Malaysian Economy - Government Sector PDF

MALAYSIAN ECONOMY THE GOVERNMENT SECTOR IN MALAYSIA CHAPTER 7 1 Overview Discuss the role of the Federal Government. Explain the need for fiscal policy in the economy. Identify the components of the Federal Government revenue, expenditure and debts. Expla...

MALAYSIAN ECONOMY THE GOVERNMENT SECTOR IN MALAYSIA CHAPTER 7 1 Overview Discuss the role of the Federal Government. Explain the need for fiscal policy in the economy. Identify the components of the Federal Government revenue, expenditure and debts. Explain the privatization policy. Analyze the advantages and disadvantages of privatization. 2 Federal Government in the Malaysian Economy The federal government adopts the principle of separation of powers under Article 127 of the Federal Constitution of Malaysia, and has three branches: executive, legislature and judiciary. The federal or central government is the ultimate authority in Malaysia and located in Putrajaya. It is headed by the Prime Minister of Malaysia who is also known as the head of government. The federal government promotes private enterprise and ownership in the economy, the economic direction of the country is heavily influenced by the government through five years development plans since independence. 3 Federal Government in the Malaysian Economy The economy is also influenced by the government through agencies such as the Economic Planning Unit and government- linked wealth funds such as Khazanah Nasional Berhad, Employees Provident Fund and Permodalan Nasional Berhad. The government's development plans, called the Malaysian Plan, currently the Twelfth Malaysia Plan, started in 1950 during the British colonial rule. The plans were largely centred around accelerating the growth of the economy by selectively investing in selective sectors of the economy and building infrastructure to support said sectors. 4 Fiscal Policy Fiscal policy is the use of government expenditures and taxes to promote particular macroeconomic goals, such as full employment, stable prices and economic growth. An expansionary fiscal policy can help to move the economy out of recession, as it increases real output, employment and income. A contractionary fiscal policy decreases real output, employment and income. It can be used to combat the problem of inflation. 5 Fiscal Policy National budget: The sources of government revenue and government expenditure for the coming fiscal year. Budget deficit: Government spending in excess of tax revenues to combat a recession. Budget surplus: Tax revenues in excess of government spending to combat inflation. Balanced budget: Government spending equals tax revenues. 6 Government Revenue The Federal Government revenue includes three components: ○ Direct taxes ○ Indirect taxes ○ Non-tax revenue and borrowing Two categories of government expenditure: ○ Operating expenditure ○ Development expenditure 7 Government Revenue Tax Revenue Income gained by governments through direct and indirect taxes. Direct taxes collected by Inland Indirect taxes collected by Royal Revenue Board: Customs and Excise Department: ○ Income taxes on corporations and ○ import duties individuals ○ export duties ○ Petroleum (PITA) ○ excise duties ○ Stamp Duty ○ sales tax ○ Real Property Gain Tax (RPGT) ○ service tax ○ Estate Duty 8 Government Revenue Stamp Duty ○ In Malaysia, stamp duty is a tax levied on a variety of written instruments specifies in the First Schedule of Stamp Duty Act 1949. ○ In general term, stamp duty will be imposed to legal, commercial and financial instruments. ○ An instrument is required to be stamped within 30 days of its execution if executed within Malaysia. ○ If the instrument is executed outside Malaysia, it must be stamped within 30 days after it has been first received in Malaysia. 9 Government Revenue STAMP DUTY FOR YEAR 2020 (Malaysia Housing Loan) Value of instruments of transfer Value of instruments of Exemption given on and loan agreement for the transfer and loan Exemption given on stamp stamp duty purchase of first home agreement for the duty purchase of first home Up To RM300,000 100% 100% on the first RM300,000 Between RM300,001 and and excess is subject to the RM500,000 prevailing rate of stamp duty Applicable for sale and purchase from 1st June 2020 to 31 December 2021 10 Government Revenue Real Property Gains Tax (RPGT) ○ Is a form of Capital Gains Tax that is imposed on the disposal of property in Malaysia. ○ It was suspended temporarily in 2008-2009 and reintroduced in 2010. ○ In 2014, RPGT was increased for the 5th straight year since 2009. ○ Based on the Real Property Gain Tax Act 1976,. A chargeable gain is the profit when the disposal price is more than purchase price of the property. ○ Levied by the Inland Revenue Board (LHDN). ○ RPGT is a tax imposed on gains derived from disposal of real property. In simplest terms, a tax on your net profit when you sell a property. 