Welfare and progressive economics on the back of macro-economic fundamentals

Under Strategy 1: “Restoring Lives and Livelihoods”, Bantuan Keluarga Malaysia (BKM) will be introduced to enhance Bantuan Prihatin Rakyat (BPR) as its amount is a bit higher (RM2000 compared to RM1800) and the coverage more targeted (e.g., additional assistance of RM500 to single parent households).

The government is also treating the issue of social protection seriously. Budget 2022 will expand the beneficiaries of the i-Saraan scheme that’s for the self-employed and those not earning regular income to save for retirement through EPF contributions. The government will now also match a minimum of 15% from the contributions to a maximum of RM250 per year for those aged between 55 and 60 years.

Under Strategy 4: “Supporting Public Service Delivery”, a Special Financial Assistance of RM700 will be provided to 1.3 million civil servants Grade 56 and below. And one million public sector pensioners will be given RM350.

But the government’s effort in ensuring equitable tax treatment has fallen short of expectations as being too modest and lacking the political and bureaucratic mettle required.

The announcement concerning the “prosperity tax” of 33% for the next chargeable income at RM100 million alongside the stamp duty increase on contract notes for trading of listed shares to 0.15%, from 0.1% and the concomitant removal of the RM200 cap triggered a wave of selling pressure when the stock exchange reopened on November 1.

This resulted in Bursa’s trading value of the shares’ market capitalisation wiped out to the tune of RM33.8 billion, even though the FBM (FTSE Bursa Malaysia) KLCI (Kuala Lumpur Composite Index) was down by only two per cent. The downtrend is expected to be short-lived.

Would the imposition of a capital gains tax (CGT) – which is more progressive and equitable in nature – have precipitated a similar outcome?

Most likely perhaps but with a certain threshold in place, the market would eventually come to terms with it even if CGT were to be a permanent feature.

According to “Insight – The impact of introducing capital gains tax in M’sia” by consultant Harvindar Singh of Harvey & Associates (The Star, February 3, 2021), Vietnam’s stock market rose 14% last year despite having a CGT tax.

As an effective anti-speculative tool, CGT can help to stabilise prices (minimise fluctuations) especially in relation to the “penny stocks” (shares that are priced between RM1.50 and RM1.00 and below).

Now, are we proud if Bursa Malaysia is known more for speculative aka gambling activities?

In addition, CGT would counter-balance the liberal availability of share margin financing facilities (i.e., borrowing from a broker or bank to buy shares) which could lead to an outcome of “forced selling” – market volatility.

Forced selling, of course, can have a potentially knock-on effect similar to a “boom and bust” phenomenon, including just as critically on the banks that lend. Think of non-performing loans (NPLs) and “toxic” assets.

As in the case of regulated short-selling (RSS) that’s mentioned in EMIR Research article, “Budget 2022 & 12MP – debt ceiling, windfall & capital gains taxes” (October 13, 2021), CGT can also help complement existing measures to reduce exposure to the risks of margin calls (i.e., topping up the accounts when the shares drop in value).

In fact, precisely for the reasons above, CGT would also be in line with Islamic values, not to mention that of other mainstream religions.

It’s noteworthy that Budget 2022 didn’t mention the reintroduction of the Goods and Services Tax (GST). It’d be awkward when the purpose is to fill in gaps in the coffers and fund welfare aid – since it means that reimposition comes at a time when the B40 segment hasn’t shrunk but increased with the inclusion of 20% of households from the M40.

That is, the GST shouldn’t be imposed when the burden will be on the shoulder of a broadening B40 population whose purchasing power have been severely eroded over the years and made worse by Covid-19.

Thus, the GST could only make a comeback when more people have graduated into the M40 as the anchor of the middle class – reflecting increasing purchasing power as a whole.

Moving on to revenue, Budget 2022 expects that revenue is projected to increase by 5.9% to RM234 billion “in line with better economic prospects”, according to the 2022 Fiscal Outlook and Federal Government Revenue Estimates/FO 2022 (p. 142).

Income tax alone is projected to constitute 37.5% of Budget 2022 (p. 102).

