Analysis debunks Putrajaya claim, shows prices of all goods categories rose after GST

KUALA LUMPUR, July 9 — The prices of goods in all categories under the Consumer Price Index (CPI) have increased since the implementation of the Goods and Services Tax (GST), a PKR-linked think-tank said, contradicting the government’s claim that the prices of eight of 12 categories of goods would go down.

Institut Rakyat’s analysis of the 100 days since the consumption tax came into effect on April 1 also showed that inflation was marginally higher than the overall national inflation rate of 1 per cent for consumers earning less than RM3,000 a month.

“Despite GSTs price impact being ‘one off’, the gloom that has descended on consumer sentiment may be prolonged by choppy global economic conditions such as the falling ringgit, China’s growing market turmoil and its impacts on our exports,” said Institut Rakyat.

“Research analysts have forecast lower growth in domestic demand over the next six months than the first six months of 2015. With the government now expecting to more than double its GST takings in 2015 to RM50 billion, up from an initial estimate of RM23.2 billion, the greater financial outflow from the private sector may further dampen domestic demand,” the think-tank added.

Institut Rakyat also noted that although inflation patterns in May followed pre-GST patterns for most goods, indicating that the price hikes were “one off”, the think-tank predicted greater inflation in the third and fourth quarter of the year when businesses pass on the cost of the consumption tax to their consumers after temporarily absorbing it earlier.

Weak consumer sentiment is also due to the fact that consumers have yet to receive wage increases that can compensate for the GST, said the think-tank.

“Businesses are also grousing that Customs and the Ministry of Domestic Trade have been overzealous in fining them for tax and price infringements since 2 April, rather than allowing a grace period for implementation hiccups,” said Institut Rakyat.

Institut Rakyat also noted that private debt could grow in order to boost the economy, as subsidy rollbacks and the implementation of the GST in the government’s pursuit to achieve a balanced budget by 2020, coupled with projected lower government development spending, would weaken domestic demand.

“Demand could be boosted by increasing private debt, but this, if allowed to climb too high, could make economic growth dependent on growth in private debt and vulnerable to any contractions in the latter.

A major factor in the 2008 financial crisis was the growth in US private debt for speculation on asset prices. A loss of confidence led to deleveraging, a contraction in the growth of private debt, and a drop in growth dependent on private debt, resulting in a financial crisis,” said the think-tank.

Institut Rakyat warned that household debt in Malaysia is already one of the highest among developed countries at 87.9 per cent of the GDP last year, exceeding US household leverage levels, citing the McKinsey Global Institute.

“Public debt, much maligned, is offset by the central bank’s ability to create money. Households do not have this power, and will have to dig into their incomes or savings to pay back debt, lest they default. Spent wisely, public debt can generate productive growth that can more than compensate for debt servicing,” said the think-tank.

Institut Rakyat noted that the Najib administration’s fiscal policy approach in trying to cut the budget deficit, targeted at 3.2 per cent of the GDP this year, has been driven partially by fear that excessive public debt will hamper economic growth.

“However, the IMF (International Monetary Fund) has recently admitted that high debt doesn’t hurt economic growth. Nonetheless, the IMF recommends placing the bulk of the burden of financing Najib’s austerity programme upon the GST, which means that Malaysian consumers will ultimately foot most of the bill whilst subsidies evaporate,” said Institut Rakyat.

The think-tank warned that IMF’s fiscal austerity recommendations may back Malaysia into a corner where the country is forced to depend on private debt, instead of taking advantage of the flexibility of government debt, that can lead to a financial crisis.

“GST entered the Malaysian economy under the guise of fiscal prudence, but vigilance is required to ensure that it does not leave us in financial ruin,” said Institut Rakyat.