Narrow tax base could hamper M'sian fiscal consolidation: report

Shoppers at a supermarket in Johor Bahru. The unpopular goods and services tax has been replaced by the sales and services tax.
Shoppers at a supermarket in Johor Bahru. The unpopular goods and services tax was zero-rated in June 2018 and has since been replaced by the sales and services tax.
MAY 31, 2019 - 4:29 PM

MALAYSIA'S efforts to improve public finance in the midst of continued fiscal consolidation is commendable, but a narrow tax base could hamper medium-term consolidation, according to the latest Asean+3 Macroeconomic Research Office (AMRO) country report released on May 31.

The 2018-19 Annual Consultation Report noted that Malaysia's economy continues to grow above potential despite growth having eased to 4.7 per cent in 2018, down from the three-year high of 5.9 per cent in 2017. AMRO expects growth to stay moderate through 2020 at around 4.6 to 4.7 per cent, due to external headwinds and fiscal consolidation.

Fiscal consolidation has continued under the new government that took power after the surprise 2018 general election result. Although budget deficit targets were revised upward for 2018 and 2019, the adjusted fiscal deficit is set to decline in 2019, excluding one-off expenses and revenue items.

"Fiscal consolidation should continue given the sizable debt burden, especially when transfers for the servicing of some of the government-guaranteed debt are included," said the report.

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But it warned that a narrowing domestic tax base could impede this if not reversed. The tax-to-GDP ratio has declined since 2015, and the tax base decline has been intensified by the shift from the goods and services tax back to the sales and services tax (SST) in September 2018.

The narrowing tax base will also limit the fiscal space to counter adverse economic shocks, noted the report. The establishment of a Tax Reform Committee in 2018 was a crucial move to facilitate a review of the tax system, but tax reform momentum must intensify by realigning taxation with economic activities. Efforts to streamline tax incentives and strengthen tax collection should also continue.

"Overall, revenue-mobilization efforts should aim at reversing the decline in the non-petroleum-related tax-to-GDP ratio," concluded the report.

Other recommendations in the report include:

  • Monetary policy should stay on hold as Malaysia balances the need to support growth with that of containing risks to stability
  • Reserves should be built up to provide a stronger buffer against external shocks
  • There should be a sustained and concerted effort to boost productivity, promoting innovation and research and development