GST expected to increase prices of goods by up to 1%, says economist

The Goods and Services Tax (GST) will cause prices to generally go up by 1% at most, according to an economist's prediction.

RAM Holdings Group Chief Economist Dr Yeah Kim Leng said, this was based on the proposed GST rate of 6% as announced by Prime Minister Datuk Seri Najib Razak in his Budget 2014 speech yesterday.

“At this junction, given that it is within the 5-6% range, any increase in price should not be more than around 1%,” Yeah told Astro AWANI, adding that the government is expected to give more information later.

Regarding the added burden on the people, Yeah said that the current low inflation environment would likely enable consumers to absorb the expected price increases.

He added that the Government, by setting the GST rate at the higher end of 6%, would allow tax collection to be revenue positive.

“It also allows the government to hold the rate for 2 to 3 years so that the system can stabilise,” he said.

If the Government had set a lower GST rate and increased it in stages over the years, it would cause inflation to spiral upwards, he explained.

“It is good that you have a one-off range that you can hold constant for at least 2 to 3 years, because if you do it on a staggered basis, it would create an inflation spiral. This is because there is an expectation of price increase, and that would create higher inflation,” he said.

On the overall outlook of the Budget, Yeah said that the Government has ‘passed the prudential test on most counts’, though it could have cut back on government spending more aggressively.

The government’s announcement on the GST as well as the subsidy reductions shows a ‘fiscal consolidation’ approach that eases fiscal concerns.

“It has strengthened Malaysia’s fiscal position as well as address some of the imbalances in the economy,” he said, adding that the measures taken are good to prevent any ratings downgrade and investors concerns.

Yeah said that the operating expenditure, which remains at almost the same level, could have actually been cut back to deal with the fiscal deficit.

However, he said that the projected 3.5% fiscal deficit to the Growth Domestic Product (GDP) is within the government’s commitment. “The uncertainty remains whether it can be achieved. Nevertheless if you can raise revenue and hold back on spending, then we are at a comfortable position,” he said.

Yeah said that the compensatory measures in the reduction of individual and corporate income tax rates will have 2 good effects.

“First, it will help to gain wider GST acceptance and on other hand, the lower tax rate would help enhance competitiveness in creating a more attractive investment environment,” he said.

On other highlights of Budget 2014, Yeah said that the ‘middle income squeeze’ has been partially addressed through the cut in individual income tax as well as the widening of the tax bracket, and also the measures on affordable housing.

“So now the maximum rate applies to households earning more. That should actually help ease the tax burden for the middle income group. The higher income bracket will now have to shoulder some of the tax burden. The more they consume the more they contribute to the income,” he said.

On areas he said the Government should have looked into, Yeah said it was car prices and the manufacturing sector.

“The much expected announcement on car prices, such as a cut back in import duties, was not included in the budget,” he said.