Malaysia needs new game plan to deal with major structural issues in the economy

Malaysia needs new game plan to deal with major structural issues in the economy
"Malaysia needs new game plan to deal with major structural issues in the economy"

A total of RM421 billion was allocated for Malaysia’s 2025 budget, RM13.5 billion more than 2024, making it the largest in the nation’s history.

While the government is expected to collect RM339.7 billion in revenue, it will need to borrow RM80 billion to cover the deficit. RM335 billion is allocated for operating expenditure, while RM86 billion is set aside for development expenditure. Increases of 0.6 per cent, 1.4 per cent, and 0.5 per cent (totalling 2.5 per cent or RM15.5 billion) in operational expenditure are due to emoluments, pensions, and debt service payments, respectively. This is unsurprising as the government has announced a salary revision for the civil service.

Technical details aside, the fundamental question is whether Budget 2025 is designed to redistribute resources more effectively and equitably. Unlike corporations, the national budget does not aim to maximise profit.

The primary goals of a national budget are to narrow the income gap between the wealthy and the underprivileged by ensuring a more equitable distribution of wealth, and to ensure economic growth is spread across the nation to address regional disparities in income and development.

To further boost the economy, the government has introduced a slew of tax incentives, such as tax breaks for hiring women returning to work and incentives for increased exports.

While the government has announced it will not reintroduce GST, Budget 2025 does contain several indirect taxes. For example, the excise duty on sugar-sweetened beverages will be increased by 40 sen in phases starting Jan 1, 2025, and the sales tax rate will be raised on non-essential imported premium goods starting May 1, 2025.

Whether these strategies and incentives will achieve the desired outcomes remains an open question.

The complexity of the Malaysian economy, or any economy for that matter, is not easily understood, even by professional economists. Any government attempt to tweak or restructure the economy may create disincentives for certain sectors and groups.

For example, the move to increase the sales tax on non-essential premium imported goods might hinder Malaysia's ambition to become a regional shopping hub and could drive Malaysians to neighbouring countries to buy premium goods.

On the contentious issue of the petrol subsidy, the prime minister, who is also the finance minister, announced that the government would gradually phase out the RON95 subsidy for the “T15” group and foreigners, who reportedly consume 40 per cent of the subsidy.

However, the exact mechanisms for how this will be implemented have yet to be finalised. The main strategy in this budget is to tax the wealthy to assist the underprivileged. The introduction of a 2 per cent tax on dividend income exceeding RM100,000 for individual shareholders signals that the measures in this budget are aimed at the rich.

The higher sales tax on premium imported goods, along with the removal of the petrol subsidy for the T15 and the 2 per cent tax on dividend income, means that the wealthy will need to contribute more to maintain their current lifestyles.

Taxing the wealthy to support the underprivileged might look good on paper.

While the minimum wage has been increased from RM1,500 to RM1,700, the percentage of employee compensation relative to Gross Domestic Product (GDP) remains at 32.4 per cent. This highlights a fundamental problem in our economy – the lack of high-paying jobs.

The World Bank, in its report, recommended creating high-skilled, high-paying jobs to drive inclusive development. It also noted that Malaysia’s economy differs significantly from its transitional and aspirational peers. Growth is slower, inequality is higher, and high-skilled jobs make up a smaller share of employment compared to other countries that have achieved high-income status in recent decades. Labour compensation, tax collection, spending on social protection, environmental management, and control of corruption all lag behind high-income OECD (Organisation for Economic Co-operation and Development) countries.

Domestically, there is a growing sentiment that the aspirations of the middle class are not being met. The economy isn’t producing enough well-paying jobs, and the proceeds of growth are not being equitably shared.

To compete with high-income countries, merely accumulating factors of production is no longer sufficient to sustain growth. Instead, broader economic development that focuses on the quality, rather than the quantity, of economic growth is required. It is evident that Malaysia needs a new game plan.

There is no doubt that Budget 2025 attempts to address the major structural issues in the economy, but structural adjustments are a long-term endeavour. Facing these challenges requires political will, particularly a resolve to take on vested interests.