (lower) ‘ratio’ be self-imposed, for example, 3 to 1 is that is, for every RM 300 billion in deficit spending, only RM 100 billion is spent on debt refinancing. This is to ensure a productive deployment of loans.

Perhaps this should be incorporated into the future law on fiscal responsibility.

It should also bring our debt service charges under control, as more money is used for expenses that will bring in income (e.g. taxes) which can then be used for debt repayment.

More critical is the fact that we have no experience in what is simplistically called “money printing” (a misnomer – since printing is not for creating new money or “net financial assets” without any corresponding liabilities like that, that is to say, for the Treasury or even the central bank but for the coffers of commercial banks against deposit withdrawals) or more exactly better called “monetary financing »(MF).

MF is simply what advanced economies like the US, UK, and Japan (and even the EU in a sense through the European Central Bank / ECB) do – directly and indirectly. Countries that engage in MF generally also engage in structural debt refinancing.

Indeed, at each stage of the economic life cycle, the government must first spend before it can tax and / or borrow.

In the United States, tax obligations are simply (literally) extinguished. Taxes are not (inherently) necessary to fund the spending treasury by simply asking the relevant Federal Reserve branch to credit (from its account with the central bank) the recipient’s account.

Already in 1946, Federal Reserve Bank of New York (FRBNY) President Beardsley Ruml remarked in his speech titled “Income Taxes Are Obsolete”.

But we can do quantitative easing (QE).

Quantitative Easing will help keep interest paid on our Malaysian Government Securities (AMSs) and sukuk etc. low. and will represent an indirect method of MF. QE in a limited form will therefore support a limited or moderate form of MF – through which Bank Negara can finance our budgetary outlays, which can help reduce the extent of our debt refinancing.

That is, instead of borrowing from our institutional investors to renew our pre-existing debt, we’d better use quantitative easing to anticipate this (through lenders offloading their long-term bond holdings. on Bank Negara).

In short, Bank Negara can either simply write off the (limited) debt (long-term bonds) or sell it back under, for example, five-year repurchase agreements (half of a 10-year AMS), i.e. the resale of bonds in exchange for cash from commercial banks.

Now that money would come from past government deficit spending – either taxes plus borrowing, or borrowing alone.

Indeed, instead of a debt rollover, that is to say of borrowing to directly repay the loan:

* We have loans to spend first;

* Expenses (fiscal injection – productive use of the loan) then appear in “reserves” in the accounts of commercial banks at Bank Negara;

* Then the reserves are used to buy back government bonds;

* The proceeds of the sale would either be remitted by Bank Negara to the Treasury (along with interest) to repay the debt when the time comes.

This requires a concerted strategic synchronization of fiscal and monetary policies, which EMIR Research has consistently called for.

Dr Rais Hussin and Jason Loh Seong Wei are part of the research team of EMIR Research, an independent think tank focused on strategic policy recommendations based on rigorous research.



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