IT has been a year since the Goods and Services Tax was introduced on April 1. One criticism is that GST is the main reason for the increase in the cost of living. Is this true?
An important lesson I learnt in Statistics class is that correlation does not mean causation.
If you are washing your car and it rains, would you conclude it rained because you washed your car?
One variable does not cause the other. First of all, it is important to highlight that the issue of high cost of living predates GST.
In the context of Malaysia, one structural way to solve the spike in the cost of living is by reforming the labour market or specifically, to address the rise in wages.
Studies have shown that the wage growth in Malaysia has long stagnated because of the inflation rate, which had been suppressed artificially through subsidies.
Hence, to overcome this, the government has to introduce a minimum wage policy to structurally raise wage rates and eventually, in the medium term, the issue of the cost of living will abate.
But, of course, during the period of adjustments, some unintended effects, such as price increases, are expected. But this is temporary, as in the medium term, when the inflation rate is adjusted through supply and demand, the wage rate will grow to make our wage structure rise, especially for the low- and middle-income groups.
Again, in the short term, the business sector has to adjust prices, which in some ways have caused the spike in general prices.
All these happened before GST. In fact, as early as July 2011, the government had added the seventh National Key Result Areas under the Government Transformation Programme, which was launched in January 2010, to address the rising cost of living.
Since December 2014, the ringgit has depreciated significantly against major currencies, especially the United States dollar.
This caused the cost-push inflation in the economy as imported goods become relatively more expensive. This is not due to GST. Had we not implemented GST last year, the ringgit would have fallen further and this would have increased prices even more.
The other issue is the function of the market mechanism. Market efficiency is one of the best methods to drive prices down.
Hence, the introduction of the Competition Act 2010, an anti-trust law, to combat monopoly or oligopoly-type of markets to promote competition and bring prices down. Again, this is not related to GST.
I’m not pretending that GST has no effect on general prices. It has generally caused prices to increase, but it is very small, and most importantly, a one-off event.
Bank Negara’s annual report showed that GST contributed only 0.7 of a percentage point to inflation last year.
In fact, the inflation rate of 2.1 per cent last year was much lower than the 3.2 per cent in 2014. Last year, private consumption and investment still expanded at healthy rates.
This year, although the inflation rate is projected to expand at between 2.5 and 3.5 per cent, the inflationary pressure has subsided compared with what was being anticipated last year.
But one of the important highlights of GST is none other than the timing. GST was introduced at the right time. GST has boosted Malaysia’s economic resilience to weather the negative effects of the significant slump in global crude oil prices. It allows the smooth process of a more diversified revenue base where the contribution of oil and gas to Malaysia’s revenue last year was just 19.1 per cent and expected to drop to as low as 16 per cent this year.
It is also a time when the government is experiencing a limited fiscal space since the economic and financial crises of 2008/09, which has caused the fiscal deficit to hover at 6.7 per cent in 2009.
GST has made our revenue stream more broad-based and stable. This allows the government to stay on course for its fiscal consolidation agenda, where even under the recalibrated 2016 Budget, the government is committed to maintaining the 3.1 per cent deficit target for this year.
Overall, GST will give a more long-term positive impact to the economy.
It creates a vibrant and resilient economy, and as a consumption tax, it provides incentives for savings and investments in the near future.
Dr Irwan Shah Zainal Abidin, Senior lecturer, School of Economics, Finance and Banking, Universiti Utara Malaysia, Sintok, Kedah