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2008 Budget Speech (3) 
by Lim Kit Siang  
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(Dewan Rakyat, Monday): Two days before the formal budget presentation by the Prime Minister-cum-Finance Minister, Datuk Seri Abdullah Ahmad Badawi in Parliament last Friday, DAP presented its first alternative budget for 2008, themed “Malaysian First: Unity Driven Equity, Growth & Innovation”.

The proposed DAP 2008 Malaysian Budget focuses on the twin challenges of globalisation and the country’s high dependence on oil and gas resources.

With increasing competition from other developing countries and the rapidly evolving technology markets, it is critical that Malaysia puts in place a system which will be able to exploit the opportunities provided by, and at the same time mitigate the negative impact resulting from, globalisation.

At the same time, a 40% dependence on government revenue from the oil and gas sector is of serious concern, especially in the light of oil reserves which will last for only another two decades and Malaysia becoming a net oil importer by 2011.

The proposed DAP Budget is meant as a distinct departure from the current administration's New Economic Policy (NEP) which is driven by race. The underlying rationale and approach to the proposed DAP Budget is the “Malaysia Economic & National Unity Strategy” (MENUS) which will be based on performance, competence and needs of all Malaysians.

It is imperative for the Government to build new capacities for the future to ensure that our productivity increase is more than sufficient to replace declining contribution from the oil and gas sector.

At the same time, we have to strengthen our social security system to ensure that the poor, less fortunate and under-privileged are not left behind in our pursuit for excellence.

The wealth of natural resources on our shores must be shared equitably to make sure that everyone gets to benefit and taste the fruits of our land.

We must also shake off our habit of designing world-class blueprints, only to fail miserably in their implementation. There must be put in place a robust system to improve productivity and competitiveness of the government's delivery system.

Furthermore, all fiscal measures and tax instruments must be utilised responsibly to ensure that the country does not bury itself in debt and to avoid expenditure on mega-projects which are unlikely to bring significant benefits to the population.

We must have policies which are designed to make ourselves competitive relative to our neighbours as well as to nurture dynamic innovative and entrepreneurial Malaysians.

Let me outline the key policy measures proposed in the DAP Budget which should be given full consideration by the government. In fact, a copy of the DAP budgetary proposals was presented to the Prime Minister’s Office in Putrajaya on Thursday, the eve of Abdullah’s Friday presentation.

The key highlights of the proposed DAP Budget 2008 are:

1. Legislating the use of oil and gas revenue to ensure that a substantial portion of the revenue is spent on education as well as research and development to build the necessary economic capacity for Malaysia, to ensure that the increases in productivity and innovation will more than compensate for the expected decline in oil revenues. It is proposed that 50% of oil and gas revenues be invested in human capital and research and development, while another 25% be used to strengthen the social security for Malaysians who are in need. Legislating the utilisation of funds will also prevent the mis-allocation of resources to bailout failed projects or other non-productive sectors.

2. Hence, RM43.3 billion is allocated for education and training, accounting for 26.3% of the overall 2008 Budget. The focus of the expenditure will be to enhance the qualitative elements of education instead of the quantitative elements. Of 250 new schools to be built, 60 and 15 will be Chinese and Tamil schools respectively to resolve the often severe overcrowding faced by these schools. RM3.2 billion has also been allocated for Research & Development.

3. RM13.6 billion is allocated to improve the quality of the nation’s transportation infrastructure, particularly the public transport system. The bulk of the increase goes to development expenditure for transportation, which will increase from RM7.3 billion to RM9.5 billion. Key attention is given to the 3 highly congested urban centres – the Klang Valley, Penang Island and Johor Bahru. A blueprint for the “Valley Circle” rail network will also be developed to improve inter-suburban connectivity, by-passing the congested Kuala Lumpur city centre.

