The PSM understands that our Prime Minister, YAB Dato Seri Anwar Ibrahim, is facing several constraints in implementing programs to benefit the people. In the past year, PSM has recommended several programs to strengthen the social protection net and to restore our country’s environment, including
- A Senior Citizen Pension of RM 500 per month for all Malaysians aged 65 and above, if they are not government pension recipients.
- Increasing the Ministry of Health’s (KKM) budget in stages to 4% of GDP within a period of 4 years from the current allocation of 2.2% of GDP, so that KKM can upgrade its services to the people.
- Construction of more PPR houses throughout the country so that B20 families can rent houses at a low cost.
- Allocating RM 2 billion of funds to help local councils take over the maintenance of low-cost flats. Many of them have deteriorated into high rise ghettoes and these generate disenchantment and delinquent behaviour.
- Creating “green” jobs, for example, in the electricity generation sector (from sunlight and waste from palm oil mills) and restoring forests that have been heavily logged.
We believe that PMX agrees in principle with the goals of the programs listed above, but has been advised by economic experts within the government as well as from outside, that for now, the Federal Government must clamp down on new expenses so that the federal budget can be balanced and the current deficit can be brought down to 3% of GDP as soon as possible. These experts emphasize the following points –
- The current deficit of the federal government is about RM 100 billion1 every year or about 5% of GDP.
- Total federal debt has exceeded RM 1 trillion1 (without taking into account “contingent liabilities” of RM 0.5 trillion)
- Debt servicing is now approximately RM 43 billion1 per year.
- If we do not reduce our budget deficit to 3% of GDP in the near future, it is possible that the International Credit Rating Agencies will reduce our country’s credit status from the current BBB to a lower level and then the cost of borrowing money will increase.
- There are risks related to efforts to increase tax rates on large corporations or the richest 1% in our country. There’s the possibility that they will move to a neighboring country and operate from there. The rate of new investments in Malaysia’s economy and the rate of new job creation will decline if this happens.
We at PSM, accept that the government’s concerns about the budget deficit and national debt situation have legitimate grounds. Our country is caught in a situation where the government’s revenue is insufficient to finance the cost of programs that should be launched to help our people and make the environment greener. But, and this is an important point, this situation was not destined by God. It was created by the neoliberal measures implemented over the past 30 years and these have restricted the government’s ability to manage the national income in a rational and fair manner.
The purpose of this Memorandum is to share some recommendations how the federal government could augment its revenue in a sustainable manner. Before going to the recommendations, we would like to share our analysis of Malaysia’s economic situation. Based on our analysis,
- Malaysia is not a poor country
The country’s GDP, in real terms (i.e. after taking into account the effects of inflation), has multiplied 24 times in the 50 years between 1970 and 20192. But the real median wage of a factory worker in 2019 is only 1.4 times more than the median wage of a factory worker in 1970, even though Malaysia’s income per capita has multiplied 7.6 times3 in that 50-year period.
- Competition within ASEAN to attract FDI has been detrimental to all ASEAN countries
The problem of poverty among ordinary workers in a country that has multiplied its GDP, stems from our “export led industrialisation” strategy, in which we market our country as a low-cost production hub in order to attract foreign companies to invest in factories in our country. This strategy was reasonably effective in the 1970s because at that time, the Vietnam War was still ongoing, Thailand was a frontline “domino” that in danger of collapsing, and Indonesia was still recovering from an internal political crisis. Foreign investors did not have many other options. So, the Malaysian authorities could impose certain conditions on them.
But the situation has changed tremendously. Investors have many other options – Thailand, Vietnam, Indonesia, China and several other countries. Because our neighbors in ASEAN also practice the “export led growth” strategy and are determined to attract foreign investors, countries in ASEAN are involved in a fierce competition for FDI (foreign direct investment) which has triggered a race-to-the-bottom. That is why we refuse to increase the minimum wage in our country even though it is clear that RM 1500 is not enough to cover the basic needs of a family. Competition for FDI has also led to a race to the bottom in corporate taxes. Thailand has reduced its corporate tax rate to 19% of company profits, and Vietnam to 20%. Malaysia has also lowered the corporate tax rate from 40% on company profits in the 1980s to 24% now. This is one of the main reasons why the ratio of the government’s revenue has shrunk from 26% of GDP in the 1980s to only 15% of GDP last year4.
