Restructuring Subsidy

Topics: Tax, Income tax, Value added tax Pages: 26 (9112 words) Published: May 8, 2013
Kajian Malaysia, Jld. XXV, No 2, Disember 2007

THE CHALLENGES OF RAISING REVENUES AND RESTRUCTURING SUBSIDIES IN MALAYSIA Suresh Narayanan School of Social Sciences Universiti Sains Malaysia Penang

Malaysia has run deficit budgets in all but five years since 1970 but past deficits have been managed thanks to substantial oil revenues and high domestic savings. However, the slow growth or decline of several traditional sources of revenue and the rising subsidy bill since 2007 have given pause for reflection on the traditional approach to fiscal management. In this paper, it is argued that fiscal management must not only centre around reducing non-productive expenditures and wasteful leakages but must also confront the problem of reducing and restructuring subsidies, particularly to petrol and petroleum-related products. The global dip in petroleum process has fortuitously provided the respite needed for such an exercise and should not lull policy makers into complacency. When the economy recovers from the current downswing, a solid revenue raising instrument such as the value-added tax must be introduced in order to wean the economy away from the current over reliance on petroleum-based taxes. Keywords: budget deficit, petroleum subsidies, revenue, value-added tax INTRODUCTION Malaysia has experienced difficulties in balancing its budget. Since 1970, the budget has been in deficit in all but five years and deficits have accumulated in periods of economic upturns and downturns, alike. Furthermore, since 1999, the deficits have consistently exceeded the figures forecast. This has prompted observers to comment that not only is the budget deficit structural in nature (not cyclical), but there is also an apparent lack of fiscal discipline (Ahmad Saifuddin, 2008).


Suresh Narayanan

Budget deficits in Malaysia became commonplace with the advent of the National Economic Policy (NEP) in 1970. In the ensuing decades, fiscal spending was actively used as a policy tool in support of NEP restructuring objectives. This spending spree came to a halt only in 1986, when it was clear that the budget deficits had reached unsustainable levels. Concerted efforts to downsize public intervention yielded five years of small budget surpluses. But this period was shortlived. Periodic downswings have forced the government to intervene with anti-cyclical fiscal policies, where expenditures often overshoot revenues. This was evident during the economic crisis of 1997−1999 and is becoming evident with the looming global crisis that threatens to derail the country’s export-led growth. On 4 November 2008, the Finance Minister revised the Growth Domestic Product (GDP) growth estimates for 2008 and 2009 downward, from 5.7% to 5% and from 5.4% to 3.5%, respectively. The budget deficit forecasted for 2009 was revised upward, from 3.6% of the GDP to 4.8%. An initial stimulus package was also announced. It consists of RM7 billion financed from savings accumulated as a result of the reduction in fuel subsidies implemented earlier in the year. Despite the fact that expenditure growth has outpaced tax revenue growth, past deficits have been managed by resorting to substantial oil revenues and large domestic savings. These resources have enabled lowcost borrowing. In fact, several traditional sources of tax revenue have either declined or are growing very slowly. A substantial portion of the revenue for 2009 will come from taxes on petroleum, petroleum products and dividends from Petronas. From this perspective, the high oil prices that prevailed during much of 2008 have been a great advantage. However, due to softening oil prices and the likelihood that developed countries experiencing recessions will demand less oil, oil prices may remain low in 2009. This, in turn, will adversely affect government receipts in 2010. If private sector activity remains lacklustre, the public sector would have to continue to enlarge its direct...
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