4. Barisan Nasional's policies of guaranteeing highway toll concessionaires as well as independent power producers (IPPs) extraordinary profits with grossly unequal contracts with little or no risks to the latter are the clearest cases of the Government failing to protect public interest. The impact of these policies are increasingly felt today with rapidly rising toll rates and energy prices. It is hence imperative that the Government renegotiate these contracts to protect the interest of the public within a 6 month period. In the event whereby no significant headway is made in the negotiations, it is proposed that the Government move to acquire the assets of these entities. The resultant savings will then be passed on to consumers or be diverted to other public interest projects, such as the public transport system.

5. When the Government launched the Multimedia Super Corridor (MSC) project 10 years ago, it promised to make every effort to grow and support local MSC status companies. However, despite the rhetoric, the Government being the largest consumer of information technology services in Malaysia has not given preference to these companies. Malaysian MSC status companies should be given specific preference in tendering for the Government IT-related contracts to help nurture these companies into successful regional players.

6. As part of our philosophy that every person or community in need, irrespective of race or religion will receive the necessary government assistance, proposal for “FairWage” Policy. This is a policy to improve the livelihood of low-wage earners above the age of 35, which will at the same time incentivise employers to provide increased employment opportunities. A “Malaysia Bonus” of up to RM1,200 will be granted to Malaysians with income not more than RM3,000 per month. In order to assist the elderly above the age of 60, many who are having problems making ends meet, those qualified will enjoy the “Senior Malaysian Bonus” of up to RM1,000. These bonuses are to be channelled into their respective EPF accounts.

7. The FairWage policy and Malaysian Bonus will cost approximately RM9.3 billion to administer. It is part of the proposed programme to share the fruits of the nation's wealth, particularly from the oil and gas sector with all Malaysians in need. In the longer term, more assistance programmes will be carried out in this grant-based mechanisms which are means-tested instead of via subsidies which are distortionary in their impact, and often disproportionately benefiting the wealthy.

8. One of the core pillars of MENUS is that all Government contracts should be tendered in an open, competitive and transparent manner. All qualified companies shall be provided with equal opportunities to secure Government supply contracts and projects. To prevent overwhelming disruptions to the current system, this policy, free from race-based requirements, shall be implemented on a gradual basis, commencing with projects or supply contracts sized above RM10 million for 2008. In view of the challenges brought by globalisation, all tenders shall be made competitive, open and transparent by 2015. Assuming a conservative 10% savings is achieved via the new tendering system, this will result in absolute savings in excess of RM5 billion per annum in conjunction with quality improvements.

9. The transformation of the Malaysian economy into one that is knowledge-based will not succeed without the critical ingredient of innovation and entrepreneurship. Therefore it is proposed that the Government set up a new RM250 million seed fund, STARTUP where we will act as a matching co-investment fund with reputable private investors who will assist in the mentorship of the start up companies. To encourage private investor participation, losses incurred by such investments shall be tax deductible from the investors' individual or corporate income tax. To further boost entrepreneurship, start-ups shall enjoy full tax exemption on their first RM200,000 chargeable income for each of their first 3 years of assessment.

10. Government revenue from small medium enterprises which constitutes more than 99% of all enterprises in the country has clearly declined with the dependence on oil and gas revenue. To revitalise the SME sector, and to assist many SMEs whose counterparts in many countries in the region enjoy significant tax advantages, it is proposed that the tax rate for SMEs on their first RM500,000 chargeable income be reduced to 18% from the current 20%. In additional a new partial tax exemption threshold will be set at RM200,000 and taxed at 12%. This means that a SME with a chargeable income of RM900,000 will be taxed at an effective rate of 18%, in line, particularly with its competitors across the causeway in Singapore. This measure will help make Malaysian SMEs to be more competitive and at the same time attract more SMEs to set up business in Malaysia, creating more employment opportunities.

11. A 1% reduction of the top tax bracket to 27%. More importantly however, there will be a revision and a simplification of the progressive tax brackets which will result in significant reduction in taxes by all. Most importantly, to assist Malaysians to cope with the rise in living expenses, particularly in urban areas, the first RM15,000 chargeable income will become tax exempt, with the subsequent RM15,000 taxed at 7%. Currently, only the first RM2,500 is tax exempt while the next RM2,500 is taxed at 1%. Based on the new tax structure, a married worker with RM3,000 pay per month, a full-time housewife who looks after 2 young children will pay no taxes, whereas under the previous tax structure, he will be expected to pay between RM55 to RM445 depending on his insurance premiums and medical expenses for his family, including parents.

