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       HOT on the heels of tabling the 12th Malaysia Plan (12MP), the next agenda is the presentation of the Budget 2022 in just under three weeks.

       All eyes are on the honourable Finance Minister to present an expansionary budget and one that reflects the needs of the people, businesses and strategic direction.

       Unlike in the past, the minister has this time around been forthcoming in terms of what to expect, anchored on three core themes – Recovery, Resilience and Reform – with the presentation of the Budget 2022 Pre-Budget Statement.

       As it is, the government has already planned to raise the statutory debt ceiling to 65% as well as raising the bar for Covid-19 Fund to RM110bil from RM65bil, with an additional allocation of RM45bil.

       To ensure future transparent and accountable process, monitoring, and execution, the government is also preparing to table a Fiscal Responsibility Act (FRA), which will first go through a public consultation process to obtain the necessary inputs, not only from stakeholders but also the public.

       In a statement by the ministry, the government was quoted as saying that it “remains committed to pursuing fiscal consolidation measures guided by the Medium-Term Fiscal Framework and supported by the Medium-Term Revenue Strategy to broaden the tax base and enhance the government’s indebtedness capability”.

       These were very strong words from the government as it takes the bull by its horn to tackle Malaysia’s twin problems related to taxes and debt.

       Higher taxes are a certainty

       Let’s face the fact, none of us wants to be taxed any higher than what we are currently paying. That is human nature. But as the saying goes, in life there are only two certainties – death and taxes.

       Some of us are not even paying any taxes as we not only under-declare our income but at the same time, we enjoy all sorts of tax reliefs that the government provides.

       Statistics from the Inland Revenue Board (IRB) reveals that in essence, less than 20% of Malaysian are subjected to income taxes.

       According to data that was provided in the ministry’s Fiscal Outlook Report 2020, as at end-2017, 62.4% out of 1.25 million companies that were registered with IRB, only 7.8% are subjected to tax.

       The report further added that only 16.5% of 15 million workforce were subjected to individual income tax.

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       With Malaysians too suffering a loss of income due to Covid-19, the 2020 national median income has now dropped to just RM2,062 per month, according to the Statistics Department.

       Clearly, half of the population is not being taxed at all as the current threshold for individuals to be taxed starts at only RM3,141 per month, based on monthly net remuneration for a taxpayer with a single status.

       This amount alone is 52% higher than the median salary of Malaysians in 2020. Even then, the tax collection is nothing as just RM1 is deducted for taxation purposes based on the Monthly Tax Deduction Schedule 2018.

       This suggests a person with a net salary of RM3,141 per month effectively only pays 0.4% of his annual income as taxes, which is barely the cost of a cup of coffee at Starbucks.

       No wonder Malaysia’s tax collections are in dire straits when measured with the nation’s economic output.

       Chart 1 shows that Malaysia’s current tax revenue as a percentage of GDP has dropped to even below 11% for last year and up to the first half of 2021.

       Large fiscal gap remains a concern

       As explained in last week’s column in relation to debt, Malaysia has been running a fiscal deficit since the Asian Financial Crisis in 1998 and will likely do so right up to at least 2025, as the government now projects a fiscal deficit of 3%-3.5% by then, based on the recently released 12MP.

       Under the 12MP, the government is also expected to spend a massive amount of RM400bil in development expenditure to take the Malaysian economy to the next level with a projected nominal GDP of RM2.021 trillion by 2025.

       Malaysia also expects average monthly household income to increase from RM7,160 to RM10,065 by the end of the 12MP, a CAGR of 8.1%, while Compensation to Employees is expected to jump to 40% by 2025 from the 37.2% achieved in 2020.

       A tall order considering that Malaysia is stuck at the low wage structure for the longest time, mainly due to failure to address income inequality and very low minimum wages of just RM1,200 per month in urban areas.

       With such lofty targets, Malaysia will likely continue to borrow to run its economy, at least for the next four years.

       It is safe to assume that Malaysia will continue to borrow, if not close to 100%, at least 90% of its planned development expenditure under the 12MP.

       This will raise the federal government’s total debt, from an estimated figure of RM984bil this year, as seen in Table 1, to as much as RM1.32 trillion by 2025, leading to a debt-to-GDP ratio of approximately 65%. This fiscal gap remains a concern and if not addressed properly, will lead to greater deterioration in time to come.

       The data for 2021 and 2022 in Table 1 are this writer’s estimates and are based on the assumption that nominal GDP growth for 2021 and 2022 will be at 6% and 7.5% respectively while another RM10bil out of the RM45bil increase in Covid-19 Fund will be utilised this year, leaving the balance RM35bil for 2022.

       In summary, looking at Chart 1 and Table 1, Malaysia is basically stuck in a low tax collection environment and rising debts.

       While the new statutory debt ceiling of 65% will likely be sustained into the future, Malaysia needs to address the issue related to fiscal debt management and taxes urgently to bring the country back to a sustainable path.

       For a start, the government should target to raise tax revenue as a percentage of GDP to 15% by 2025 and to 20% by 2030 to ensure sustainable and responsible fiscal management.

       Thus, based on nominal GDP of RM2.021 trillion in 2025, taxes collected then will be about RM303.1bil, which is almost double what was collected in 2020 amounting to RM154.4bil.

       However, of the RM148.7bil increase, only about RM58.1bil or 39% comes from tax enhancement strategies and new taxes, while the balance RM90.6bil or 61% is generated via organic growth of the economy once the tax strategies are in place.

       Next week, this column will discuss appropriate tax strategies that the government should consider to enhance its fiscal management.

       Failure is not an option as we have seen how debt-driven growth strategies in the past, although enabling the government to carry out large development, comes with a price and that price is a debt dependency, which can be a ticking time-bomb if not managed well.

       Pankaj C. Kumar is a long-time investment analyst. The views expressed here are the writer’s own.