Some Hit and Some Misses in the 2010 Budget

Business Times Singapore did a feature on Najib's 2010 budget. It encapsulates the shadow of an intended fiscal management feature within the budget bringing chiefly revenue from two additional sources. These are: the return of the real property gains tax and a new tax on credit card holders. If administered properly,it will help to quell a potential property bubble from occurring as well as check credit card abuse.

Let us read the report. I have paraphrased where necessary for brevity.

" The main thrust of Malaysian Prime Minister Datuk Seri Najib Razak’s maiden Budget last Friday appears to contain the fiscal deficit.

Courageous cuts were made in both operating and development spending. Najib, currently also Finance minister, cut operating expenditure by almost 14 per cent and development expenditure by over 4 per cent. The cuts will bring the deficit down from 7.4 per cent of GDP this year to 5.6 per cent in 2010.

Taking cognizance that the prospects for global economic recovery are still uncertain, it is only prudent that Malaysia slows down the pace of its pump priming. The budget envisaged that private sector will take up the slack of the reduced government spending by export expansion— at least 3-4 per cent in 2010. Private consumption is also expected to be almost 5 per cent more.

Malaysia estimates real GDP growth for 2010 to come in at 2-3 per cent. If the government is serious on hewing off further fat from its operating expenditure,it can administer transparency and accountability modes in tenders and contracts.

An unconventional feature of the 2010 Budget is the proposal that people residing and working in the Iskandar region in Johor be taxed only at a flat rate of 15 per cent. This is apparently design to kick start the region’s development. But in the Malaysian context, such a low tax rate could create problems. Najib’s proposed cut is a whopping 11 percentage points off Malaysia’s current minimum income tax rate of 26 per cent and could entice a lot of less-than-bona-fide companies and individuals to the area.Administering two separate tax zones in a single country is a difficult proposition and enforcement could be tricky. This is not the same thing as a free trade zone or a duty free area, which the Income Tax Board has long experience in dealing with.[That is an area where MACC should start looking from now onwards.]

The Budget also proposed the restoration of the real property gains tax at a flat 5 per cent on all such assets, irrespective of the tenure of holding. This appears to be a rollback of a liberalisation by former prime minister Tun Abdullah Ahmad Badawi in 2007 — although Tun Abdullah had only suspended the tax rather than abolish it.

Originally the tax was 30 per cent of the disposal gain if the seller had kept the asset for less than six years. Thereafter, the tax got progressively less until it reached zero, depending on the tenure. In short, it was to deter land and property speculation. On the other hand, sadly PM Najib’s proposal would appear to penalise those who were never speculators.

Finally, Najib proposed a RM50 charge on each credit and charge card and a RM25 fee for each supplementary card. The rationale is to curb the aggressive growth of credit card debt. Malaysia, with an estimated working population of about 14 million, has a staggering 11 million cards in circulation. Najib may be right to assume that that is several million too many. [However, many an individual holds more than one card.As such, many will be returning all their unnecessary cards, so bank incomes will take in dip in this aspect.]

[Curtailing expenditure using credit card may also work against the current government efforts to promote consumption that drives the recovery of the economy.]