Before I go into my views on the budget, I’d like to express my disappointment with the poor quality of the discourse that I’ve read on the topic over on the LYN forums. Most people over there, including at least one moderator, seem to be basing their evaluation of it entirely on how it benefits or harms them personally, completely discounting its effects on a wider scale. While this is somewhat predictable, I’ve also known LYN to offer intelligent and knowledgeable commentary on important issues in the past which is why this particular disappointment is so galling.

To me the most interesting aspect of the new budget is the re-introduction of the property gains tax. The original announcement of a 30% tax on gains made from the disposal of a property purchased within the first two years of acquisition  and dropping down in subsequent years seemed bold and promising to me. Since I’ve long been an advocate of capital gains taxes in Malaysia, I felt that this was overdue even though as someone with someone with significant investments in REITs, this would personally hurt me. I see today however that this has been toned down to a mere 5% tax regardless of length of tenure, which seems pitiful to me.

The other major move that most people are talking about is imposing a RM50 service charge on each credit card issued. Currently, it’s not clear whether this is going to take the form of an explicit tax or a mandatory minimum annual fee but the intent is clearly to rein in the preposterous pace of credit cards issuings in the country. Ordinarily, I abhor government-led social engineering even when I agree with the intent, but in this case I believe that the intervention is mild enough to give it a pass. However, I doubt that this will have any major effect as it will be easy enough for the banks to issue rebates to offset the cost.

The various tax breaks including the increase of personal relief from income tax are obviously designed to win some popularity with the voting public but was it really necessary to also throw in a 1% decrease in the tax rate for the highest income bracket? This looks like a particularly unwise move when the government deficit is expected to rise to record levels. Even if the government insisted on keeping the fiscal taps open for stimulus purposes, it would have a better idea to spend the money on a negative income tax on the poorest Malaysians rather than giving a tax break to the richest. A negative tax would effectively be a subsidy for cheap Malaysian labour which should also help to reduce the incentive for employers to hire foreign labour which so many Malaysians seem to be upset about.

Finally, I think that completely opening the financial sector to foreign equity is a great move. In fact, to those who argue that reducing the top rate of income tax would be useful in attracting top tier talent to the country, I’d argue that levelling the playing field is a far greater incentive. It would be even better if the government had the political capital to do away with silly NEP quotas and restrictions, but this is still a good start.

Overall, I favor an economic policy that concentrates on building the fundamentals for consistent and reliable growth rather than trying to jump start the economy for quick spurts of growth. For this reason, I disagree with the tax exemptions for the Iskandar project and believe that it will only open the door to more cronyism and corruption. A good budget should be fiscally responsible and while I agree that turning the taps completely off at this time would be unwise, I believe that the government has not made enough of a commitment to reduce the deficit in the future and I fear that this could lead to increased inflation expectations in the future.