Budget 2018 – reality check for middle-class Malaysians
THE much anticipated Budget 2018 has come and gone, leaving behind a bag of crowd pleasers that has something for everyone. Even the middle-class segment of the population, the long “forgotten” group, has been thrown a lifeline.
Malaysians rejoiced at the welcomed developments i.e. the planned removal of tolls, greater housing benefits, allowing employers to hire maids directly and proposed extended maternity leave.
But the real question is, is it going to be enough?
From the onset, Budget 2018 sets out to offer some respite to the middle class Malaysians, who have long struggled with rising costs of living, transportation, education, healthcare and interest charges on cars and housing loans. Here are but a few of the goodies which are certain to lend a helping hand:
Budget 2018: The good parts
The income tax reduction by two percentage points for those earning RM20,000 to RM70,000 a year is a much welcome move as this translates to tax savings of RM300 to RM1,000 for individuals with a chargeable income of over RM20,000.
Next, the unprecedented announcement of a 50% tax exemption for rental income of up to RM2,000 per month for each residential property meant that middle class with rental income can enjoy some extra tax savings on their investments.
And not forgetting the extension of the SSPN which offers tax relief of up to RM6,000 for another three years. For an individual who is in the 24% tax bracket, this adds up to an annual tax savings of RM1,000.
And what could be better
Nevertheless, despite the step in the right direction approach taken by Budget 2018 to ease the financial burden of the middle class, one can’t help but to think that it could have probably been a bigger boost or better headstart for the middle class had some of these missing elements been included:
A bigger individual income tax rate reduction would be ideal. In some countries, income tax payers saw more than 10% income tax cuts following the introduction of GST. So far Malaysians have seen an adjustment in individual income tax ranging from 1%-3% in the 2015 budget and another 2% for 2018. A higher reduction will go a long way in easing the daily burdens of rising living costs among the middle class.
Rather strikingly absent from the list of goodies in Budget 2018 is the reduction of corporate income tax which could have benefited a significant number of the middle-income population who are business owners. They too have been negatively impacted by GST and increasing costs of running their business. In comparison, a reduction in corporate income tax would have been a much-welcomed relief to help business owners remain competitive and increase their chances of surviving and thriving in today’s challenging times.
The success of SMEs in every community will invariably have a trickle-down effect in stimulating the economy and creating employment opportunities as well.
Finally, tax exemptions on advisory fees paid for engaging licensed financial planners who provide holistic financial planning services will go a long way in encouraging better personal financial management among the public. As it is, many middle-income Malaysians do not place financial planning at the top of their list of priorities given that they have so many more pressing financial demands to contend with.
Providing an incentive for more individuals to get their personal finances in order will be a positive step towards creating a society of financially knowledgeable and adept investors who will indirectly benefit the country’s economy as well.
Stand on your own two feet
As the saying goes: “Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime”.
Truth is, while Budget 2018 may appear to help the middle-income group cut down on expenses and increase their disposable household income, the impact from previous years’ budgets, predominated by austerity drives, GST, and the depreciating ringgit, continues to spillover until today.
One just has to look at the escalating living costs, rising prices of goods and services, unfavourable exchange rates and the increasing unaffordability of property prices especially for first time home owners, to realise that.
Looking realistically at the whole scenario, it is clear by now that the allocation for the nation’s yearly budget is unpredictable. In some years it may work in your favour, in others, you may be disadvantaged by it. It’s important to note that even if it is a favourable budget, the benefits are often small and insignificant to ones’ personal wealth.
Therefore, instead of spending too much attention on the government budget, a wiser and more strategical move would be to have a clear view of your own personal finance. Prepare your own 2018 budget, which includes a balance sheet and income statement.
Upon completion of your own budget, use the following financial ratios to measure your financial fitness.
1. Basic liquidity ratio – dividing your total cash and cash equivalent assets by your monthly expenses will show the length of time you are able to continue meeting your expenses in the event of total loss of income. An optimum level would be about six months.
2. Savings ratio – when comparing annual savings as a percentage of annual gross income, a person should have at least 30% saving rate, inclusive of the 11% contribution to EPF, to be considered in a healthy level. If you don’t contribute to EPF, a healthy level would be at least 35%.
3. Debt service ratio – by looking at your total annual debt payments in relation to your annual gross income, you can tell how much of your income is needed to service your debts which include your home loan, car loan, personal loan and so forth. Clearly, the lower the ratio the better off you are, but as a benchmark, try to keep it below 30%. A word of caution: any hikes in interest rates will raise your ratio as well so a bigger buffer is recommended.
With these ratios in mind, the next step is to draw up your own budget and get your finances in order. If you feel you do not have the time nor the expertise to do it yourself, seeking professional advice may be an option.
Ultimately, every middle-income
Crutch or catalyst
Budget 2018 is unlikely to make a significant impact on the lives of the average middle-income household as what benefits handed out now would have been reduced or negated by years of rising living costs coupled with nominal or even stagnant income growth.
Unfortunately, we have no control over these external forces. As Stephen Covey puts it, when we have a circle of concern with factors that we are unable to change, we should instead focus our energy inwards to the circle of influence where we can act on and make a difference.
If we continue to look forward to shortterm benefits from yearly budgets, we are essentially creating a financial crutch for ourselves which will become harder and harder to discard overtime.
When you reduce dependency on the benefits, you will be less affected by it as you already have your own financial plan.
Any additional perks given by the national budget will just be considered icing on the cake.
It is clear by now that the allocation for the nation’s yearly budget is unpredictable. In some years it may work in you favour, in others, you may be disadvantaged by it.