Rising Cost Of Living: Who Is To Blame?

On paper, Malaysia seems to be smashing just about any economic indicator available: the economy recorded a sterling growth of 5.7% in the first quarter of 2017. The World Bank revised upwards its GDP forecast from 4.9% to 5.2% for this year.

Ratings agencies such as Fitch have maintained their ratings on Malaysia as “A-” with a stable prospect.

Typically, the government is upbeat about the country’s economy performance, forecasting annual growth between 5.2% and 5.7%, higher than March estimates which hovered between 4.3% and 4.8%.

But sentiment on the ground reveals otherwise. It’s not uncommon to read a news report about a family struggling to make ends meet. The blame is usually directed at the government of the day and its policies.

However is this a fair assessment? We take a look at some of the possible factors that are contributing to the financial woes of the average Malaysian:

Rising food prices

In its Report on Household Expenditure Survey 2016, the Department of Statistics Malaysia (DOSM) revealed that food and non-alcoholic beverages made up 18% of the main household consumption expenditure.

According to the latest Consumer Price Index (CPI), food and non-alcoholic beverages accounted for 30.2% in CPI weights. Overall, there was an increase of 4.6% for Food and Non-Alcoholic Beverages category.

The increase by food sub-group index consisted of oils and fats (+39.6%), fish and seafood (+8%), vegetables (+4.8%), and fruits (+3.9%). Even the Food Away From Home Index saw a rise, with an increase of 5.1%.

Slice it further and you’ll notice a sharp rise in many essentials such as cooking oil (49.1%), choy sum (+13%) and Indian mackerel or ikan kembung (+11%), among others. Even round cabbage saw an increase of 6.7%.

Speaking of fish, there have been some grouses over the rising costs, with tales of a political conspiracy. Sadly there is nothing fishy about it.

Fishermen have been reported to complain about how expensive their profession is. They cite diesel prices, maintenance costs, even repairing fishing nets and the wooden jetty. Not forgetting, wages for their workers.

Catchment has also seen a decrease and this is an overall trend where global fish supplies has come to a halt. While demand has increased, global fish supplies have stagnated and overfishing expanded.

Globally prices have been increasing, so this is not a local phenomenon, but good ol’ supply and demand in action: a lot of demand but little supply. Good news is the price of chicken has seen a decrease of 3.5% with prices now going for RM8.78/kg.

Slow wage growth

According to the DOSM, in its Salaries & Wages Survey Report 2016, the median monthly salaries and wages received by paid employees improved by 6.2% to RM1,703 compared to RM1,600 in 2015. Mean monthly salaries and wages also recorded an annual growth rate of 6.3% to RM2,463 compared to RM2,312 in the previous year.

But Standard Chartered Global Research observed that real wage growth was slightly negative during the first half of 2017.

This is not only unique to Malaysia with wages only rising in single digits – like forever. The government has been jawboning employers to pay their staff more, but there’s only so much the government can do in pushing businesses to compensate staff better.

Speaking of public policies, there were two manoeuvres worth discussing: minimum wage and BR1M.

When it was unveiled in 2013, there was an immediate jump in wages. The DOSM reported that 66% of household income in 2014 consisted of wages and salaries. Two years on, wages and salaries shrunk three percentage points to 63%.

As for BR1M, while the policy has helped B40 families cope, it is a victim to an obvious structural flaw: household income is a monthly affair while the cash handout is distributed on an annual basis.

One economist decided to gauge the effectiveness of BR1M by converting the annual payouts to monthly amounts, to see how much of an impact it makes on the average monthly household income.

So in 2012 and 2016, the B40 households income averaged RM1,847 and RM2,848, while BR1M payments for households earning below RM3,000 per month, were RM42 and RM83 (RM500 and RM1,000 divided by 12).

BR1M accounted for only 2.3% and 2.9% of household income of the B40, who are its principal recipients.

Goods and services tax (GST)

Last year, think tank Institut Darul Ehsan (IDE) found most Malaysians believe that the GST correlates with the rise cost of living.

In a series of surveys called “Survey Malaysia 2017: Mood of the Nation”, a total of 4,468 respondents were asked if they agreed with this statement: “GST is the reason for the rise in the cost of living.”

Of the total, 82% of the respondents agreed while eight percent disagreed. The remaining 10% said they kurang setuju (did not fully agree).

Malaysia is one of the last countries in the world to run a full-fledged value-added tax, or in our case GST.

The other countries that have yet to implement such a system are the US, Hong Kong, Brunei and the countries under the Gulf Cooperation Council (GCC).

Theoretically speaking, the implementation of the GST is almost always accompanied by a one-time increase in price levels or living costs but not the rate of price increases or what we call inflation.

In fact, on inflation, Bank Negara Malaysia has an interesting article on perception versus reality and how memory bias is one of the reason the general public views actual inflation to be higher than the official CPI inflation.

To be fair to the government, the implementation of the GST at 6% is much lower than its predecessor, the sales and services tax at 16%. Of course, there was no adjustment period and Malaysians had to deal with the brunt of that 6% head on.

But on the other hand, the government still provides a list of exempted and zero-rated items. If it wanted to maximise revenue, it would have taken a leaf from Singapore and remove those two categories, meaning everything consumable is charged GST.

The only explanation as to why a section of Malaysians are feeling the pinch is simply because of their monthly basket of goods.

From the latest CPI, the items that saw the sharpest spikes are essentials: transport and food.

Also where you live matters: the index for Food and Non-Alcoholic Beverages rose 4.7% in Kuala Lumpur and 4.5% in Selangor.

Towards a more equitable tax policy

In our pre-Budget Facebook Live session not too long ago, the panellists talked about an equitable tax policy.

The GST for example is regressive because it hits everyone through all layers of society, as rightly pointed out by one of the speakers, Dr Muhammed Khalid of DM Analytics.

Malaysians who receive an inheritance are not taxed. For property flippers, the Real Property Gains Tax (RPGT) is only up to five years for Malaysians. “Other countries tax these on top of individual and corporate income tax,” he said.

Prominent economist Dr Jomo Kwame Sundaram added that the country needed a sustainable revenue base for the country rather than just tinkering with consumption tax.

In its latest economic report, the Treasury found that 42.6% of government revenue came from income tax while 22.8% came from indirect tax such as the GST.

But policymakers will have to come up with a more equitable plan if the country wants to move in the direction of relying on less income tax.

According to the Organisation for Economic Co-operation and Development (OECD), an effective tax policy is one that helps raise revenue to finance public expenditure on transfers, health and education that tend to favour low-income households as well as on growth-enabling infrastructure that can also increase social equity.

What was unveiled in Budget 2018, that 2% tax cut on income tax, does not serve to alleviate the burden of Malaysians as everyone gets to benefit from it, given the country’s tiered tax structure.

Until that is fine-tuned, the average Malaysian has to keep calm, adjust his or her lifestyle and carry on.