Thursday, December 26, 2013

The Cost of Government


As posted by Dr. Mahathir Mohamad at Che Det on December 26, 2013

1. Governments need money. It cannot function without money. It has to pay the people who work for it. It has to provide services and infrastructures. And now it has to provide more and more social amenities such as education, medical care etc. And of course it must defend the country and maintain law and order.

2. The funds are mostly raised through taxes on the activities of the people, on incomes, on profits, on the services provided by the government such as transportations, sewerage, water and power, ports and airports, approval processes and oversights etc.

3. Although there are many countries where people avoid paying taxes and rates, the people of Malaysia generally pay their taxes and other charges for services rendered by the Government. But as the cost of Government increase over time, the taxes and rates will need to be increased. Naturally tax and rate-payers do not like to pay more taxes and other charges. But they admit to a need for higher tax rates if for nothing else the rise in the cost of living when the wages and salaries of government servants need to be raised as well as the higher cost of Government procurements.

4. But the tax payers cannot suddenly come up with the money to pay the new taxes and charges. Lately Malaysian individuals and businesses have to come up with more money because of the many increases in cost due to Government policy decisions. Firstly the increase in minimum wage to RM900/-. This increase cannot be limited to those earning less than RM900/-. Those already earning RM900/- and above will also need to be paid higher wages. With this the costs of doing business and producing goods and services have increased and in turn the cost of living for everyone has increased.

5. Over and above this the Government decided to reduce subsidies on petroleum products. Then the electricity charges are going to be raised. For the people of Kuala Lumpur new rates, some increasing by 2000 % are to be charged.

6. In 2015 the GST (Goods and Services Tax) will replace the sales tax. Obviously the Government wants to collect more than the revenue from sales tax, and this must add to the cost of goods and services.

7. We must accept that the Government needs more money with the passage of time. But should the increase be as big as the Government says. Should the taxes and rates come all at the same time?

8. In business there is a thing called “cost down”. When a business is faced with competition or its cost of production reduces its profits, it can either increase prices or reduce cost. To a certain extent the price can be increased. This might cause a reduction in sale and also profits. It is far better to reduce cost and maintain or minimise the increase in price.

9. When a business exercises cost down, what it does is to examine everything that it does which contributes to the cost of doing business. It examines the efficiency of the process, the material cost, the reduction of wastage, the speed and volume of production. Invariably some cost can be reduced.

10. The same can be done by Government. All its cost can be examined to determine which are truly necessary, which cost can be reduced, which service can be curtailed or modified etc. etc.

11. Government often waste money because it is not too concerned about the returns on its expenditure in whatever form. For example has a contract been given to the best offered price – though not necessarily the lowest. Every year the Auditor General reports on wastage through improper procedures and carelessness. Usually not much is changed so as to benefit from the Auditor General’s criticism. There is no doubt that much money can be saved if the AG’s criticisms are taken seriously. Even changing procedures can reduce costs.

12. If the Government is interested in reducing the cost of governance, it can do so and perhaps quite substantially. For example it can reduce the cost of electricity by switching to LED for street lights. The savings would be more than 50%. The subsequent reduction in the amount of electricity to be generated will reduce subsidy on fuel for power. But this has not been done by Government. The initial cost may be high but the savings will mitigate this.

13. With regard to taxes, the effect of the increase should be studied very carefully. Is it really true that the percentage fixed cannot be changed. It must always be remembered that increases in tax must contribute towards increases in the cost of living, the cost of doing business, the reduction in profitability and for the Government reduction in corporate tax on profits. Once a long time ago the Government was losing tax on goods brought in by travellers to Singapore simply because it was difficult to determine whether the costly watches, pens and jewellery items were bought in Singapore or worn by traveller when he went to that tax-free country. The Government decided to remove taxes on luxury goods. As a result tax-free shops sprouted in Malaysia and the Government collected more through corporate tax from these shops than it ever collected in import duty.

14. In another instance the government reduced corporate tax gradually from 45% of profits to 26%. More business was done and the collection in corporate taxes increased tremendously. Another case is the tax-free incentives for investments. With this investments increased. Indirectly the government could collect from income tax on executives. The nasi lemak eaten by workers increase the businesses of the rice wholesalers and the Government will collect corporate tax from them.

15. The public needs to find the money to pay the increased tax. Obviously it would be easier if the percentage is low, or spread over a longer period.

16. If the percentage increase is really necessary, cannot it be introduced in stages. For example the increase in electricity charges is fixed at 15%. That is a big jump. It will upset the cost of production of goods which all use electricity, some at a high percentage. Contracts which had already been made will result in losses and this in turn will reduce corporate taxes on profits .

17. Cannot the increase be in stages eg. 6 % per year for 3 years or longer. The losses on current contracts would be minimised. Future contracts would take into consideration the increases. There would be time for “cost down” and increase in contract prices.

18. At 6% per year for 3 years the rate would increase by 18% eventually instead of 15% now. But a 6% increase in the second year would be on 106% of original price and in the 3rd year would be on approximately 113% of the original price, therefore more than 18%. If this is too high, the yearly rate of increase can be reduced to 5%.

19. Clearly the Government would be getting more than the 15% of the current price. It will not really lose anything despite the delays in the increases.

20. Yes, Government needs more money with the passage of time. But with due consideration for the cost to people and business, the Government would really examine the tax rates to be introduced. It will not hurt the Government too much but it will gain a lot of goodwill from people. They might even remember in the next election.

21. Recently Francois Hollande, President of France decided to raise tax on profits to 50%. People left France to do business elsewhere. Far from collecting more tax, the Government may lose much when other businesses and business people emigrate.