Pakatan Harapan is now the Government of Malaysia. To many, the euphoria of this momentous occasion is beginning to wear off as the people begin to take stock whether or not their lives have actually improved over the recent past.
In order to understand this, we need to explain a little bit about the voting dynamics that propelled Pakatan Harapan into power. Most politicians acknowledge that the collapse in the support for Barisan Nasional and the spike in support for Pakatan Harapan in the West Coast and “the PAS” in the East Coast peaked just near the elections. In terms of achieving political aims – the timing is perfect, as humanly as perfect goes.
Unfortunately, this euphoria also brings with it the burden of expectations. There are many expectations, some economic, some political and some social justice concerns.
I want to comment a bit on one very important decision which was to abolish the GST.
Decision to abolish GST
This was one of the earliest decisions made by the new administration. There is an economic argument that needs to be considered here which is that prices are sticky, so abolishing GST without a commensurate decrease in prices achieves nothing. In fact, it may even be counterproductive since the Government has revealed the public debt figure to be in excess of RM 1 trillion.
What is needed really is analytics and enforcement.
The analytics serves to first understand where the cost increases due to GST occur throughout the supply chain. One way is to be able to categorize GST collection into the various HS codes or their alternatives and then map out the transformation of intermediate products to final products. For example, lets say RM 100 worth of steel goes into a particular product with RM 6 being GST, making a total of RM 106. This product goes through a second set of transformation with the addition of RM 50 ringgit of component and a 20% markup. So the total selling price, ex GST is now RM 187.2 . The GST applied is 6% which is RM 11.2, so the total price at the distributor channel is now RM 198.5. Without GST, the actual price would be RM 180 (RM 100+RM 50 = RM 150 * 1.2 = RM 180), so the effect of GST is to actually raise prices by RM 18.5, or more than 10%.
Now when GST is zero rated, will suppliers reduce prices by 10%?
Not really unless there is strict enforcement as well as an understanding of demand – supply economics.
That is why the Rembau Times kept on harping that the initial focus should and must be to strengthen the Ringgit. A strengthening of the Ringgit reduces inflation by driving down the cost of imports whilst at the same time keeping Government revenues at their previous elevated levels. There are various strategies to strengthen the Ringgit but you do require the resources available to the Federal Government to actually impact it.
Of course, one benefit is that we have guys like Dr Ong Kian Ming, a Masters in Economics from Cambridge University advising the Finance Minister. So there are positives having this kind of high powered talent available to the Government. Tony Pua too is there, and given his background in business will be able to provide some support in terms of establishing a dividend requirement from the GLCs or to sell down Government stake in GLC to pay down debt.
This I think will be Ringgit positive and achieve some of the objectives of the PH Government.