KUALA LUMPUR: Malaysia can halve its fiscal deficit by gradually restoring its subsidy-to-gross domestic product (GDP) ratio and tax revenue-to-GDP ratio to their respective 10-year averages (2013-2022) of 2.4 per cent and 12.8 per cent.
To this end, Malaysian Rating Corp Bhd (MARC) recommended the implementation of consumption taxes such as the goods and services tax (GST) or Value Added Tax (VAT).
"These tax measures, administratively efficient and designed to reduce avenues for tax avoidance and evasion including from within the informal sector, are crucial enablers of the optimisation of Malaysia's fiscal and debt position, as well as the nation's economic future," MARC said in a statement today.
According to 2022 data from the Organisation of Economic Co-operation and Development (OECD), 174 countries and territories, including many with lower income levels than Malaysia, have adopted the GST or a similar consumption tax model.
As such, the abolition of the GST in Malaysia in 2018 by the previous government places the country in the minority of those without GST.
MARC said the removal of GST back then had been commonly perceived as a populist action rather than a decision rooted in economic logic, leading to an adverse impact on Malaysia's policy credibility and stability.
"It is therefore crucial to address and rectify the consequences of this previous policy reversal," it added.
To complement Malaysia's existing social assistance programmes, concerns about the potential impact of GST on low-income households can be alleviated through measures such as targeted exemptions for essential goods and the implementation of a tiered tax rate structure.
In addition, enhancing the sustainability of debt through the raising and broadening of the tax base is a prerequisite to upholding investor confidence in Malaysia's debt markets.
This, in turn, safeguards the nation's prospective capacity to secure funding for vital public services and investments, and mitigates burdening future generations with elevated debt levels and tax obligations.
The trajectory of the ringgit is significantly influenced by debt management credibility.
The preservation of confidence in the capital markets and the stability of the national currency constitute fundamental prerequisites for economic prosperity.
"Without such stability, there exists the potential for distortions in the behaviour of economic agents, thereby inducing a state of cautionary hysteresis," explained MARC.
Over the 10-year period from 2013 to 2022, Malaysia's fiscal deficit averaged 4.2 per cent of GDP.
Excluding the Covid-19 fund, Malaysia's fiscal deficit would have been averaging at consistently below 4.0 per cent of GDP.
As such, the government's goal to achieve a 3.5 per cent fiscal deficit-to-GDP ratio by 2025 appears pragmatic and achievable.
Malaysia's debt-to-GDP ratio in 2022 stood at 60.3 per cent against its peers' median of 40.9 per cent.
Furthermore, the pace of debt accumulation in Malaysia was slightly higher compared to peers, adding 7.3 per cent to the debt-to-GDP ratio for the 10-year period from 2013 to 2022 while the peer group's median increased 5.3 per cent.
Thus, Malaysia must maintain its ongoing efforts towards the formal institutionalisation of various debt metrics, such as the intended tabling of the Fiscal Responsibility Act.
The prospects for fiscal improvement against its peers hinge on the effective execution of government policies MARC said.
Notably, policymakers have expressed intent to curtail subsidies.
Malaysia's subsidy-to-GDP ratio reached 3.8 per cent in 2022, compared to the five-year average (2017-2021) of 1.6 per cent.
Subsidies have risen and remained a substantial portion of the government's operating expenditure, accounting for 23.0 per cent in 2022 from an average of 10.0 per cent over the previous five years (2017-2021).
MARC said excessive spending on subsidies constrains the government's capacity to redirect funds to other critical public service areas.