Will tax, EPF cuts boost consumer spending? Economists say cautiously optimistic

KUALA LUMPUR, Jan 29 ― The RM2,000 tax relief for two million Malaysians and lowered Employees Provident Fund (EPF) contribution rates announced in yesterday’s Budget 2016 revision may put more money in consumers’ pockets but economists say the measures may not necessarily boost private spending.

The economists said that at best, the budget tweaks will give Malaysians more spending power but with consumer confidence at an all-time low, it was hard to predict if more money would result in a more vibrant domestic economy.

“It comes at a time when it will give some relief, albeit a small relief because it also depends on their income band and their take home pay. It will help to cushion the consumer spending from falling off the cliff.

“I am still cautious about the consumer spending but with these cuts, it will help a bit give some relief with those working on the income margins,” independent economist Lee Heng Guie said in a phone interview withMalay Mail Online.When announcing revisions to Budget 2016 yesterday, Prime Minister Datuk Seri Najib Razak said tax relief of RM2,000 will be granted to individual taxpayers earning monthly salaries of RM8,000 or below for 2015.

The move is expected to benefit an estimated two million taxpayers, giving them an additional RM475 million to spend.

The prime minister also announced that employee contributions to the EPF would be reduced by three percentage points to 8 per cent from the current 11 per cent, increasing private consumption expenditure by RM8 billion a year.

AmBank senior economist Patricia Oh said, however, that it would still depend on where Malaysians chose to put the extra money, if at all they decide to use it.

EPF has said that the reduced contribution rate is optional and workers will be allowed to stick to the original 11 per cent.

“That would be boost spending but whether employees will use it entirely for consumer spending is another thing,” Oh said when contacted.Kenanga Investment Bank Berhad Economic Research Department head Wan Suhaimie Saidie expressed a similar sentiment that the measures would only “theoretically” boost consumer spending as “only time will tell.”

Despite the uncertainty and volatility of the global economy, Wan Suhaimie noted that the domestic economy could stabilise in the latter half of 2016 so long as the US and China also experience favourable conditions.

“My view is that the economy would be better in the second half (assuming US is improving and China stabilises, oil price back to around 40-50).Domestically, I expect the economy could exceed 4.5 per cent this year given the pro-active measures since last year (recall budget adjustment early 2015, GST in April, subsidy rationalisation etc). Plus the ringgit weakness is overblown as fundamentals has remained relatively intact,” he said in an email to Malay Mail Online.

The prime minister announced earlier today that Putrajaya would trim its growth forecast to 4-4.5 per cent this year, down from an earlier forecast of 4-5 per cent.Lee also lauded the Putrajaya’s initiative in cutting expenditure but said Malaysians would need more specifics on how the government plans on tightening its belt, especially at a time when the public is struggling with rising costs.

“Where exactly you're going to cut apart from just saying cutting development expenditure like noncritical projects but also in operational expenditure, we also want to know where these savings are going to come from.

“Malaysia is in this trust deficit so whatever numbers you throw it'll just be a number but many are not sure if they can deliver,” he said.In his announcement, the prime minister said that the budget revision will see a cut in operating and development expenditure of around RM7 billion to RM9 billion.

Oh lauded Putrajaya’s prudence in cutting expenditure as it would reflect well on global rating agencies when it is time to reexamine Malaysia’s standing.

“Rating agencies will probably look at it well because prudence is always good.But spending-wise, the cut in development expenditure and operational expenditure would probably mean some projects and other development spending will be put on hold… that's positive as long as key projects remain,” she said.

The revised Budget 2016 was announced yesterday amid the continued plunge of global oil prices that hit Malaysia’s revenue. THE  MALAY  MAIL  ONLINE