The First 100 Days

I’ve had multiple requests to comment on this, but haven’t had the time. To be honest, I didn’t read either side’s political manifesto too closely, as most election promises are so hedged with operational realities that the likelihood of full implementation was never going to be very high, when political idealism meets unyielding economic realities. However, now that we have some clarity on the direction forward, it’s time to seriously assess Pakatan Harapan’s manifesto.

I won’t go over the whole thing, just the 10 items that were promised for the first 100 days, and even then only those that are economics related. So, no comment on investigating scandals or the stature of Sabah and Sarawak.

GST, Exports, and the Ringgit

This is something I had to explain a few times as well over the past couple of weeks, so again, committing this to writing.

The Pakatan Harapan manifesto promises to abolish the Goods and Services Tax (GST) and bring back the old Sales and Services Tax (SST). Analysts expect this (along with the other spending plans in the manifesto) to result in a sell down of the stock market, and a drop in the Ringgit. Contrary what people may think, this has nothing to do with “investor sentiment”. There are fundamental reasons for thinking this will happen, though I’ll only touch on the SST/GST effect.

Thoughts on Alternative Budget 2018

So, I’ve finally sat down to read through Pakatan Harapan’s alternative budget for 2018. There are some good ideas here, and a fair share of bad ones, but no more than expected. The numbers are bonkers, but I expected that since this is more a political manifesto than a real fiscal document. I’ll give most of it a pass except the more egregious ones, and like many, I note that some of the policy objectives and prescriptions are contradictory. At least one proposal has me upset, but I’ll leave that for the very last.

Can the (overall) numbers be achieved? I’d say yes. If the government really wanted to, they could go with a balanced budget tomorrow. But I think it would involve as much cutting the provision of public goods and services, as it would be some putative “savings'” from reducing corruption and improving governance. I’m sceptical that there’s that much savings to be had from that source.

Teaching Moments

Angst over GST seems to be rising, or at least being more deliberately aired. I’m feeling like a broken record (for those under the age of 40, this is what that phrase means).

First up (except):

On Bruce Gale’s Najibnomics
By TK Chua

…The author wrote as if 1MDB, FGV and the controversial Arab donation are trivial matters. Are these not matters closely related to the poor governance, malfeasance and lack of confidence that the country is facing now? How else is the management of an economy perceived to be in good hands if not through the manner in which public finance is managed?

The author talked about “inherited” problems, such as public debt, which is strictly not the fault of the current administration. It was due to a single year’s pump priming in 2009 when the present prime minister first assumed office.

Perhaps it is time for the author to look further afield – at off budget agencies, public enterprises and GLCs, the massive loans of which are guaranteed by the federal government. Perhaps he should also look at new loans to be disbursed soon on new mega projects such as the ECRL and other gateways, the viability of which are deemed doubtful by many….

Chart of the Week: Core Inflation and the Impact of GST

I was struck by a graph I saw the other day, and I’ve tried to reproduce it here. This is the still relatively new Core Inflation Index from DOSM (index numbers, log annual changes; 2010=100):

The graph of the growth (inflation) of the index is truncated because that’s more or less what’s publicly available, but trust me that the longer series shows core inflation at roughly 2% for the two years prior.

This shows very, very clearly the impact of GST, and fulfills the prediction I made nearly four years ago – GST caused an upward shift in the price level, but didn’t cause inflation (as narrowly defined by economists) to rise. It was purely a price level change, and didn’t change the slope of the index. The impact appears to be a roughly 1.8% peak to trough increase in the price level, in line with the MOF/BNM forecast.

Core inflation is currently appearing to accelerate, but that can’t be ascribed to the imposition of GST, which after all happened exactly two years ago.

Technical Notes:

Data from various Consumer Price Inflation reports from the Department of Statistics. NOTE: DOSM’s core inflation index excludes both highly volatile prices (certain seasonal foods such as vegetables) as well as petrol prices (which have been very volatile since the float in 2014). It also excludes prices of goods that are “administered” i.e. those whose prices are either fixed by the government (e.g. rice), or move due to changes in government tax policies (e.g. tobacco and alcohol). Therefore a presents a truer picture of underlying price pressures in the economy. Note that this doesn’t mean stuff doesn’t get more expensive, it just takes away the volatility in inflation, which makes it more useful for policymakers such as BNM.

Budget 2016: Some Thoughts

The best laid plans of mice and men…

I was going to put up an analysis of Budget 2016 the day after the budget, but as luck would have it, I managed to come down with pneumonia and have spent most of the last two weeks trying to recover. So here’s a very belated, quick overview of what I think of the budget.

Or you can take this is as the confused, feverish ramblings of a diseased brain.