11 Government Revenue Good and Services Tax (GST) ○ The GST is a value added tax and collected at every stage of the supply chain. ○ GST is levied on most transactions in the production process, but is refunded with exception of Blocked Input Tax, to all parties in the chain of production other than the final consumer. ○ The existing standard rate for GST effective from 1 April 2015 is 6%. ○ The Government of Malaysia tabled for first reading the Bill to repeal GST in Parliament on 31 July 2018 (Dewan Rakyat). GST was replaced with the Sales Tax and Service Tax starting 1 September 2018. 12 Goods and Services Tax (GST) vs Sales and Service Tax (SST) 13 Government Revenue Non-Taxed Revenue Major components: ○ Petronas Dividend ○ Petroleum royalty and gas ○ Road tax ○ Bank Negara Dividend Revenue from: ○ issuance of licenses and permits ○ fines and penalties ○ proceeds from sale of government assets ○ rental of government property 14 Government Expenditure Two types of government expenditures are; (i) Operating Expenditure and (ii) Development Expenditure. Government inject extra spending into the economy ○ to boost the aggregate demand and economic activity Government supplies goods and services that the private sector would fail to do ○ transportation ○ merit goods ○ common defense ○ welfare payments and benefits ○ improve supply-side in the macroeconomics ○ solve market failure 15 Government Expenditure Operating expenditure Figure 7.3 Operating Expenditure by Component (% to OE) Major components: ○ emoluments ○ subsidies ○ debt service charges ○ grants to state governments and statutory bodies ○ pensions and gratuities ○ supplies and services ○ refunds and write-off Source : Ministry of Finance 16 Government Expenditure Figure 7.4 Government Development Expenditure and Allocation Percentage to Prime Minister Departments (PMD), 2004 - 2019 Development expenditure economic service social service (health, education) security (police, army) general administration Source : Ministry of Finance 17 Government Expenditure Figure 7.5 Composition of 2021 Federal Government Budget 18 Government Debt National debt can be defined as the country’s borrowings, comprising domestic debt and external debt. Major sources of the government’s domestic borrowing come from the selling of Treasury bills, government’s securities and other investment certificates. Major sources of external loans come from the World Bank, International Monetary Fund (IMF), Asia Development Bank and also developed countries, such as the United States and Japan. 19 Government Debt Figure 7.6 Government Debt as a percentage of GDP, 1990-2020 (%) Source : BNM 20 Privatization Policy and Malaysia Incorporated Policy Privatization is defined as the transfer of the public sector activities and functions to the private sector. In 1983, the Privatization Master Plan was launched. Objectives of privatization: ○ To relieve the government’s financial burden and transfer of public services to the private sector can save government expenditure, subsequently avoid budget deficit and reduce government debt. Malaysia Incorporated, launched on 25 February 1983, aims to establish and strengthen cooperation to benefit both the private and public sectors. 21 Privatization Policy and Malaysia Incorporated Policy 4 reasons for privatization 1. To improve work efficiency and productivity Privatization will increase the number of companies in the industry. Consequently, these companies will have to compete among themselves to gain a market share in the business. In order to compete, privatized companies will have to improve the efficiency and productivity of their employees and quality of goods produced. 2. To facilitate economic growth Private companies are profit- oriented and they will use the minimum cost of production to produce maximum products. Privatization of public companies will have positive effects on national output and national income. Government revenue will be increased when companies produced more output and earn more profit. 22 Privatization Policy and Malaysia Incorporated Policy 3. To reduce the size and presence of the public sector in the company Privatization will reduce the size of public sector in the economy. As time goes by, the economy will be increasingly led by the private sector which is efficient in allocation of factors of production. 