Our Federal Budget: We need to think out of the box

by Jeyakumar Devaraj

Much of the discourse regarding the development of the Malaysian Health Care Services is within a framework of accepting a 3 to 6% increase in the total Health Budgetary allocation every year as the norm for the foreseeable future. Planners within the Health Ministry as well as many Civil Society activists agree that it would be unreasonable to ask for a bigger allocation for health given that the government has many other services to fund. This acquiescence to a very minimal rate of increase of the federal health budget then leads health planners to seriously consider other sources of financing – hence the flirtation with ideas such as “partnering” with the private sector in trying to meet the health needs of the nation (Public-Private Partnerships), outright privatization of certain services, a National Health Fund based on an additional tax on the working population, etc.

But is this low rate of increase in the health budget something immutable? Something that is going to be a constant? Consider the diagram below.

This diagram clearly shows that government expenditure as a proportion of Gross Domestic Product has been steadily decreasing in Malaysia since the 1980s. And a similar thing is happening all over the world, leading to budgetary deficits and ballooning sovereign debt all over the world. It is important that we recognize this isn’t a “natural” development. It is the result of the growing power of the top 1% of society vis-à-vis the bottom 90%. It is a social phenomenon and like most social phenomenon can be countered by appropriate political and legislative action.

There are two major reasons for the decrease in the Malaysian government revenue as a percentage of GDP. The first is that our corporate tax rates have been progressively reduced from 40% of corporate profits in 1988 to its current 24%. This is because we are engaged in a race to the bottom with Singapore and Thailand in our desperation to attract FDI! The highest tax brackets for personal tax have also been progressively reduced, and for the same reasons.

The second reason for the drop of government revenue with respect to GDP is because ongoing financial liberalization – unashamedly promoted by the World Bank and the IMF, and cemented into treaties by successive “Trade Agreements” – has made it easier for big corporations and the super-rich individuals to avoid paying taxes. Corporations now can transfer-price their profits to tax havens thus avoiding taxes in the country where value was created (Malaysia) as well as their home country (US or EU) where value is realized through the sale of the commodity. Profits are declared in the tax havens. (See Diagram Two for an exposition of this point.) This liberalization of the international financial environment is a reflection of the increasing dominance of big capital in an era where trade union based political parties in the EU and US have been eviscerated by the outsourcing of production to Asian countries, especially China.  

Diagram Two: Transfer Pricing and Tax Evasion

Countries like Malaysia are constrained from taking drastic steps in the short-term to address tax evasion as described above for they, quite correctly, fear capital flight and drop in investment as the richest 0.1% will just shift to greener pastures. But to take the existing international financial system as an immutable given that we have to plan within (till the end of time) is simply wrong thinking and lazy politics! Yes, we would have to work in international fora and lobby other countries in the developing world. And it will all take time to overcome the neoliberal predisposition drummed into the minds of many government economists by World Bank and the IMF. But it is a battle that we need to wage if we wish to give substance to the slogan of “Merdeka” we so proudly shout every 31st of August!

What needs to be done by this collective international effort is to legislate –

 a)      Penalties on countries that further reduce their corporate tax rates. The Free Trade Agreements can be tweaked to achieve this aim.

b)      Outlawing the routing of exports from the developing countries through tax havens to the receiving countries, as the intention is not product enhancement, but tax evasion through transfer-pricing.  

c)       Proper declaration of value added in the developing countries that manufacture these products so that taxes can be levied on actual value added. We must get a fair share of the value we add in these global chains of production!

None of these will be easy to achieve. But they are by no means impossible. But first we need to escape the confines of the neo-liberal box that the Bretton Woods Institutions have put us into! 


Dr. Jeyakumar Devaraj is the National Chairperson of the Socialist Party of Malaysia (PSM).

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