- The milking of funds from the B40 and M40 groups is completely unfair
The chart below summarizes the national income distribution in Malaysia now
% of GDP
|Workers Formal Private Government Informal|
6.5 million 1.6 million 2.5 million
Farmers, Market gardeners, Fishermen, Village Workers, FELDA Settlers
Micro and small enterprises
Enterprises which previously deserved to pay GST
340,000 companies with 1 million owners
Billionaires and the corporate class
The chart above shows that 44% of the country’s income is earned by the wealthy who amount to less than 0.1% of the country’s population.
At the same time, 90% of Malaysian families receive only 42% of the national income. And even this 42% is not distributed equally. For example, from the chart above we can calculate that the average income for workers in Malaysia (first row), is as much as RM 4324 per month7. But according to our Statistics Department, the median salary for workers in the formal sector as only RM 2600 per month8 in March 2023. This means that 50% of workers in the formal private sector receive a monthly salary lower than RM 2600. Only a minority earn a salary that exceeds RM 20,000 per month (managers, accountants and professionals).
We are also aware that the income of B40 families is not enough to cover all their basic needs. That is why the rate ofn stunting in children aged 5 years and under is currently 20%. 20% of Malaysian children are in families that cannot provide them with sufficient nutrition! The lack of food not only stunts physical growth but also brain development. This blocks the development of their full potential. Shocking and shameful!
This is why PSM rejects any new tax that will burden the common people such as GST or compulsory payment of a health insurance (The compulsory Social Health Insurance that is being hinted at in the Government White Paper on Health Care). We believe that taxes on the richest 10% of our country should be increased, especially taxes on the richest 1%. Among the tax changes that can be implemented are:
- Gradually increasing tax on corporate profits to 30%.
- Imposing a tax on wealth for individuals who have assets exceeding RM 500 million. (Wealth Tax)
- Imposing a tax on income from investments (Capital Gains Tax)
- Implementing a tax on carbon emissions that exceed a maximum limit.
- Inheritance tax
- Tax on financial transactions (Tobbin’s Tax)
But increasing taxes on the richest strata cannot be implemented at the moment because of the liberalised financial regulations created by the several International Trade Agreements (PPA) that Malaysia has acceded to. These PPAs have created many opportunities for the richest 5% to avoid paying high taxes. For example, large corporations can establish their headquarters in a country where corporate tax is low and transfer royalties, Intellectual Property payments, accounting charges and so on to the headquarters in order to reduce the profit that needs to be reported in taxation area that has a high tax rate. Apart from that, the wealthiest individuals and corporations can choose to shift their new investments to countries where the tax rate is lower. New factories could be located in Vietnam or Thailand instead of Malaysia, if Malaysia alone increases the corporate tax rate.
So, if we want to ensure that the richest 5% in our country pay reasonable taxes, it is necessary for us to devise a 10-year strategy to enable tax increases on the richest individuals and corporations.
A 10 Year Strategy:
- Discussions with ASEAN Countries
Considering the facts described above, it is very important that the Malaysian government starts discussions with neighboring countries such as Thailand, Vietnam, Indonesia and the Philippines9 to devise a strategy to stop the race to the bottom in corporate tax matters. We can explain to them that this race disadvantages our countries – our governments do not get enough revenue and therefore social security and environmental restoration programs have to be postponed. We were forced to borrow money, and debt servicing absorbs a significant part of our revenue – about 14% now for Malaysia. Domestic gross demand growth is impaired because government spending, which is one of the determinants, is shrinking in proportion to the GDP. So it is in the interest of all the ASEAN countries to bring the race to the bottom to an end.
