RM 10,000,000,000 for the economy

NST Online : 2007/09/09

Fuelling the economy:
Almost RM 10,000,000,000 in our pockets

By : RAJAN MOSES

Tan Sri Nor Mohamed Yakcop says the living expenses of students overseas has been doubled so that they can now live in comfort and just focus on their studies.
Tan Sri Nor Mohamed Yakcop says the living expenses of students overseas has been doubled so that they can now live in comfort and just focus on their studies.

It’s the people’s billions – to spur the economy. Second Finance Minister Tan Sri Nor Mohamed Yakcop provides the rationale behind Budget 2008.

Security is not only for the foreigners to have the confidence to invest, but it’s also important for our quality of life, says Tan Sri Nor Mohamed Yakcop.
Security is not only for the foreigners to have the confidence to invest, but it’s also important for our quality of life, says Tan Sri Nor Mohamed Yakcop.

Second Finance Minister Tan Sri Nor Mohamed Yakcop tells RAJAN MOSES and SHAHRIMAN JOHARI the rationale behind the Budget 2008 and the potential multiplier effects of some of the key measures.
Q: Five million EPF (Employees Provident Fund) contributors will now be able to withdraw savings from Account 2 for monthly housing loan repayments. If they start withdrawing from their savings now, what’s going to happen to their savings eventually?

A: We know that EPF savings is for retirement and we don’t want people to take the money and use it up really early. What we’ve done is divide the EPF savings into two accounts — Account 1 and Account 2.

Account 1 has 70 per cent of all contributions and it can’t be touched until the age of 55. Account 2 can be used. And the best way to use Account 2 is to buy a house.

Because if you want to buy a house when you retire at 55, house prices would have gone up. A person’s No. 1 asset is a house. The biggest expenditure a person would make in his lifetime is a house. And that would appreciate over time and give him security.

But for many people, paying for a house is a big burden as it is a big chunk of their disposable income. To allow this kind of withdrawal in the long run is good, because old age security is also about owning a house.

With this money, two things can be done. Those thinking of buying a house can now buy a bigger house. But for those with a house they are comfortable with, this money can be spent on other things like their children’s education and better facilities to improve the quality of life. This is the best thing we can do for the rakyat.

When we added it all up, we were surprised that the figure came to RM9.6 billion. If you look at it as a snapshot, without this move, you have RM9.6 billion sitting in EPF, but now, there is potentially RM9.6 billion to put into pockets every year.That is big. For consumption-led growth — and we want consumption-led growth — we don’t want to depend too much on exports. Exports are good but there are all these vagaries.

You have to go more and more on other boosters of growth, and consumption spending is an important booster.

Q: And what sort of multiplier effects will this budget measure have?

A: The multiplier effect for construction and housing is one of the highest. So many industries — building, cement, tiles, furniture, etc — will experience the multiplier effect. The broad-based impact is high for housing.

Q: How will this EPF privilege be monitored to prevent abuse as has happened in the past with withdrawals for unit trust investments?

A: The abuse before was because of the (intermediaries). In the case of unit trust, people were trying to sell, and people did not know what sort of upfront fees they were paying.

In the case of computer purchases, true, there were many people who did not buy computers, but just took out the money and shared it with certain people and got a receipt for it. So we have had to cancel that.

In the case of housing, the chances of abuse is negligible. I’ll say basically non-existent. The way it’s done, you have to say where you have a loan, say Maybank (for which you pay RM500 a month). The bank will have to confirm this.

RM200 will be credited into your account as long as the loan is outstanding and as long as the loan is being serviced.

If for three months you don’t pay the loan, they will stop paying you. So, when you pay the loan, EPF will pay you.

Q: Would you say this housing measure is one of the biggest planks of the budget next year?

A: This is one of the two biggest planks in the budget. The other is education — to make education completely free.

We have made education free in terms of fees and we’re also giving free textbooks. Previously, parents had to fill a form declaring their salary and how many children they had.

We had limited the number of eligible children. There was much red tape. A parent earns a little more than the minimum, he can’t enjoy the benefits. His friends earn a little less, but he has more children than his friend, but his friend enjoys the benefits… all sorts of things.

We say it’s not worth it, we will just give it to all Malaysians who want to use this scheme and it doesn’t matter how many children they have. All their children can now enjoy free textbooks. More than that, we also looked at the criteria for entering university.

We found that more and more universities, both public and private, had, among their entry requirements, participation in co-curricular activities, especially uniformed bodies.

The parents want their children taking part but don’t have the money to buy the uniforms.

There are parents who just can’t afford the uniforms or they have to give up something very important in order to buy the uniforms for their children. So we decided to give one uniform free.

We are building more schools, making teaching a noble profession again and increasing teachers’ salaries.

We are also emphasising Tamil and Mandarin by giving significant increases in the allowance for Tamil and Chinese school teachers.

There are many retired teachers with so much experience and knowledge who will be taken back into teaching.

We recognise that we have many students and not enough scholarships, so we are increasing that, too (by 80 per cent).

