Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly, on October 26 - November 1, 2015.

 

At last, some good news for the middle-income group. For many years now, an oft-heard complaint after almost every budget speech has been that this is the most neglected segment of the population.

Certainly, like the majority of Malaysians, this group has been feeling the squeeze since the cost of living started escalating. It appears that the government finally took the grouses of the middle-income group into consideration when it crafted Budget 2016.

Just like it identified the bottom 40% of the population (B40) and came up with measures to ease their financial burden, the latest budget has targeted a new group — M40 — which are households with a monthly income of between RM3,860 and RM8,320. This definition will be reviewed from time to time.

While it is a welcome move and one certainly must not look a gift horse in the mouth, the question is, will the measures announced make a significant difference to this segment of the population?

Let’s take a look at the key measures:

• Tax relief for each child below 18 years of age is increased from RM1,000 to RM2,000 from year of assessment 2016;

• Tax relief for the individual taxpayer whose spouse has no income is increased from RM3,000 to RM4,000;

• Individual taxpayers are now given tax relief of up to RM5,000 per year for medical treatment and care of parents who are ill. Effective 2016, tax relief for children who provide for their parents is RM1,500 for the mother and RM1,500 for the father. The relief is subject to the condition that each parent does not have income exceeding RM2,000 a month and must be 60 years and above;

• Tax relief will be raised from RM6,000 to RM8,000 for each child above 18 years who is studying at a local or foreign institution of higher learning, from year of assessment 2016; and

• Tax relief will be increased from RM6,000 to RM8,000 for a disabled child above the age of 18 who is studying at a local or foreign institution of higher learning, from year of assessment 2016.

All these measures are well and good for the short term but they are not sustainable for the long term. The higher tax exemption will provide some households with some relief but if the cost of living continues to rise, the effect will be negated eventually. What’s really needed are solutions that go beyond cash handouts and tax relief.

The crux of the matter is this: the current environment is likely going to get worse before it gets better. This is because the man in the street is already feeling the pinch, coping with the Goods and Services Tax (GST) that was implemented on April 1. In the months ahead, rising toll charges and a weakening ringgit will continue to drain the people’s pockets. Businesses like food and beverage will pass on the higher logistics cost to the customer — this has always been the case.

Additionally, employers are unlikely to absorb the higher minimum wage rate announced in Budget 2016. The higher wage cost will eventually be passed on, ending up with the consumer.

On the whole, Budget 2016 does not give a clear indication of how the government will deal with the headwinds facing the domestic economy currently — rising household and public debt, falling commodity prices, rising costs, shrinking current account surplus and foreign exchange reserves, a crumbling ringgit, falling exports against the backdrop of a China slowdown, intensifying competition in the region, and the list goes on.

The household debt-to-gross domestic product (GDP) ratio had risen to 88% as at Aug 31 while the government expects to spend RM24.4 billion on debt service charges this year, up from RM22.6 billion in 2014.

When government finances are so constrained, it is all the more important for the limited resources available to be channelled into the most productive areas.

There are structural weaknesses in the economy and as long as these problems are not addressed effectively, growth will continue to come under pressure. The net effect would be job loss and shrinking household income. We are seeing this already; some corporations and banking groups have undertaken retrenchment exercises to cut costs as a more hostile operating environment eats into their profits.

What’s needed are bold measures to address the current economic challenges coming from both the domestic and external fronts. Everyone, whether you are in the B40 or M40 group, will prosper if the economy is doing well and our currency is strong and our financial markets vibrant.

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