A replay of Reagan’s tax cut?

THE centrepiece of Pakatan Harapan’s (Pakatan) manifesto is its Alternative Budget 2018. Key proposals include eliminating the goods and services tax (GST) and reverting to the previous sales and services tax (SST), cutting wastage, reducing corruption as well as providing toll-free highways, free tertiary public education, affordable public transport and housing.

Pakatan’s alternative budget will trigger stronger consumer spending, generate greater business activity and both will in turn boost government revenue and result in a budget surplus of RM6 billion, Pakatan claims.

As a sceptic of those who claim cutting taxes will accelerate economic growth and expand government revenue, I would describe Pakatan’s alternative budget as the fiscal equivalent of the iconic advertising tagline: “Fly now, pay later”.

While Barisan Nasional (BN) ministers and other critics have described Pakatan’s alternative budget as unrealistic, irresponsible and failing in substance, the opposition coalition’s fiscal proposals are likely to be popular among voters.

First, abolishing GST is politically attractive. Since GST was implemented on April 1, 2015, living costs have increased – and higher living costs could be a major issue in the 14th general election.

One indicator of rising prices is the consumer price index (CPI). From 3.2% in 2014 – the year before GST’s implementation – the CPI has accelerated to 3.7% last year.

Additionally, the CPI for food and nonalcoholic beverages in four states – Kuala Lumpur, Johor, Malacca, Sabah and Labuan and the Selangor-Putrajaya area – exceeded the national average of 4.1% in December 2017. Voters in these states could favour Pakatan’s proposed abolition of GST.

Another item that has witnessed accelerating prices is petrol. RON95 petrol jumped from RM1.90 in December 2016 to RM2.27 one year later, a surge of 19.5%. Petrol is essential for businesses and consumers and a doubledigit jump could have a broad spill-over impact.

Second, also politically popular is Pakatan’s proposal to cut wasteful government spending. One example of egregious expenditure documented by the auditor-general is a Kelantan local council paying RM4,699 for walkietalkies in 2014 compared with the actual price of RM750.

Over-payments buttress popular belief that government spending could be sharply reduced without damaging its efficacy.

Additionally, Pakatan has proposed slashing the massive RM20.8 billion allocation for the Prime Minister’s Department (PMD) in 2018 to RM8.4 billion – the latter figure is based on PMD’s RM5 billion budget during Tun Dr Mahathir Mohamad’s administration and adjusting for average annual inflation of 3.5%.

Third, Pakatan’s proposal to cut corruption is likely to gain resonance among voters. A constant drumbeat of news reports about improper payments now totalling billions of ringgit reinforces the perception that corruption has worsened significantly.

Recently, the Malaysian Anti-Corruption Commission (MACC) said the biggest seizure in its history involved the seizure of RM114.5 million involving infrastructure projects in Sabah totalling RM3.3 billion dating to 2010. Another MACC investigation revealed RM1.5 billion had been diverted from projects in Sabah intended to help the poor.

These investigations coupled with the 1 Malaysia Development Bhd (1MDB) “issue” could persuade many voters to give credence to Pakatan’s claim that stamping out corruption could plug, substantially, the gap between government revenue and expenditure if GST is abolished and replaced by SST.

Close examination of Pakatan’s alternative budget suggests the opposition coalition’s fiscal projections are based on optimism rather than realism.

Last year, GST corralled RM44 billion in government revenue (Pakatan’s assumption – RM42 billion) while SST raised RM17.1 billion in 2014 (Pakatan’s estimate – RM16.5 billion).

Theoretically, this will create a gap of RM26.9 billion based on government data against Pakatan’s forecast of RM25.5 billion.

Pakatan claims removing GST and substituting it with SST could stimulate business activity, fuel higher consumer spending and, in turn, boost government revenue.

This argument was peddled by supplysiders in US President Ronald Reagan’s administration and, more recently, by proponents of US President Donald Trump’s tax cut.

Enacted in 1981, Reagan’s tax cuts were so large that projections of a worsening budget deficit forced Congress to raise taxes in 1982, 1983, 1984 and 1987 while later presidents signed off on tax increases – George H.W. Bush in 1990 and Bill Clinton in 1993, David Wessel, Senior Fellow, Economic Studies at Brookings Institution noted in a recent article.

“One lesson from that history: When tax cuts are really too big to be sustainable, they’re often followed by tax increases,” he wrote.

Pakatan may argue its budget proposals don’t amount to a tax cut because GST will be replaced by SST. I disagree – creating a significant fissure between government revenue and expenditure is effectively a tax reduction.

More worrying, will Pakatan’s proposed removal of GST and re-introduction of SST have a deleterious impact on Malaysia’s budget deficit? Like Reagan’s tax cut, could this result in higher taxes in the foreseeable future?