First Day Of GST

…and the world hasn’t ended. Car prices have even come down, as predicted (so will furniture, and quite a few imported manufactured goods). There will no doubt be teething troubles along the way, but Malaysia’s most significant tax reform in a generation is now established.

But confusion abounds. Take this article from yesterday:

Students claim GST in university fees and services despite exemption

KUALA LUMPUR, March 31 — University students have complained that they will be charged the goods and services tax (GST) on their fees despite Putrajaya insisting that education is exempted from the tax.

Thinking Like An Economist: GST Edition

[UPDATE: Changed comment on petrol prices]

I was at Giant supermarket this weekend, doing my usual grocery shopping. Of course, there was a massive crowd stocking up on everything from flour to diapers, as this article aptly describes.

Some of the purchases are warranted; some are not. Personally, I only bought what my family needed this week and no more. It wasn’t worth the time and effort for me to get more. The point I want to make here today is that calculating the cost-benefit of stocking up isn’t as simple as calculating the money savings one might have relative to after GST comes in.

For high-ticket items, the logic is pretty clear – it’s worth the trouble…mostly. Buying a new smartphone now for instance – say one costing RM1k – one would save about RM60. For the vast majority of the population, such savings are worth it.

The cost-benefit for groceries is not nearly as simple.

Economic Efficiency and GST

We’re less than two weeks away from GST going live, so it might be appropriate to look at the economic arguments in favour of it.

On the WCI blog, Frances Woolley reviews the textbook arguments (excerpt):

The case for taxing basic groceries

Economists frequently argue that taxing basic groceries is a good idea - for example, see these papers/posts making the case for taxing food in the US, Canada, and New Zealand.

The equity argument for taxing groceries is straightforward. Suppose everyone spends $500 a month on groceries. If groceries were taxed at 10 percent, everyone would pay about $50 in tax (or slightly less, if people cut back on their food expenditures when the tax is introduced). If part of the revenue raised by taxing groceries was used to give every low income individual a $60 tax credit, the tax on groceries would actually increase the well-being of the worst off members of society. Any additional revenues raised could be used either to decrease other taxes, leading to greater economic efficiency, or to provide needed social or infrastructure programs, further enhancing efficiency and/or equity.

GST Price Guides

These were supposed to come out a couple of months ago based on the original planned timeline, but I remember some concerns being raised that releasing them too soon might render them inaccurate enough that people might not trust them.

In any case, here they are:

1. Northern Zone
2. Eastern Zone
3. Central Zone
4. Southern Zone
5. Sarawak
6. Sabah

Complaints about retail pricing or price gouging can be addressed to the 1Malaysia One Call Centre (1 800 886 800)

Car Prices and GST: Bogus Arguments

Datuk Aishah of MAA on the impact of GST on car prices (excerpt):

MAA unclear of GST implications to car prices

PETALING JAYA: The Malaysian Automotive Association (MAA), which has projected a total industry volume (TIV) forecast of 680,000 units for 2015, is in doubt whether the implementation of the Goods and Services Tax (GST) would actually lower car prices.

Its president Datuk Aishah Ahmad said one of the issues is that for current stock held by distributors and dealers, Customs regulations denote that car companies cannot claim back the entire sales and service tax of 10%, but only 2%, meaning that the remaining 8% has to be borne by the company or be passed on to customers.

Tax Irrationality

Ay Caramba! (excerpt):

Cloudy with a chance of money

A NEW year means new resolutions, and maybe for some, a new look and a new home.

But for many, the New Year also ushers in new debts.

Amid the worries about possible tough times ahead – with rising cost of living, falling Ringgit, subsidy cuts and the impending implementation of the Goods and Services Tax (GST) on April 1 – many Malaysians have gone on a buying binge, especially on big-ticket items.

Growth And Taxation

Growth and taxation – it seems like a contradiction in terms. Taxation tends to create economic distortions, affecting decisions on consumption, investment and savings. This happens because taxes change the incentives facing economic agents – a consumption tax reduces the propensity to consume, an income tax reduces the incentive to work and invest. Subsidies work in the exact opposite way.

But there are forms of taxation that can promote growth – or at the very least, be less distortionary. That’s a point that’s almost totally absent from the debate surrounding the implementation of GST in Malaysia:

1. As a value-added tax, it’s far less distortionary than the SST system that’s currently in place; and
2. Because just like in any other country where a VAT has been implemented, exports will be zero-rated. As a result, GST will also actually give a (minor) fillip to growth relative to the SST system

The Meaning Of Zero Rated

I’m still snowed under with work commitments, so the blog will be on temporary hiatus until I can get a handle on my new job responsibilities.