After achieving the goal of stopping the race to the bottom in corporate tax rates, we can start moving towards increasing corporate tax rates to 30% of profits within a period of 5 years among ASEAN countries. To achieve this goal, Vietnam will need to increase its corporate tax by 2% per year, Thailand by 2.2% per year and Malaysia by 1.2% per year so that we are all at the 30% level after 5 years. The ASEAN Trade Agreement (ASEAN FTA) could be modified to reflect the new agreement on corporate taxes and a penalty could be incurred where tariffs of several percent are imposed on the exports of ASEAN countries that do not comply with the agreement to gradually increase corporate taxes.
This approach should be brought and discussed with developing countries in Africa, South America and Asia – the “G77” – because they are also experiencing financial problems and insufficiency of government funds that are even worse than Malaysia’s.
- Discussions with the corporate class and billionaires
ASEAN governments should hold continuous dialogue with regional capitalists to convince them that ASEAN governments are not anti-corporate and explain that efforts to increase corporate taxes are good for the corporate class as well, as it brings several benefits including
- increasing aggregate demand in all countries that implement it. The increase in gross demand in the ASEAN region will generate new investment opportunities for corporations.
- Job creation and improvement in social assistance programs will make our society more harmonious, peaceful and safe. The rich can leave their houses without fear of being mugged or robbed.
- The dependence of ASEAN capitalists on the United States and European markets can be reduced if the purchasing power among the 650 million people of ASEAN increases.
The steps outlined in the two paragraphs cannot be implemented immediately. It might take several years to negotiate such an agreement. That is why this effort should be started as soon as possible because significant increases in corporate tax, capital gains tax, wealth taxes, the carbon tax and several other taxes cannot be implemented by any ASEAN country unilaterally. In a globalised world, these taxes need to be imposed simultaneously in several ASEAN countries to reduce the risk of capital transfer to neighboring countries.
While waiting for reforms in the corporate taxation system, the Malaysian government could implement the following strategies to increase funds in order to improve our social safety net system.
Strategies that can be implemented now
- Subsidy Rationalisation
The rationalization of subsidies for petrol, electric power and cooking oil has the potential to save RM 30 billion – RM 40 billion per year. But subsidy reduction should only be done after it is discussed with the people and in a way that does not burden the B40 and M40 groups. In general, the approach to reducing subsidies is to let the price of the commodity float according to market forces up to a newly defined ceiling, while transferring some money to the B80 people’s bank accounts to cover the increase in the cost of living caused by the rationalization policy.
If we take the issue of petrol as an example, the price of RON 95 can be allowed to float with RM 3.10 per litre fixed as the ceiling. At the same time, a sum of money is transferred to each car and motorcycle owner in the B40 and M40 groups every month with the condition that
a/ the money transfer is only for one car, for one owner, and
b/ the amount transferred is RM 80 per month for a car and RM 30 per month for a motorcycle. (The amount of RM 80 is enough to cover the increase in the cost of 80 liters of petrol when the price reaches the ceiling level.)
The number of cars registered under the names of B40 and M40 members is about to be 10 million10, and the number of motorcycles is also estimated at 10 million10. Therefore, the amount of money that needs to be transferred to the people’s accounts is about RM 10.4 billion per year. This is less than the RM 30 billion10 per year currently used for RON 95 subsidy payments.
This proposal should be announced to the public with an explanation of how the savings in petrol subsidies will be used to increase the social safety net assistance for them. The issues listed below should be discussed among the people through a town hall meeting.
- Is this RM 80 enough for every car owner?
- How to handle a husband-wife couple where they use two cars but both are registered under the husband’s name.
- Someone uses a car registered under his or her parent’s name.
- A person who owns a motorcycle and a car.
- People who live in remote areas. Is there a need to transfer a larger amount to them?
- Similar issues.