12. The rate of global climate changes is accelerating and it has become absolutely necessary for Malaysia to play its part in protecting the environment. Hence, a “Green Tax” is proposed to be implemented in 2010 whereby a “carbon tax” is charged at RM25 per tonne of CO2 equivalent, with the exception of methane emissions from the agricultural sector as well as special exemptions for carbon intensive businesses which adopts global best practices on emissions. In addition, a 5% severance tax is proposed on the extraction of metals and forestry products in the country. However, companies which secure certification from The Forest Stewardship Council (FSC) accredited certification bodies will be granted the severance tax exemption for promoting responsible management of the forest.

13. As a part of our new source of revenue as well as to negate the rent-seeking culture, the approved permits (APs) current issued for free by the Ministry of International Trade & Industry to a select pool of “businessman” should be auctioned to the highest bidders instead. Based on an estimated 70,000 APs issued per annum and a conservative RM25,000 market price, the auction will provide an additional RM1.75 billion to the government coffers.

14. Women will also benefit significantly with the proposed extension of paid maternity leave from 60 to 90 days if they have worked for at least 180 days prior to delivery with the employer. Their pay will be shared equally by both the employer as well as the government. This together with other measures proposed in the Budget will play their role in strengthening the bond between the mother and child, promoting strong family values, while at the same time, encourage more women to join the workforce. As at 2004, Malaysian women participation in the work force stands at 47.3%, significantly below that of our neighbours, Singapore and Thailand at 53.9% and 64.2% respectively.

15. Finally, this proposed DAP budget seeks active involvement from the civil society. Instead of attempting to tackle all issues on its own, which the government will not be able to competently and effectively, sizeable grants will be made available to specialist non-governmental organisations (NGOs) to promote, educate and run various social causes and programmes. The sum of RM240 million is proposed to be set aside as partial or full grants for NGOs to pursue environmental causes, eliminating poverty, promote healthy living, managing women issues or assisting the disabled, to be disbursed over the next five years.

THE CHALLENGES AHEAD FOR MALAYSIA

Globalisation

Globalisation brings both new threats and opportunities for the Malaysian economy. Should we rest on our laurels and continue to believe that we can be sheltered by the proverbial coconut shell, it will only result in irreparable damage to the economy. However, if we were to instil in our economy the spirit of resilience as well as the ethics of competition, hard work and innovation, Malaysia will be able to achieve its full potential via the vast opportunities provided by globalisation.

Today, capital, enterprise and talent are flowing to countries where government can be trusted, where the workforce is well-educated and skilled, and where the quality of life is high. These are key pillars of our economy and our country which we must build in order to reap the full benefits of globalisation.

Malaysia used to attract some of the biggest technological giants such as Intel, Motorola and Dell to develop and manufacture their latest technologies in the country. However, in the past decade, we have clearly fallen behind in terms of advancement in manufacturing technology. For example, Malaysia's current leading semi-conductor wafer-fabricator, SilTerra Malaysia Sdn Bhd offers major foundry compatible CMOS logic, high-voltage and mixed-signal/RF technologies down to 130 nanometer feature size. SilTerra’s wafer fab has a design capacity of 40,000 eight-inch wafers per month.

However, semi-conductor technology has advanced significantly with state-of-the-art 90-nm technology on 300-mm wafers, and 65-nm production. In fact, 45-nm process technology is now under aggressive development. Our neighbour, Singapore, for example, is attracting more of the ‘first-of-its-kind’ investments such as the chip used in the latest PlayStation3 and Xbox. A French semiconductor company, Soitec, is investing $700 million to set up in Singapore its first offshore facility to make the wafer for this chip. It is high precision, high technology. The wafers have alternating layers of silicon and insulator, unlike conventional wafers which use silicon throughout. Singapore became the only country in Asia that it trusts well enough to set up its first manufacturing campus outside of France. Hence, it is key for Malaysia, in the age of globalisation, to bring back global investments in leading age technologies.