4. To meet the New Economic Policy (NEP) One of the objectives of NEP is to provide opportunity for greater Bumiputera participation in the manufacturing sector, in terms of equity, employment marketing and professional services. More business opportunities for Bumiputera participation. 23 Privatization Policy and Malaysia Incorporated Policy 7 modes of privatization 1. Sale of equity Transfer of three organization- related components, namely management responsibility, assets and personnel. Sale of equity either be partial or complete sale of shareholdings in a state- owned public company. A complete sale will involve a transfer of 100% government equity in a company – E.g., PROTON and TELEKOM. 2. Sale of assets This involves the transfer of one, two or even all three components mentioned in sale of equity. Example: the asset of quarries in Selangor, Perak & Penang. 24 Privatization Policy and Malaysia Incorporated Policy 3. Lease of assets Leasing of government immovable assets is a way of privatizing public services. It involves the transfer of rights to use assets for a specified period of time. This method is usually applicable to fixed assets of public entity that are earmarked for privatization, especially if the assets are large such as seaports and airports. 4. Management contract Some government services were contracted out to the private sector. For instance, parking services and rubbish disposal. Management contract involves the transfer of management responsibility and sometimes transfer of personnel; e.g., Alam Flora and Selangor Water Treatment Plants. 25 Privatization Policy and Malaysia Incorporated Policy 5. Management Buy Out (MBO) Involves top managerial personnel of a company taking over the company that they are initially employed in. Can team up with the rest of the employees in an exercise known as Management-Employee Buy-Outs. 6. Build-Operate-Transfer (BOT) The private sector constructing a facility using its own fund, operating it for a period known as concession period and transferring it to the government at the end of that period. 7. Build-Operate Similar to BOT but does not involve the transfer of facility to the government. Usually accompanied by a grant of a licence and/or concession. For example, Projek Lebuhraya Utara Selatan (PLUS) or known as PLUS Expresssway or PLUS Malaysia Berhad. 26 Privatization Policy and Malaysia Incorporated Policy Impacts of privatization Most studies found positive effects based on a number of measures such as output/sales, profitability, efficiency, capital spending and leverage (decline) Impact of privatization on employment levels is more ambiguous. Workers, owners/shareholders and buyers tend to gain from privatization. Impact of privatization on consumer welfare is ambiguous. Positive contribution of privatization to capital market development. 27 Privatization Policy and Malaysia Incorporated Policy Rationales and Motivations Solve the problems of deficits and mounting external debt. Private-sector-led growth and development. Meet the objective of wealth redistributive policies. 28 Privatization Policy and Malaysia Incorporated Policy Effect on the Regulatory Reforms Privatization in Malaysia was primarily implemented in the infrastructure sector: ○ Electricity ○ Telecommunications ○ Water ○ Expressways ○ Ports ○ Airports 29 Privatization Policy and Malaysia Incorporated Policy Diverse market structures after privatization ○ Monopoly: KTM in railways, Indah water in sewerage, TNB in power distribution and transmission, water authorities and ports to their respective localities. ○ Oligopoly: Pay phones and cellular services (Maxis, Celcom, Digi, and more). 30 Impact and Performance Social Welfare Mixed results Road transport: Reduction in travel time. Ports: Gain in government revenues, improvement in services and higher wages. Telecommunications: Improvements in productivity and financial performance of Telekom Malaysia, reductions in telephone tariff levels. Water sector: No improvement in access to treated water. Failures in sewerage and urban transport sector. 31 Impact and Performance Macro Impacts Significant savings in capital expenditures. Limited adverse impact on public employment. Privatized companies accounted for large share of market capitalization of the Kuala Lumpur Stock Exchange (Bursa Malaysia). Distributive impact via under-pricing in the short term. 32 Conclusions The objectives of reducing the government financial and administrative burdens are likely to have been met through privatization process. Efficiency gains within privatization are likely to be mixed. Privatization has supported the redistributive goal of the New Economic Policy. Privatization process involved political patronage. Government continues to have significant control over the privatized firms, i.e., GLCs. 33