Nevertheless, I can’t resist commenting on this (excerpt, emphasis added):

Putrajaya confusing Malaysians about GST, says NGO

Second Finance Minister Datuk Seri Ahmad Husni Mohamad Hanadzlah’s recent explanation of the goods and services tax (GST) is illogical and only confuses the Malaysians, a civil society group said.

The Oppressed People's Network (Jerit) refuted Husni’s remarks that those earning RM2,000 a month would only pay RM15.06 of tax because of the GST.

“The finance minister appears to try to confuse the people with his statement,” Jerit Coordinator E. Parames said in a statement yesterday....

Live Blogging Budget 2014 [UPDATED]

As usual, I’m going to try live-blogging the budget announcement, commenting on things as and when they are announced. The PM is scheduled to start his speech at 4.00pm, so I’ll begin around then.

[Refresh the page for updates]

1. PM is in the House, and we’re off in a few minutes
2. Wasting time til markets close, as usual
3. I don’t think the KLCI hitting an all time high really proves anything
4. Forecast 2014 GNI per capita RM34k
5. Forecast 2020 GNI per capita to beat USD15k target (told ya so)
6. RM217.6 billion for opex, RM44.5 billion for development – pretty flat over 2013
7. Budget deficit forecast for next year at 3.5%, right on track
8. GDP forecast for 2014 is 5%-5.5% – not ambitious
9. Talking about rail and oil & gas investment – looks like no postponement of RAPID
10. Logistics masterplan – given our trade openness, this probably should have been done much earlier. Still we’re 29th in the world
11. Tourist development fund offering subsidised interest rates
12. RM1.8b for high speed broadband
13. 10% matching government contribution for voluntary EPF contributions – good move
14. Private retirement scheme – RM500 one-off incentive for those between 20-30
15. 12 minutes to market close, and the bigger news items
16. RM2.4 billion in subsidy and incentive for padi beras and fisheries
17. Further incentives for agriculture R&D through Biotech Corp
18. New plan for entrepreneur development to be developed by new dept under MoF
19. Malaysian Global and Innovation Centre (MAGIC) to boost R&D and innovation (one-step centre) with seed capital of RM50 million
20. Dunno about that – why would this be more effective than what we’ve done before?
21. RM120 million for SME development
22. Here it comes
23. Committee to investigate government waste identified in the A-G report
24. Government to switch to outcome based budgeting (I think this has been part of the GTP targets)
25. MoF, MITI and Health Ministries to be pioneers
26. No need to file tax return if salary deductions are enough to cover tax liability
27. Subsidies to be restructured and better targeted
28. Comprehensive database covering welfare
29. SST to be abolished (haha)
30. GST is here!!!!!
31. Low inflation is the best time for implementation (that makes sense)
32. GST to be effective April 1 2015
33. GST rate at 6%
34. Public goods and services exempted
35. So is property
36. One-off RM300 for BR1M recipeints
37. 1%-3% income tax cut; RM4k households will no longer pay income tax
38. Income tax bands to be adjusted. Maximum tax rate only applies for incomes over RM400k, instead of RM100k  as now (effective 2015)
39. For companies; 1% cut in corporate tax (effective 2016)
40. Income tax for cooperatives also cut
41. ICT accelerated allowance from 2015
42. GST related investment, GST related training and others to be given tax relief
43. Enforcement of profiteering act to be raised
44. Markets are going to be REALLY happy
45. After all that, everything else is going to be a bit of an anticlimax
46. Details of GST will be available eventually through Customs – bookmark this link
47. Flexible work arrangement to be introduced for women
48. RM100 school assistance program to be continued
49. Book vouchers also to continue (RM250)
50. Lots of investment to ensure LRT, MRT, and Komuter are easier to use
51. RM4.1b for rural development
52. Nothing much on housing so far
53. Lots of smaller allocations now – health, crime, flood mitigation etc
54. 2.6 million Malaysians above age of 30 have diabetes – sugar subsidy to be cut. Yes!!!
55. I still think we should tax sugar…and petrol.
56. RM2.2 billion for women’s development
57. This is the last time I try following TV, Twitter, and Whatsapp while blogging!
58. RM441 million for the assisting the disabled
59. Indian community to be assisted with RM100 million for education, mainly for pre-school; RM50 million for Indian entrepreneurs (Not nearly enough I think)
60. Now for housing
61. RPGT to be reviewed. RPGT raised to 30% for 1-3 years, 20% for 4 years, 15% for 5 years
62. Floor for foreigners raised from RM500k to RM1 million
63. DIBS is banned!!
64. 200k new affordable houses to be built in 2014
65. Incentives for private sector developers to build affordable houses (RM30k per house)
66. Standards being given for low cost and medium cost houses
67. Lots of other smaller measures for housing
68. For middle income taxpayers – tax savings up to RM480
69. Wrapping up now…finally
70. One thing more…for the civil service, salary scales to be adjusted?
71. And one more thing…BR1M goes to 3.0, increased from RM500 to RM650
72. For single person households, RM250 to RM300
73. BR1M insurance scheme to be extended to all households members who qualify (worth RM50-100)
74. RM3000-4000, BR1M will be given RM450, plus RM50 insurance coverage
75. Allocation of RM4.4 billion for BR1M 3.0 all told
76. Pensioners to receive RM250
77. Civil servants to receive half month bonus, with minimum of RM500
78. All over bar the shouting now

And that’s a wrap. I’ll be looking more closely at the aggregate figures later tonight, hopefully with something coherent to say about it.

