Tale of 2 Finance Ministers: One abolishes GST while the other increases

Dr Mahathir Mohamad, who became the 7th PM of Malaysia on Thurs (10 May) announced yesterday (12 May) that Lim Guan Eng, also the deputy president of Pakatan, would be the new Finance Minister of Malaysia.

The Star reported that Lim’s appointment as Finance Minister has been lauded by businessmen and observers.

“This news of Lim Guan Eng being the Finance Minister is great and very encouraging,” said the president of the Associated Chinese Chamber of Commerce and Industry in Malaysia. The view is that the son of DAP veteran Lim Kit Siang, who was once a political detainee, will be able to understand better the financial needs of ordinary Malaysians.

Lynn Cheah, former CEO of Eastspring Investments, said. “Lim Guan Eng will be a competent Finance Minister.”

“He will have a mountain to climb when the Goods and Services Tax (GST) is abolished,” she noted. “I am, however, convinced that his ministry will overcome the shortfall in government funds.”

Malaysian Institute of Economic Research executive director Emeritus Professor Dr Zakariah Abdul Rashid said Lim had “two essential ingredients” to manage an economy. “As a trained chartered accountant, he has an analytical mind,” Dr Zakariah noted. “As a senior politician and former chief minister, he has demonstrated a good understanding of the country’s socio-economic issues.”

As the former Chief Minister of Penang, Lim has brought much socioeconomic developments to Penang. “Under him, investment for the state has increased. There are more tourists and affordable houses for the people,” an education consultant praised Lim.

Lim expected to abolish GST which has affected the poor and small businesses

The new Pakatan government is expected to abolish the highly unpopular GST imposed by the previous Najib’s government. This was promised by Pakatan during the election campaign.

In Feb this year, just three months before the Malaysia GE14, Lim warned that with GST, it would run the ever increasing risk of GST hike every time the government needs money (‘Guan Eng: S’pore GST hike shows PH right to promise abolition‘).

At the time, he said, “By supporting BN, GST will not only be retained but is likely to be increased in future.”

The GST was implemented in Malaysia in April 2015 by the BN government at 6%. Singapore introduced it in April 1994 at 3%, which was later progressively raised to the current 7%. But the Singapore government has already announced that GST would be increased to 9% after 2020.

Lim said that Malaysia’s move to start the GST at 6% had caused “economic dislocation and cost-of-living disruption” among ordinary people. “Singapore can afford to implement GST because it is a high-income economy with a GDP per capita 5.6 times more than Malaysia,” he said. “That is why the poor and small businesses are worse off in Malaysia as compared with Singapore.”

But in recent years, Singaporeans have also been concerned about the high cost of living in Singapore and worry that it may deter young people from starting families or having big families. These were the findings by the government feedback unit Reach last year.

Lim added that the Singaporean government’s decision to increase GST bears out Pakatan’s stated intention to abolish the GST. He said the only solution to prevent the GST rate from going up was to terminate it. “This is what Pakatan Harapan is promising, to abolish GST within the first 100 days of taking power, and restore the previous sales and services tax (SST),” said Lim 3 months ago.

He also added that this was the reason why Dr Mahathir had refused to impose the GST when Malaysia faced an economic crisis during his tenure as PM in his earlier years. Dr Mahathir knew about the “adverse” economic impact of GST on the poor and small businesses, Lim said.

Heng says GST hike being done for a “very important purpose”

Meanwhile in Feb this year, Police scholar and Singapore’s Finance Minister Heng Swee Keat announced a GST hike from the current 7 to 9 per cent, which is slated to be implemented after 2020. Heng was with the Singapore Police Force for 15 years before he became the Principal Private Secretary to then Senior Minister Lee Kuan Yew in 1997. However, he did serve 6 years as MD of MAS from 2005 to 2011.

Speaking at a forum organized by Mediacorp, Heng said Singaporeans need to understand that the GST hike is necessary and being done for a “very important purpose” – to finance Singapore’s “growing expenditure needs”.

When asked how he would alleviate the worries expressed by the ordinary Singaporeans about the GST hike, he said, “I appreciate their concerns but it is important to understand why we need to do this.”

He said that because of continue spending on areas like healthcare, security and infrastructure, the PAP government needs to find new sources of revenue.

“We’ll have to find new sources of revenue so that is what we started with,” he said. “It is important to bear in mind that we are doing this for a very important purpose.”

Even though part of the govt budget is already financed by the net investment returns contribution (NIRC) from Singapore’s reserves, it is still not enough, apparently.

Humongous surpluses in many years

Yet, Singapore’s budget has been running operating surpluses for many years. It does not even include the lucrative revenue contributions from land sales which are ultimately financed by heavy home mortgage borrowings from ordinary Singaporeans for 20 to 30 years.

When asked if the larger-than-expected Budget surplus of $9.6 billion for the last FY2017 would make GST hike a tougher sell, Heng replied, “It certainly has made the job of explaining it more difficult, but it is very important for all of us to bear in mind that the surplus we had last year is not likely to be repeated again and again.”

But then, looking at historical data, Singapore seems to record more surpluses than deficits. Out of the the 19 years from FY1997 to FY2015, Singapore recorded 13 years of surpluses and 6 years of deficits.

If we throw in FY2016 (surplus $5.2 billion) and FY2017 (surplus of $9.6 billion), the results would be 15 years of surpluses vs 6 deficits out of the 21 years.

And the biggest joke was that only $1.9 billion operating surplus was to be “expected” for last year but Singapore recorded a whopping $9.6 billion instead, five times more than the “expected”. So, for most years, Singaporeans would be hearing the same story from the government – we do not expect a surplus or this was a 1-time affair but results proved otherwise.

The many years of surpluses recorded by Singapore only help to make Singaporeans feel like they have been squeezed and over-taxed, year after year.

Still, Heng acknowledged the impact of GST hike on the less well-off Singaporeans and said that there will be “efforts” to make sure it remains “progressive” with the roll-out of a “good offset package” for them.

It has been estimated that the 2 percentage point GST hike would translate into revenues amounting to only 0.7% of GDP annually.

“I’m not saying that that itself will be sufficient (because) how our healthcare cost would grow, we cannot predict with certainty,” he said. “But as far as the GST is concerned, looking at our current projections and trends, 2 percentage point is likely to be the right one.”

When asked if he was worried that the opposition could campaign on this issue at the next GE, he said, “When we know that this is the right thing to do, we must have the courage to do it and not make narrow personal calculations.”

Perhaps like Najib, he thinks the governing PAP will always beat the oppositions in elections, no matter what the PAP does.