At the same time, with increased exposure to globalisation, we are clearly facing a worsening of our income distribution. In particular, there has been slow or no growth in wages at the lower end. The income share of the bottom 40 per cent of households decreased from 14.0% in 1999 to 13.5% in 2004 while that of the top 20% of households increased from 50.5% to 51.2%. Consequently, the Gini coefficient worsened from 0.452 in 1999 to 0.462 in 2004. All ethnic groups recorded an increase in the Gini coefficient during the period. The inequality among Bumiputera was the highest compared with the Chinese and Indians. Income inequality in Malaysia has been ranked the worst in Southeast Asia.

Globalisation, corresponding with a drastic increase in competition for skilled labour and global talents, has resulted in widening income gaps between the skilled and the low-skilled, between the young and old, between those who are nimble enough to adapt quickly to the market and those who aren't.

Therefore our approach to globalisation is twin-pronged. Firstly, we must embrace globalisation, particularly in terms of open economic competition so that Malaysia, as a whole can grow to its full potential. However, we must at the same time carefully manage the negative impact of globalisation, particularly on the less educated and lower income group in the country.

To face up to the opportunities provided by globalisation, it is critical that we build capacity and capabilities, with the greatest emphasis on education and human capital development for the future. At the same time, we must attract new investments, grow new businesses, and create new and better paying jobs to replace old ones.

To bring the economy forward, it is hence critical that we develop a “Malaysian Economy & National Unity Strategy” (MENUS) to fully exploit the strengths and talents of all Malaysians to contribute towards the growth of the country. MENUS will replace the outdated New Economic Plan (NEP) with a distinct shift in focus from a race-based economic agenda to one which serves to promote efficiency, competitiveness and equality of opportunity for all Malaysians.

MENUS will promote a productivity driven and private sector-led economy that requires comprehensive reforms to education, as well as the private and public sectors. The reforms should increase the incentives of people to acquire and make the full use of human capital and for companies to invest and innovate to be stay ahead of competition. Earlier policies within the NEP which is incompatible with private incentives that causes the outflow of talented people and businesses to other countries that offer a better deal for their endeavours must be reversed.

An integral element of MENUS is to ensure that business contracts tendered in the private sector, including Government-linked companies (GLCs) shall be based on the quality and price of the proposal, and not based on racial composition requirements. At the same time, to ensure a smooth transition from the NEP system to MENUS, Government contracts shall be migrated to a open, transparent and competitive tender system based on quality and price over a 5 year period. The tender process for all government projects above the value of RM10 million shall immediately be migrated to the new system, and all such projects must be tendered openly and competitively.

MENUS will ensure that there will be minimal wastage of economic resources we have observed in recent years due to government bailouts of large projects. The poor delivery system has resulted in catastrophes, such as the Middle Ring Road II increase in cost from RM120 million to RM190 million and the MATRADE Building from RM167 million to RM287 million. It will also eliminate poor workmanship seen recently, such as the renovation works for the Parliament, the construction of the mega Jalan Duta Court Complex as well as the government buildings in Putrajaya.

However, as we grow the economy, we must ensure that no one is left behind, irrespective of race, religion or creed. All Malaysians have the opportunity to succeed. Under MENUS, we will ensure that all social subsidy programmes target the deserving groups, particularly those from rural areas as well as lower-income families. Subsidies and grants shall be focused strictly on lower-income groups, instead of being abused and wasted on the wealthy. As part of MENUS, the DAP will propose to allocate RM9.3 billion in 2008 as grants and income supplements for the lower income groups. The key objectives of these grants and income supplements will serve the dual function of easing the financial burden of the needy as well as incentivising and improving their abilities to secure better opportunities. This programme is a major cornerstone for the Government to share the country's wealth derived from the oil and gas sector with the rakyat.

