GST needed to reduce fiscal deficit, prevent recession

Goods and Services Tax (GST) is perceived to be the most devilish of policies implemented by the government this year which many see as a measure to burden the people due to the inefficiencies and corrupt practices of the government. I would concur that our government isn’t exactly the most efficient government in the world but the implementation of GST is more important than most people think.

Why GST?

Sales and Service Tax (SST) was a relatively inefficient tax system where it was easy to avoid paying taxes causing a huge outflow for the government. GST is more efficient as people are taxed on their consumption, the more they consume, the higher the total amount of taxes that they will pay. It eliminates the presence of the cascading effect which reduces business cost for producers, eliminates double taxation and increases the competitiveness of exports as exports are not taxed. GST also helps alleviate the burden of poorer people as basic necessities are zero-rated.

How important GST is to our economy?

Unfortunately people in general do not see the importance of GST to us at all. It is safe to say that more than 80% of people do not understand how indispensable it is to our economy.

Being a very commodity driven, export orientated and oil reliant economy, Malaysia has been hit hard by the global fall in commodity prices especially that of oil which represents a huge proportion of total revenue to the government. Oil prices went down from an average of about USD$100 (RM429) per barrel last year to a price average of about USD$55 per barrel this year according to the Crude Oil Brent (ICE) index, equivalent to about a 50% drop in oil revenues.

As we can see from the tables above, Malaysia is going through an enormous loss of revenue by the plunge in oil prices and this huge loss can be offset by the extra revenue gained by GST. This is especially so as in 2016, Petronas will cut dividends by RM10 billion. This warrants the confidence of the government for us to achieve a fiscal deficit target of 3.1% of GDP.

What happens if we do not implement GST?

If we do not implement GST, based on the current state of the economy, our fiscal deficit level as a percentage of GDP will hit almost 5% this year and a prospect of a downgrade of our credit ratings will be possible.

What will happen if we do not reach our target fiscal deficit level to GDP ratio?

Fiscal deficit is defined as the total spending in excess of total revenues. If we do not reach our target fiscal deficit level, or if fiscal deficit increases on a yearly basis, we might risk getting our credit ratings cut. Getting our credit ratings cut will have serious implications on our economy. With a lower credit rating, it would be difficult for the country to borrow money to expand its economy. Furthermore credit ratings cuts are usually followed by severe austerity measures. Equity and capital markets will fall and the economy will most likely go into deep recession.

Conclusion

It is very easy to jump on the bandwagon and accuse the government of implementing GST as an easy way out of the mess that they created, especially if people do not understand why it is implemented in the first place. Economics might be intricate to some and some policies might not be feasible to implement but the GST is definitely not one of those policies. The government needs to make people understand the positive effects of GST on the economy. Just saying how much it will help is futile as people need to know how the GST mechanism actually works.