GST And Tax Evasion

One of the main advantages of a GST/VAT system, at least from the point of view of the tax collector, is that it provides an incentive for businesses to comply. The ability to claim offsets against GST/VAT paid on inputs (which businesses have to pay for anyway), brings them into the tax collection net. That widens the scope of coverage and increases the number of goods and services that are taxed. Higher compliance = higher tax yield, relative to alternatives such as Malaysia’s existing single-stage sales and service taxes (SST).

I’m not going to discuss what this does to consumers and prices.

The other advantage here is that in theory, due to higher compliance, the probability of tax evasion (though not necessarily fraud) should fall. This is especially important for developing countries, as the size of the economy outside the formal sector is much larger and the capability of tax authorities to audit transactions is comparatively poorer.

This NBER working paper outlines an experiment to see if GST/VAT does indeed reduce tax evasion in the real world (abstract):

No Taxation without Information: Deterrence and Self-Enforcement in the Value Added Tax
Dina Pomeranz

Tax evasion generates billions of dollars of losses in government revenue and creates large distortions, especially in developing countries. Claims that the VAT facilitates tax enforcement by generating paper trails on transactions between firms have contributed to widespread VAT adoption worldwide, but there is little empirical evidence about this mechanism. This paper analyzes the role of third party information for VAT enforcement through two randomized experiments among over 400,000 Chilean firms. Announcing additional monitoring has less impact on transactions that are subject to a paper trail, indicating the paper trail's preventive deterrence effect. Tax enforcement leads to strong spillovers up the VAT chain, increasing compliance by firms' suppliers. These findings confirm that when evasion is taken into account, significant differences emerge between otherwise equivalent forms of taxation.

All I can say is:

Technical Notes

Dina Pomeranz, "No Taxation without Information: Deterrence and Self-Enforcement in the Value Added Tax", NBER Working Paper No. 19199, July 2013

Waiting For GST

There’s a famous play by Samuel Beckett called “Waiting for Godot”, where two characters hang around, talking and interacting, waiting for someone who never turns up. Malaysia’s GST saga, by turns tragic and comedic, definitely falls into the same mould.

Now it seems that at long last, Godot might actually arrive (excerpt):

GST implementation a must

KUALA LUMPUR: The implementation of a goods and services tax (GST) is a must and not an option.

Secretary-General of Treasury Tan Sri Dr Mohd Irwan Serigar Abdullah said at the half-year Economic Transformation Programme (ETP) update that the Government was trying its best to include it in Budget 2014 if everyone was agreeable to it.

Dr Mohd Irwan added that it would only be in place in 2015 if the Government announced it in the coming budget as it would take 14 months for the GST to be implemented.

GST And Inflation Part IV: Some Theory

I wonder how many people have figured this out?

If, as the reports say, GST will yield greater tax revenue than SST, that implies an increase in effective taxation. But all other things equal, greater taxation isn’t inflationary – it’s deflationary. At the very least, it’s dis-inflationary.

GST And Inflation Part III: The Economists’ Lament

The title, in case you missed it, is in plural. It’s a common complaint in the profession, and something the comments to my posts on GST make very clear – many people simply don’t understand inflation.

It’s actually a pretty easy concept to understand. Why then does virtually every non-economist get it wrong?

GST And Inflation: Part II

I’m on a roll here (abstract; emphasis added):

The Economic Incidence of Replacing a Retail Sales Tax by a Value-Added Tax: Evidence from Canadian Experience
Richard Miller Bird & Michael Smart

A decade ago, several Canadian provinces replaced the retail sales taxes by value-added taxes. This paper estimates the effects of this tax substitution on consumer prices in the reforming provinces. Consistent with theory, we find that the resulting effective tax rate changes were shifted forward to consumers in most sectors of the economy. The overall effect on tax-inclusive consumer prices was small, albeit perhaps somewhat regressive.

This needs some explanation – we’re looking at a very similar scenario in Malaysia that Canada has already gone through. To wit, replacing a sales tax with a value-added tax and at the same time changing the marginal tax rate.