We are doubling the living expenses of students overseas so they can now live in comfort, enough for them to focus on studying without having to worry about money. So education, I’ll say is the next most important plank in our budget.

Q: There was widespread disappointment that there was no cut in personal income tax. Why was this excluded?

A: It is about the number of people paying tax. We have 11 million people working, the number of people paying tax is very little, a million or so.

And our tax structure is already such that if you are earning RM3,200 with two or three children, you virtually don’t pay tax.

We thought that this is one area that is not the priority now, because of the 11 million people working, 10 million don’t pay tax.

Q: What was the rationale behind the move to further cut corporate tax to 25 per cent in 2009 from 26 per cent in 2008?

A: We have to be competitive. We know that (corporate tax in) Singapore is 18 per cent, Hong Kong is 17.5 per cent.

And generally to be competitive, we thought we can afford to go down one per cent, although one per cent translates to about RM900 million in revenue.

Although we are 25 per cent, for effective tax we may even be lower than them because we don’t have goods and services tax (GST).

We also, in addition to, or in return for the corporate tax, give so many allowances to investors — capital allowances, accelerated capital allowances, pioneer status, all sorts.

So when you add all those up, the effective tax rate is significantly lower than 25 per cent. But we decided we could go down to 25 per cent, we can afford to do it and in the process, create more investment activities.

Q: One of the things that stood out in the budget was the KL and Penang-centric nature of some announcements. What’s in store for other cities?

A: The traffic jams in KL and Penang are terrible. So for transportation we have to concentrate on KL and Penang. Of course, in Johor, too, the traffic is becoming worse. But we say in the next sentence that we will look at other states.

And also for other activities like IDR (Iskandar Development Region), the Yayasan Hartanah Bumiputra was given RM400 million.

Q: There is a lot of talk that this budget is an election budget.

A: In a way, every budget is an election budget because in a very generic sense we want to make sure the people benefit.

But this is also a responsible budget, because we see that despite providing so much allocation in so many areas that is close to everyone’s hearts, our (budget) deficit went down from 5.5 per cent to 3.3 per cent last year, 3.2 per cent this year, to 3.1 per cent.

So in that sense it’s not an election budget, we were very careful with what we spent. And, very interestingly, we didn’t give the (civil servants) a bonus.

If it’s an election budget, we would have given them a bonus. We know that we have to be responsible, the amount of money is limited, there are so many things to do with the money.

We have just given the salary increase to government servants. Should we give more, or use that money to build that extra bridge, or that extra road in Sabah, or extra water facilities in Sarawak… so many needs.

It’s very tempting to just say never mind, make all these government servants happy, but we didn’t do it. So, in that sense, it’s not an election budget.

Q: How will the government be able to spend more and yet bring the budget deficit down?

A: We are very lucky because the tax system is very efficient, getting better and we are also quite lucky that the oil sector is doing well.

The oil prices, at where they are now, give us enough tax from the oil sector and enough dividends from Petronas for us to carry on development.

But we are very careful. We have to use these funds in such a way that we can have long-term leverage and spend in ways that we can get long term returns.

And that’s why, although we have so much money coming from the oil sector, we will continue being disciplined, by having the deficit reduced, and by making sure that we never borrow for operating expenditure.

For operating expenditure, we just keep to whatever we get from tax. So the discipline is always there.

The economic growth and the higher earnings of the corporate sector will translate into tax.

And the higher earnings of Petronas, translated into taxes and dividends, is what enabled us to reduce the deficit while we also spent.

Q: Why is it that next year’s growth forecast is only slightly above this year’s? Is that a cautious forecast?

A: Actually we thought we could get 6.5 per cent growth and we were initially quite confident.

But this (US) sub-prime issue has come about and frankly, we are not 100 per cent sure of the impact of it. It appears to be manageable and has not led to a major economic crisis.

But, because we are not 100 per cent sure, we put 6.5 per cent, but also had this 6 per cent of downside in case the sub-prime becomes an issue bigger than what we are anticipating now.

Q: So it’s a cautious estimate?

A: Yes, cautious, because of the sub-prime issue.

Q: Will the government announce more off-budget measures in future? Like the cigarettes tax in July, etc.

A: That’s only once, because every time it comes closer to budget time, there’s all sorts of activities going on, people hoarding this and that. So we thought, just get it out of the way.

Q: But there were also other off-budget measures announced earlier, like scrapping Real Property Gains Tax, for example, which was announced out of the budget instead of part of the budget. Does the government want to make this a habit?

A: Not really. This budget has to be seen in the context of announcements made outside the budget.

In fact, the announcement we made outside the budget were the removal of Real Property Gains Tax, the IDR fiscal incentives and the liberalisation of Foreign Investment Committee rules in respect to residential property.

Pemudah, the one-stop centre, and the civil servants’ pay rise, could have been announced in the budget, but we announced it earlier. So maybe the budget has to be seen in the context of these things. As and when required, we will announce it earlier or after the budget.

Q: There’s been quite a big push to attract Middle East money to Malaysia.

