Prof Datuk Dr Mohamed Ariff, a professor of international economics at the INCEIF (International Centre for Education in Islamic Finance), said revenue has shrunk to 22 per cent of the gross domestic product (GDP) compared with previous years when it stood at 34 per cent.

“There was also only a marginal increase in revenue by RM1.1 billion in 2010 compared to the previous year although the economy expanded by more than five per cent. Clearly something is wrong with the level of taxes,” he said in an interview with the Business Times yesterday.

However, with the general election around the corner, Ariff does not expect to see any increases in taxes. Meanwhile, the Goods and Services Tax (GST) will most likely be introduced only after that.

To generate revenue in the 2012 Budget, he expects a cut in the individual tax rate to raise disposable income, which will help raise domestic consumption.

Ariff also does not expect a cut in subsidies to be sufficient to bring down the budget deficit which stands at 5.4 per cent to the GDP significantly.

“From what I see, the government may increase the real property gains tax which stands at 5 per cent to 30 per cent.”

The coffers have not been growing fast enough while Malaysia started reducing tax rates to attract foreign investors as well as trade agreements to liberalise tariffs.

“Last year, the federal government debt stood at RM430 billion in the first quarter of 2010, up by RM23 billion from the first quarter in 2009 – that is an enormous increase in government debt,” he said.

Although the debt level at 53 per cent of the GDP is not that severe as that during the 1980s, it has been growing by 12 per cent per year on the average and in 2009 it spiked to 18 per cent per year.

If not addressed, it can snowball and lead to dire situations faced by economies elsewhere. Malaysia was able to withstand the Asian financial crisis because of a long fiscal surplus period it enjoyed in the 1990s.

“Fortunately, our debts now are locally sourced, but with the low revenue level, the government will face the strain to borrow further.”

The former executive director with the think-tank Malaysian Institute of Economic Research said Malaysia’s monetary policy, which is handled by Bank Negara Malaysia, has done well.

Banks are now well-capitalised, non-performing loans are also a non-issue while the growth of money supply is also impressive.

“It’s our fiscal side which is worrying and in serious problems. We have been in deficit since the crisis in 1998 and today we rank as one of the Asean economies with the longest deficit line.”

Rolling out RM68 billion stimulus package at the height of the global economies crisis has also added more fiscal strain on the government’s debt level and economy.

“We still lack the fiscal discipline in balancing the book (trimming the deficit). The problem is how to get it done when revenue is not growing. Do we cut expenditure or increase the tax revenue?”

With the run-up to the general election, Ariff feared that the focus seemed to be providing sweeteners to the people, saying populist policies do not benefit economies in the long term.

Policies should be focused on fixing the economy and getting more revenue while trimming the expenditure so that the economy continues to remain competitive in a global market.

Ariff also commented that the recovery of the global economy will be slow and probably take three years for the US and Europe to get back on track, posing further challenges to small trading nations like Malaysia.

SOURCE: Business Times