As Public Debt Rises, AMRO Proposes Tax Broadening to Restore Fiscal Room for Post-pandemic Economic Stability | Malaysia

AMRO said a cross-country comparison showed tax collection in Malaysia could be further bolstered by indirect taxes, with the proposed tax measures potentially contributing up to an additional 3.25 percent of GDP. – Photo by Hari Anggara

KUALA LUMPUR, May 4 – Despite continued fiscal policy support amid the Covid-19 pandemic, Malaysia’s build-up of public debt has underscored the need to restore fiscal buffers towards economic stability and resilience post-pandemic when the country’s economic recovery is on solid footing, a regional macroeconomic surveillance organization said today.

Asean + 3 Macroeconomic Research Office (AMRO) economist Diana Del Rosario said one of the mitigation measures the Malaysian government could undertake is to implement reforms to broaden the tax base. in order to reduce the budget deficit and bring the public debt back to the statutory level before the pandemic. limit.

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

“Our projection on this domestic debt shows that domestic debt would remain at around 57% even if the legal debt limit fell to 55% of gross domestic product (GDP) from 2023.

“In terms of total public debt, total debt would remain at around 60% until 2025, although we assume a gradual pace of fiscal consolidation during this period.

“It is therefore necessary to allow a faster reduction of the budget deficit and public debt ratios. And one of the ways is to expand the fiscal space, ”she said during a press briefing on AMRO’s 2020 annual consultation report on Malaysia released today.

She stressed that there was already a downward trend in tax ratios even before the Covid-19 pandemic occurred.

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

“Of course, the GST could be supplemented by other revenue spending measures,” she said, adding that such measures should be carefully reintroduced and implemented when the economy recovers.

According to the aforementioned published report, tax revenues were reduced due to lower corporate taxes and the replacement of the GST by the sales and services tax (SST) in 2018.

In its analysis published in the report, AMRO said that a cross-country comparison showed that tax collection in Malaysia could be further bolstered by indirect taxes, with the proposed tax measures potentially contributing up to an additional 3.25% of the tax. GDP.

“The share of indirect taxes, including value added taxes as well as other taxes on goods and services, represented 3.2% of total tax revenue in 2018 in Malaysia, lower than in other emerging markets. of the region.

“Therefore, it is possible to increase tax collections through indirect taxes, such as GST / SST, carbon tax and excise tax on tobacco,” he said.

As part of its proposed tax reforms, AMRO said the scope of the ESS can be broadened before the GST is reintroduced, with the government building on efforts since the introduction of the digital services tax in January. 2020 and its decision as part of the 2021 budget to impose a tax on cigarettes in free zones as part of the strategy to combat the illicit trade in cigarettes.

In addition, he said that additional income can also be generated by increasing the personal tax rate for high income groups, increasing excise rates on some products and introducing a tax on capital gains outside the property.

AMRO also said that an introduction of environmental taxes – in the form of a carbon tax offered the promise of simultaneously increasing revenues and helping to meet environmental goals by discouraging harmful behavior in the medium to long term. .

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

“The large fiscal program in response to the pandemic and the shortfall due to the economic recession reduced the budget deficit from 3.4% in 2019 to 6.2% of GDP in 2020.

“Assuming the pandemic is contained, GDP growth is expected to rebound to 5.6% in 2021 and 6.2% in 2022, before returning to its long-term average of 4.8% from 2023.

“Incomes will rebound as the economy recovers, while spending related to the pandemic will gradually subside. As a result, the budget deficit will gradually decrease, to 6.0% of GDP in 2021 and 3.4% in 2025.

“In the baseline scenario, the federal government’s debt ratio is expected to remain above 60% over the medium term,” he said.

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