Malaysia needs to formulate medium to long-term revenue strategy -- World Bank

Summary

Joshua, External Affairs Officer for the World Bank's Malaysian Country Office, discusses the urgent need for a Medium-Term Revenue Strategy (MTRS) in Malaysia. With tax revenues declining to under 12% of GDP, he highlights the importance of setting a clear revenue target based on a long-term fiscal view of national spending needs. The strategy should involve a balanced mix of tax instruments, including GST, while addressing concerns about regressivity. He also stresses that any new revenues must be used efficiently, focusing on improving government expenditure management to build public trust and ensure productive use of funds.

Takeaways

• 😀 Malaysia's federal tax revenues are currently below 12% of GDP, which is a concern for fiscal sustainability.
• 😀 The primary goal of Malaysia’s medium-term revenue strategy (MTRS) should be to set a clear revenue target, such as raising taxes from 12% to a specific number like 15% or 20%.
• 😀 The first step in developing the MTRS is to have a long-term fiscal view that considers how much revenue is needed to meet spending demands in key sectors such as health, education, and infrastructure.
• 😀 A crucial element of the MTRS is determining the optimal mix of tax instruments, considering factors like their effectiveness and any regressivity issues they may introduce.
• 😀 It's essential to address potential concerns of regressivity in tax instruments, such as GST, by ensuring mechanisms are in place to mitigate their negative impact on lower-income groups.
• 😀 Increasing revenue should be paired with efforts to ensure efficient and effective use of the raised funds, avoiding wasteful spending.
• 😀 The government must signal its commitment to using tax revenues productively to foster trust and ensure that taxpayers see the value in contributing more.
• 😀 Managing expenditures is just as important as raising revenues, as improving efficiency in government spending helps plug the 'leaky bucket' of fiscal inefficiency.
• 😀 Expediting the implementation of the Government Procurement Act is one example of how Malaysia can improve public procurement and reduce inefficiencies in spending.
• 😀 The government must communicate to the public that if taxes are increased, there will be corresponding efforts to improve expenditure efficiency and reduce waste in public programs.

Q & A

Why is Malaysia's revenue share of GDP a concern?

Malaysia's revenue share of GDP has been declining, with federal tax revenues currently below 12% of GDP. This decline presents challenges for the country's ability to finance its public spending and development needs.

What is the role of the Medium-Term Revenue Strategy (MTRS) in addressing Malaysia's fiscal challenges?

The MTRS aims to provide a clear, long-term fiscal strategy by identifying how much revenue needs to be mobilized to meet Malaysia’s future spending needs. It involves setting specific revenue targets and determining the optimal mix of tax instruments to achieve those targets.

Why is it important to have a target for revenue mobilization, and how does this affect fiscal policy?

Having a clear target for revenue mobilization helps the government plan and implement fiscal policies effectively. Without a target, there is uncertainty about how much revenue is needed, which makes it difficult to make informed decisions on expenditure and taxation.

How should Malaysia approach the mix of tax instruments for raising revenue?

Malaysia needs to carefully consider the optimal mix of tax instruments, such as GST and other taxes, to maximize revenue while addressing potential issues like regressivity. The goal is to raise sufficient revenue without placing an undue burden on any particular group of taxpayers.

What is the potential issue with implementing aggressive tax instruments like GST?

Aggressive tax instruments, like GST, can be regressive, meaning they disproportionately affect lower-income individuals. It's important to have mechanisms in place to address these concerns and ensure the tax system is fair and balanced.

How does the government signal its commitment to using raised revenues productively?

The government must demonstrate that any increased tax revenues will be used efficiently by signaling that these funds will be invested in key sectors and managing expenditures effectively. Transparency in spending is crucial to building public trust.

What is meant by the analogy of a 'leaky bucket' in the context of government expenditure?

The 'leaky bucket' analogy suggests that raising revenues is pointless if those funds are not used effectively or efficiently. Just like water leaking from a bucket, inefficient spending results in a loss of resources, undermining the effectiveness of revenue mobilization.

What is one specific example of improving expenditure efficiency mentioned in the transcript?

One example is expediting the Government Procurement Act, which could help reduce inefficiencies in public procurement. Improving this process would ensure that government spending is more effective and that resources are not wasted.

Why is improving public procurement a key step in managing government expenditure?

Public procurement is often a source of inefficiencies in government spending. By improving this process, the government can ensure that public funds are used in a way that maximizes value and reduces waste.

What is the ultimate goal of combining revenue mobilization with expenditure management in Malaysia's fiscal strategy?

The ultimate goal is to create a sustainable fiscal system that not only raises the necessary revenue but also ensures that the funds are used productively. This requires a holistic approach to both revenue generation and expenditure efficiency to ensure long-term economic stability.