Economists are of the view that there are at least two problems which need to be addressed urgently by the government, namely:
The government should take heed of the view that the 1998 Budget had missed the opportunity to send out a clear-message of the need for belt-tightening.
Although Anwar said the Government has reduced expenditure by trimming the allocations of ministries and departments by two per cent, the operating expenditure for 1998 of RM45.6 billion is well above the 1997 Budget allocation of RM42.7 billion, while the development estimates 1998 of RM18.5 billion is well above the 1997 Budget allocation of RM17.3 billion. The total 1998 budget of RM64.1 billion is still much higher than the total 1997 budget at RM59.9 billion.
A very clear message that the government is serious about belt-tightening is to ensure that the 1998 Budget is two per cent less than the 1997 budget. Of course, some expenditures are contractually "locked-in", while others are necessary or desirable (e.g. most educational or public health expenditures), but this is unlikely to be a sufficient explanation.
The government should seriously embark on the exercise to reduce the 1998 Budget by two per cent of the 1997 Budget, including development expenditures except for essential expenditures affecting education and health.
The Government has announced the postponement of RM65.6 billion worth of mega-projects. The question is why the government had not taken the opportunity to cancel most of the posted mega-projects, particularly the economically indefensible ones which have not begun like the Northern Regional International Airport on a reclaimed island in Kedah, the Kuala Lumpur Linear City Project, the Cameron Highlands – Fraster High – Genting Highlands Road Project and the Straits of Malacca, Malaysia – Indonesia Bridge?
The 1998 Budget has introduced several budgetary proposals which are quite blunt instruments and therefore unlikely to be either effective or equitable.
Two examples are the hefty increase for fees for an international travel document from RM145 and RM265 to RM300 and RM600 and the fees for restricted travel documents from RM60 to RM150 and the increase from RM20 to RM50 a year for motor vehicle driving licence.
Such increase in passport fees impose a special hardship on Malaysians who work or study overseas and there should be an exemption for persons falling under these categories. Similarly, as having a motor vehicle driving licence has become a necessity rather than a luxury, the hefty increase in motor driving licence rates would have an inequitable effect on the poorer strata of the society.
The increase in passport fees will bring in an additional revenue of RM130 million while an increase in motor vehicle driving fee an additional RM150 million. This RM280 million additional levy on the people could have been avoided if the corporate tax reduction had been reduced from 30% to 28.5% instead of 28%, for this half per cent difference in corporate tax would have exceeded the RM280 million estimated to be collected from the passport and motor driving fees increases.
The Finance Minister has indeed given a surprise present in his budget by reducing corporate tax by two per cent from 30 per cent to 28 per cent as the depreciation of the ringgit has caused an increase in the cost of operation and per unit cost of production which had eroded the competiveness of Malaysian manufactured products in the international market.
Anwar said the two per cent reduction in corporate tax is to enable the private sector to absorb the increase in costs and not pass them on to the consumer. Entrepreneurs, he said, should not burden consumers with price increases.
However, what mechanism is there to ensure that the two per cent reduction in corporate tax would be translated into reduced consumer prices in keeping with the objective of the tax reduction and not be a give-away to the private sector?
And this is not a puny giveaway. The reduction of the corporate income tax from 30% to 28% means a loss of RM1.2 billion in revenue or a RM1.2 billion subsidy to the private sector ensure that consumers are not burdened with price increases as a result of the depreciation of the ringgit.
Is the Government prepared to set up a special agency to monitor and track how this RM1.2 billion boon from the two per cent reduction in corporate tax would really be enjoyed by the consumers, and that the corporate sector would not be double beneficiaries in pocketting not only the RM1.2 billion but in further raising consumer prices.
Economists are highly skeptical that the RM1.2 billion boon from two per cent reduction in corporate tax would be passed on directly or finally to the consumers. If they are right, then this is a very inequitable aspect of the 1998 Budget at a time when everybody should share equally in facing the hard times – for the government is squeezing RM280 million from the ordinary Malaysians in terms of increased passport and driving licence fees, while on the other hand, it is giving away RM1.2 billion in corporate tax to the rich and well-to-do.
The higher taxes on imported cars and CKD units will mainly favour Proton and Perodua temporarily as car purchasers have already begun to go down. The structure of the taxes do not encourage assemblers to increase local content. Nor do the higher taxes address the larger problem of an excessively high car to population ratio, which they are supposedly addressing.
Fears have been expressed that the new rules imposed to qualify for the "reinvestment allowance" may have the perverse effect of discouraging reinvestment of corporate savings, which is not desirable.
Currently, reinvestment allowance (RA) is granted to the manufacturing and the agricultural sectors which carry out expansion, modernisation and diversification projects. The RA is at 60% of qualifying capital expenditure incurred. Generally this allowance is deductible against 70% of the statutory income. However, a 100% deduction against statutory income is allowed for companies that undertake projects located in Sabah, Sarawak and the Eastern Corridor, as well as companies that reinvest and could significantly increase their productivity.
On grounds on ensuring that all reinvestment activities would result in greater efficiency and productivity, new rules are being introduced whereby the reinvestment allowance would only be granted to investments which would enhance productivity such as investment on automation and robotics.
To avoid the adverse effect of discouraging reinvestment of corporate savings, the government should consider alternative measures to ensure greater efficiency and productivity as in providing an additional incentive for technological upgrading in the course of reinvestment.