A: The Middle East are so much richer than what they were when oil was just US$20 (RM70) a barrel. You know the amount we are talking about is US$100-250 billion of funds these Middle East investors have.

And I suspect they don’t want to put all their eggs into one basket — in the US and Europe. It will be prudent on their part to diversify, and they have very good feeling about Malaysia.

They feel we have a strong economy, good civil system, regulatory system and leadership that they can trust. And we have the infrastructure.

For them, we have the Islamic environment and the friendship that they have formed with our leaders. They’re very comfortable to come here for a holiday.

And they know we are the first to implement Islamic banking way back in 1993 when the whole world did not believe in it. Now others choose to do it, which is good.

And the Middle East knows that we are the only country with a dual banking system — Islamic and conventional. So they are very comfortable and they do want to come. But we have to walk the extra mile, to talk to them and to make sure that this cash flow comes quickly into the country.

Therefore, in this budget we have proposed a number of steps to open up to the Middle East investors.

I think this is the beginning of the major inflow of Middle East funds into Malaysia. We already saw that with the IDR and the signing of US$1.2 billion investment.

We think there is still plenty of scope.

Q: Pemudah featured quite prominently in the budget. How is it going to operate in the future after this budget?

A: Pemudah is a mechanism. The difference between the way things were done earlier and the way things are done now. Basically, Pemudah is about improving the processing of requirement, etc. It doesn’t touch on policy, which will be deliberated by the cabinet.

There are so many areas that can be improved. And for once we have institutionalised the system, and the private sector is part of it.

The private sector is usually the party that suffers with so many processes. Now, they are part of Pemudah and they said, “Hey, why do we have 15 forms when we can make it into just 4 forms?” That’s exactly what we did with Customs.

There are so many areas where you can improve performance without touching policy and so Pemudah will be very useful.

Immigration: If you are an Indian living in Singapore, why can’t you apply for a visa in Singapore? Why do you have to go back to India to apply for a visa?

These are simple issues, but sometimes we may not have paid attention to it. But now we have a focused body to make sure these issues are handled well.

Performance and delivery system, as you know is very close to the PM’s heart.

Q: Will these new immigration measures see the arrival of more knowledge workers into Malaysia?

A: Basically, to go forward, we need to build that knowledge workforce. Because this whole economy now and in the future will be about knowledge workers. Gone are the days when we can survive by working as factory workers in an assembly line.

How to create knowledge workers? We want to create as many as possible hence the allocation to education, 20-25 per cent of budget keeps going to education.

Free education, higher education, etc. all this is about creating these knowledge workers. But in the very short term, we may not be able to create all the knowledge workers we need.

While we attract foreigners and the Islamic banks to come, we are still going to need people to work for them.

We are creating many, but it doesn’t mean the demand can be met with our supply.

So for knowledge workers, we have to open up a bit for them to come easily, work and spend here.

I think it is not a zero sum game where the foreign knowledge workers come, they win, Malaysians lose. It’s not that. It’s win-win.

As investments come, foreign workers will come and more investments will come eventually as the supply of knowledge workers is available.

So, we believe that the role of the Immigration Department and the government in general is not only to keep the undesirables away.

It’s often not realised that the role of government, the role of immigration, should also be to attract the desirables into the country.

Q: Talking about undesirables, public security has been given quite a boost in the budget.

A: While all these measures are in place, without the security, we will not be able to move fast. Security is not only for the foreigners to have the confidence to come in and invest, like in Johor or other parts. But even if we don’t look at investment, security is very important for our quality of life.

If a Malaysian doesn’t feel safe to go out for a walk in the park in the evening, then what type of life do we have here?

So security is very important, both from the investment point of view and more importantly from the quality of life point of view.

So we are building more training facilities to train more police. We want to make the presence of police more visible.

For that we have given them 2,000 cars last year, and another 2,000 cars this year. We have given 1,900 motorbikes and computers that can be used in cars. Of course the lives of policemen are going to improve, more salary, more quarters. So, security is key.

Q: The police have been given a lot of benefits over the last two years.

A: I think they will be able to deliver. Things are improving. In Johor, for example, they have seen substantial improvement.

Q: What about government funds for a housing loan scheme for those without fixed income?

A: While we build more houses and allow people to take EPF money to buy houses, there are people without fixed income who don’t have EPF.

They are the petty traders, the farmers, the fishermen. They get a good income but there is nothing to take out from EPF because they don’t contribute to EPF.

So what we have done is set up a RM50 million fund. Initially we use Bank Simpanan and Bank Islam to give the loan. If anything goes wrong, it will be covered by this guarantee fund. This is very good for the farmers, petty traders, etc.

Q: What mechanism is there to ensure they repay? Already Pahang has frozen such schemes because of very low repayment.

A: Before we give the loan we will check that they have a permanent income, but we won’t insist on receipts. We just make sure.

We have some innovative and good people to look into this, to make loans available to them. But most people do pay back housing loans, provided they genuinely buy a house.

Transcribed by Chong Pooi Koon

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