The issue of petrol price hikes has provoked people’s anger, demonstrations and even the disposal of governments in other countries, our government should handle this matter wisely. For certain, the opposition will use this issue to criticize the government relentlessly. Among the approaches that should be taken by the government, is to
- Separate the rationalization of diesel11 from the rationalization of RON 95.
- Combine the reduction of RON 95 petrol subsidies with a program that clearly benefits the people such as a Senior Citizen Pension program or the increase of bus services throughout the country.
- Give the people in all areas, the opportunity to give their feedback through Town Hall meetings. Ideas from the people should be collected and used to fine-tune the proposed petrol subsidy reduction.
- Hold a national referendum and only implement this new scheme if it’s approved in this referendum.
- Reduce leakages in government expenditure
It is estimated that between RM 20 billion to RM 40 billion is lost every year due to corruption, quotations that are too high by crony-contractors, the purchase of low quality or faulty goods, inefficiencies on the part of suppliers and contractors, and so on. This matter is often reported by the Auditor General, but it keeps recurring.
To reduce these leakages, the government officials who manage funds should be made more accountable. The following steps should be implemented
- The Auditor General’s Office (AGO) should be allocated more staff and funds so that the AGO can conduct more investigations into government departments at the Federal and State levels.
- All ministries and government departments should be required to investigate any weaknesses and leaks identified by the AGO and institute measures to overcome them. Actions being taken to remedy the situation must be reported to the AGO, MACC, PAC (Parliamentary Accounts Committee) and the Chief Secretary to the Government.
- Action must be taken against officials who have committed wrongdoing, negligence or accepted bribes, depending on the level of wrongdoing. The senior officer in charge of the unit or department where the offense / negligence occurred should have his bonus deducted and/or denied a salary increase for the year in question. Government regulations should be modified to enable the imposition of these penalties.
- A special unit should be established under the Chief Secretary of the Government to monitor the action being taken in various ministries and departments to ensure that wastage, corruption and inefficiencies are taken seriously by all heads of units and divisions.
- The laws regarding corruption should be modified such that any government official or politician can be prosecuted if he cannot explain how he or his family has accumulated such a large amount of wealth.
- Debt monetization
Debt monetization is a modality of generating funds for the government by borrowing from the National Bank itself, and at a very low rate of interest. Usually a government borrows money by issuing government bonds. The coupon rate for Malaysian Government bonds is approximately 4.3% per annum and these interest payments (termed “debt servicing”) now comes to RM 43 billion annually. If the government sells bonds to the National Bank itself with low interest rates, we can obtain some of the funds we need for programs that benefit the people, without increasing the amount of interest payments.
But this modality has certain problems. One is the possibility that it will cause inflation through an increase in the amounts of imported goods. For example, if the Ministry of Health’s allocation is increased by RM 10 billion, part of it will be used to buy equipment such as MRI Scanners from other countries. Another part will be used to hire new staff. About 30% of a normal household’s expenditure is on imported goods – some types of food, clothes, mobile phones and so on. Our estimation that about 40% of any additional government expenditure will be utilised to buy imported goods. An increase in imports will lead to more Malaysian currency in the international money markets. This will tend to lead to a decline in the value of the ringgit compared to other currencies12 because the value of the ringgit is determined by the balance between the supply/demand of the ringgit in the currency market. And when the value of the ringgit declines, the price of imported goods will rise, causing inflation.
Another negative effect of this modality is the possibility that international credit rating agencies will lower our country’s credit rating. This is a serious matter because it will increase the cost of borrowing funds from international financial institutions. Not only for the government, but also for the private sector that borrows funds amounting to RM 80 billion per year on average.
PSM’s recommendation is to use debt monetization cautiously by borrowing an amount equivalent to 1% of the country’s GDP from the National Bank for the coming year. 1% of GDP is about RM 20 billion and these funds should be used to strengthen the social protection net (perhaps increasing allocations to public health) and to restore our forests. Our estimation is that an increase in government spending of RM 20 billion will lead to a RM 8 billion increase in imports. This is a small amount compared to Malaysia’s total import value of RM 1000 billion in 2022. The risk of this affecting the value of the ringgit is small.
