As govt debt rises, AMRO proposes broadening of tax to restore fiscal buffer for post-pandemic economic stability

AMRO said a cross-country comparison showed that tax collection in Malaysia could be further boosted through indirect taxes, with proposed tax measures having the potential to contribute up to an additional 3.25 per cent of GDP. — Picture by Hari Anggara
AMRO said a cross-country comparison showed that tax collection in Malaysia could be further boosted through indirect taxes, with proposed tax measures having the potential to contribute up to an additional 3.25 per cent of GDP. — Picture by Hari Anggara

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KUALA LUMPUR, May 4 ― Despite continued fiscal policy support amid the Covid-19 pandemic, Malaysia’s build-up in government debt underscored the need to restore fiscal buffers toward economic stability and resilience post-pandemic when the country’s economic recovery is on a firm footing, a regional macroeconomic surveillance organisation said today.

Asean+3 Macroeconomic Research Office (AMRO) economist Diana Del Rosario said one of the mitigation measures the Malaysin government could undertake was to implement reforms to broaden the tax base to lower the fiscal deficit and guide the government debt back to the pre‐pandemic statutory limit.

“In terms of fiscal side, Malaysia clearly needs to restore its fiscal buffers once the economic recovery is on track.

“Our projection on this domestic debt shows that the domestic debt would remain about 57 per cent even if the statutory limit on the debt would fall to 55 per cent of gross domestic product (GDP) starting 2023.

“In terms of total government debt, the total debt would remain about 60 per cent to 2025 even as we assume a gradual pace of fiscal consolidation during this period.

“So there is a need to enable a faster reduction in fiscal deficit and government debt ratios. And one way is to broaden the tax space,” she said during a media briefing on AMRO’s 2020 Annual Consultation Report on Malaysia published today.

She highlighted how there was already a trend decline in the tax ratios even before the Covid-19 pandemic came about.

“And one way to reverse this trend decline would be an introduction or reinstatement of the Goods and Services Tax (GST).

“Of course the GST could be supplemented with other revenue spending measures,” she said, adding that such measures should be reintroduced carefully and be implemented when the economy has gained a firm footing.

According to the aforementioned report published, tax revenue had narrowed owing to the decline in corporate income tax and the replacement of the GST with the Sales and Services Tax (SST) in 2018.

Through its analysis published in the report, AMRO said a cross-country comparison showed that tax collection in Malaysia could be further boosted through indirect taxes, with proposed tax measures having the potential to contribute up to an additional 3.25 per cent of GDP.

“The share of indirect taxes, including value-added taxes as well as other taxes on goods and services, accounted for 3.2 per cent of total tax revenues in 2018 in Malaysia, lower than in other emerging markets in the regions.

“Therefore, there is some scope to increase tax collections through indirect taxes, such as the GST/SST, carbon tax, and tobacco excise tax,” it said.

As part of its proposed tax reforms, AMRO said the scope of the SST can be broadened before the GST is reintroduced with the government building on the efforts from the introduction of the digital service tax in January 2020 and its move under Budget 2021 to impose a tax on cigarettes in duty free zones as part of the strategy to curb illicit trading of cigarettes.

Furthermore, it said additional revenues can also be generated from raising the personal income tax rate for the high-income groups, raising excise tax rates on selected products and introducing a capital gains tax aside from property.

AMRO also said an introduction of environmental taxes ― in the form of a carbon tax ― offered the promise of simultaneously boosting revenue and helps in achieving environmental objectives by discouraging harmful behavior over the medium or long term.

The published report also said both the negative impact of the Covid-19 pandemic on economic growth and the sizable fiscal response have raised concerns about medium-term debt sustainability in Malaysia.

“The sizable fiscal package in response to the pandemic and the revenue shortfall due to the economic recession raised the fiscal deficit from 3.4 per cent in 2019 to 6.2 per cent of GDP in 2020.

“Assuming the pandemic is contained, GDP growth is expected to rebound to 5.6 per cent in 2021 and 6.2 per cent in 2022, before reverting to its long-run average of 4.8 per cent from 2023 onwards.

“Revenue will rebound as the economy recovers, while pandemic-related expenditure is gradually unwound. As a result, the fiscal deficit will decline at a gradual pace, to 6.0 per cent of GDP in 2021 and to 3.4 per cent in 2025.

“Under the baseline scenario, the federal government debt ratio is estimated to remain above 60 per cent over the medium term,” it said.

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