With such a figure that’s just slightly short of half of the overall budgetary allocation sources, income tax (individual, company, petroleum, withholding, etc.) is expected to bear a heavy financial burden. But is such a projection realistic – given an environment of declined earnings during the lockdowns and hence any profit which will have to be offset by cash flow constraints?

Borrowings and “use” (sales, lease, etc.) of government’s assets is expected to make up only 29.5% of Budget 2022. This means that much of the borrowings will be utilised for debt rollover.

Under Section 4: Debt Management of the FO 2022, “… [f]ederal [g]overnment’s total gross borrowings are expected to record RM210.8 billion or 13.9% to GDP in 2021 … RM110.4 billion [will be deployed] for principal repayments while [only[ RM98.8 billion [is[ for deficit financing” (p. 163).

Debt rollover is, of course, a normal fiscal policy practice. And EMIR Research has been consistently advocating that the government’s budget isn’t like a household. Any constraint is self-imposed.

That said, we also recognise that there are limitations due to the position of our currency, not least. We surely don’t want to put ourselves in a situation where currency speculators can smell blood.

Towards that end, we caution the government on the existing extent of its debt rollover arrangements and urge that a (lower) “ratio” be self-imposed, e.g., 3 to 1, i.e., for every RM300 billion in deficit spending, only RM100 billion is allocated for debt rollover. This is to ensure productive deployment of the borrowings.

Perhaps this should be incorporated into the forthcoming Fiscal Responsibility Act.

This should also bring our debt service charges under control – since more money is used for spending that will bring in the returns in terms of revenue (e.g., tax) which then can be used for debt repayment.

More critically is the fact that we don’t have experience in what’s simplistically known as “money printing” (a misnomer – since the printing press is not to create new money or “net financial assets” with no corresponding liabilities just like that i.e., for the Treasury or even the central bank but for the commercial banks’ vaults against deposit withdrawals) or more accurately better termed as “monetary financing” (MF).

MF is simply what the advanced economies like the US, UK and Japan (and even the EU in some sense via the European Central Bank/ECB) do – directly and indirectly. Countries that engage in MF typically also engage in structural debt rollover.

This is because at each stage of the economic life-cycle, the government must first spend before it can tax and/or borrow.

In the US, tax liabilities are simply (literally) extinguished. Taxes aren’t (intrinsically) needed to fund the Treasury which spends by simply instructing the relevant Federal Reserve branch to credit (from out of its account with the central bank) the account of whomever is the recipient. Already back in 1946, Chairman of the Federal Reserve Bank of New York (FRBNY) Beardsley Ruml made the point in his speech entitled, “Taxes for revenue are obsolete”.

But we can do quantitative easing (QE).

QE will help keep the interests paid on our Malaysian Government Securities (MGS) and sukuk, etc. low and represent an indirect method of MF. QE in a limited form will correspondingly support a limited or mild form of MF – whereby Bank Negara can finance our fiscal spending which can help to reduce the extent of our debt rollover.

That is, instead of borrowing from our institutional investors to rollover our pre-existing debt, we are better off in using QE to pre-empt that (by way of the lenders off-loading their long-term bond holdings on to Bank Negara).

In short, Bank Negara can either just write off the (limited) debt (of long-term bonds) or resell it under, e.g., five-year reverse repo agreements (half of 10-year MGS), i.e., resale of bonds in exchange for cash from the commercial banks.

Now this cash would come from the prior deficit spending of the government – either from taxes plus borrowings or borrowings alone.

In effect, instead of a debt rollover, i.e., borrowing to directly pay off the borrowing:

1. We have borrowing to spend first;
2. The spending (fiscal injection – productive use of borrowing) then appears as “reserves” in the accounts of commercial banks in Bank Negara;
3. Afterwards, the reserves are used to buy back the government bonds;
4. The proceeds from the sale would either be handed over by Bank Negara to the Treasury (together with interest) pay down the debt when the time comes.

This requires concerted strategic fiscal and monetary policy synchronisation which EMIR Research has consistently called for.