Apart from the strategies and methods described above, the Malaysian government should continue with its stated intention of
- impose higher taxes on luxury goods. Maybe the Certificate of Entitlement (COE) system to buy cars with an engine larger than 2 liters could be imposed. (COE is being used in Singapore.)
- capital gains tax on investments in companies that are not listed on the Malaysian stock exchange (unlisted companies).
Since these two methods have already been announced by the Prime Minister himself, we will not repeat them here.
It is our hope that our recommendations will be taken seriously by the Ministry of Finance and the Economic Planning Unit. We are ready to discuss with any part of the Ministry of Finance, or the Economic Planning Unit (EPU) and explain our recommendations in greater detail.
Parti Sosialis Malaysia
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- These figures are quoted from the Reports of the Ministry of Finance
- These figures are based on the following facts
Cumulative inflation 1970 – 2019 = 5.3 times (Source: www.worlddata.info/asia/malaysia/inflation-rates.php)
GDP in real ringgit value
1970 RM 11.829 billion (Source: Jabatan Statistik Negara)
2019 RM 1513.2 billion = RM 285.5 bil in ringgit 1970
(1513.2 divided by 5.3)
285.5 divided by 11.829 = 24.14
- Total Malaysian Population
1970 10.31 million (Source: www.macrotrends.net>MYS)
2019 32.8 million (Source: Jabatan Statistik Negara)
32.8 divided by 10.31 = 3.18
24.14 divided by 3.18 = 7.59
- The Federal Government’s revenue in 2023 is estimated to be RM 291.5 billion
Malaysia’s GDP in 2023 is estimated to be RM 1930 billion (Source: Budget Debate in Parliament, 2023)
- These figures are regarding Malaysia’s Economy including the GDP = RM 1695.2 billion in 2022 – Economic Planning Unit, Prime Ministers Department
- The figures in the chart below are the estimates of the Biro Kajian Dasar PSM, based on articles in the newspapers and online media.
Amount (Monthly average income)
|Farmers, Gardeners, Fishermen, Village workers, FELDA Settlers|
2 million (RM 2000)
2 million x RM 2000 monthly x 12 months = RM 48 billion
Micor and small enterprises
1.8 million (RM 3000)
1.8 million x RM 3000 x 12 = RM 64.8 bil
1.2 million (RM 3000)
1.2 million x RM 3000 x 12 = RM 43.2 bil
Business that were previously qualified to pay GST
340,000 companies with 1 juta owners (RM 20,000)
1 million x RM 20,000 x 12 = RM 240 bil
Billionaires and the corporate class
100 – 32.4 – 2.8 – 3.8 – 2.5 – 14.2 = 44.3%
The figures in the chart above are before government taxes are taken into account. The GDP ratio obtained by the government through direct, indirect taxes, dividends, etc, is approximately 15%. Most of this amount comes from the top line and the bottom two lines.
- 32.4% of RM 1695 billion is RM 550 billion.
When divided by 10.6 million workers, the monthly income is
RM 550, 000 million divided by 10.6 million divided by 12 months = RM 4,324 per worker per month.
- National Statistics Department
- Malaysia’s competitors for FDI are Thailand, Vietnam, Indonesia and the Philippines. So an agreement between these 5 countries could stop the race to the lowest corporate tax rate.
- All these figures are the estimates of the Biro Kajian Dasar.
- An increase in the price of diesel will trigger inflation because the cost of transportation of goods will go up and the common people will get angry. What can be implemented is to monitor the consumption of diesel by imposing the condition of using a card to buy diesel at a subsidized price so that the amount purchased through each card can be monitored. Parties who buy a lot of diesel to sell in other countries can be identified from the excessive amount they buy.
- This problem will be reduced if more countries use this method. This is because an increase in the imports of one country is an increase in the exports of other countries.