“Why was SST increased?” Msian economist explains

As y’all probably already know, our government has raised SST by 2% effective 1 March 2024, and while many Malaysians are understandably concerned about how that will affect their dompet, Professor Yeah Kim Leng has a slightly different view of things.

According to the Prof Yeah, who is the Director of Economics Studies at Sunway University, there are good reasons for the tax hike even raising taxes is an unpopular move worldwide. The first and obvious reason, says Prof Yeah, is that…

Tax hikes enable the government to provide better infrastructure & services

In an interview with Free Malaysia Today, Prof Yeah said that the government needed to reduce its annual deficits and to increase spending to improve the quality of health, education, housing, and essential services.

“While the tax rate increase will affect all consumers regardless of income levels, the less affluent segments can access various social assistance programmes that include fund transfers to cope with living cost hikes.” – Professor Yeah, to Free Malaysia Today

He also stated that the government had to spend and borrow a boatload of money to counter the Great Viral Attack of 2019 and ensuing economic downturn. As a result, there was an unsustainable level of difference between the government’s income and debt, which led to the decision of raising the SST.

Prof Yeah added that Malaysia’s level of taxation is ‘considered low’ compared to its peers as well as relative to historical trends, and that politicians shouldn’t use the SST hike as a ‘weapon’ since that will have a negative impact on consumer and investor confidence.

“…the issue should not be politicised to the detriment of investor confidence, and ultimately the country’s growth prospects,” – Professor Yeah, to Free Malaysia Today

Having said that, Prof Yeah doesn’t deny that problems could arise, namely…

Certain businesses might take advantage of the SST hike to up their prices

Despite some sectors being exempt from the tax hike, Prof Yeah it would be a cause for concern if traders and businesses capitalized on the increase to up their prices to increase profit margins.

This would, according to him, spark a spike in inflation, especially if cost-pass-through expenses (expenses a third party charges a business which are then passed on to the consumer) were way above than the 2% rise in SST.

“While the overall inflation is expected to edge up marginally by 0.1 to 0.2%, profiteering, together with uncontrolled inflation expectations, may push inflation above the country’s long-term trend of 2-2.5%,” – Professor Yeah, in an interview with Free Malaysia Today

And with the estimated RM3 billion the government will get from the tax hike, something else to consider is whether the government will deliver on their aim to better the country’s infrastructure and essential services, but this we’ll have to wait and see.