Reliance on Oil & Gas

Malaysia is a country blessed with abundant natural resources. In particular, we are thankful that the country is rich in oil and gas, which created Malaysia's sole representative in the Fortune 500, Petroliam Nasional Berhad (Petronas). In the most recent financial year ending March 2007, Petronas achieved record profits before tax of RM76.3 billion thanks to record high crude oil prices which increased from under US$25 per barrel to above US$70 all within 4 years.

Of greatest importance, was the fact that Petronas contributed RM53.7 billion to our national coffers in taxes, royalties, dividends and export duties last year. Contribution from Petronas and other oil and gas companies operating in Malaysia was budgeted to make up some 46.8% of the government revenue for 2007. This represents a steep increase from approximately 30% in 2006 and 25% in 2004. These statistics marks Malaysia's heavy reliance on oil and gas industry today.

Malaysia's abundance of oil & gas resources is akin to striking lottery. It is a once-off affair, and at some point of time, our reserves will run dry. According to Oil & Gas Journal, Malaysia held proven oil reserves of 3.0 billion barrels as of January 2007, down from a peak of 4.6 billion barrels in 1996. These reserves will last us for only another 20 years or so.

In addition, Malaysia is expected to become a net oil importer by 2010 assuming a conservative growth of 4% in petroleum products consumption. Our trade current account surplus has also been boosted significantly by oil and gas related products which constitutes more than 11% of our exports. The frightful acceleration of dependence on our limited oil and gas resources places the country's economy at great risks.

Malaysia must not fall into the trap of what economists call the “resource curse”, that is countries devoid of natural resources fare better than countries better endowed. Countries such as Hong Kong, Singapore and Switzerland contrasted against the oil-rich but poorly developed Middle East countries immediately come to mind. This appears to be closely related to the phenomenon known as the Dutch disease. The Netherlands in the 1960s, after its discovery and depletion of oil and gas in the North Sea, was plagued with unemployment and an unproductive manufacturing sector due to the negative side effects of such a discovery.

What is perhaps most worrying for Malaysia, with the reliance on natural resource overshadowing the other productive sectors of the economy, is the resulting “rent-seeking economy” where influential parties within the government together with external parties focus their efforts in securing a larger share of the economic pie, instead of creating a bigger pie.

Therefore the DAP proposes that the Government legislate that 50% of our windfall from oil and gas is kept under lock and key, with the sole purpose for investment in human capital as well as research & development, over and beyond our typical expenditure on education and training. In addition, 25% shall be legislated for use in our social security system while the balance may be used for development expenditure of the national budget. This way, the funds will be prevented from being expensed to an unproductive and wasteful rent-driven economy. All unutilised allocation from revenue derived from the oil and gas sector shall be maintained in a stabilisation fund for future investments in the legislated segments. To quote Economics Nobel Prize winner, Joseph Stiglitz, “abundant natural resources can and should be a blessing, not a curse. We know what must be done. What is missing is the political will to make it so.”

Three Core Objectives – to build new capabilities, strengthen social security systems and improve productivity and competitiveness

The proposed DAP Budget seeks to shift Malaysia's stagnating underlying economy to a more dynamic performance-oriented economy which can compete with the best in the world, which will also reduce our increasing dependence on oil & gas revenue. It also seeks to harness the synergistic energy and benefit from a united Malaysian population in achieving these common goals. At the same time, there is the goal to redress persistent socio-economic inequalities between the wealthy and the poor, regardless of race, religion or creed.

Hence the core thrust of such a Budget are:

1. To Build New Capacities & Capabilities for the Future;

2. To Strengthen our Social Security System;

3. To Improve Productivity & Competitiveness of Existing Delivery System

Thrust 1: BUILDING NEW CAPACITIES & CAPABILITIES FOR THE FUTURE

OPTIMISING HUMAN CAPITAL

The economic contribution from natural resources, especially in oil and gas is expected to decline over the next 20 years as our reserves runs dry. As revenue from oil and gas constitutes more than 40% of the overall Government budget, there is a serious challenge in sourcing alternative sources of revenue to sustain Government expenditure at current levels.

The direct source of replacement contribution towards greater economic productivity in the light of the above will be by substantially raising human capital. With the right quality of human capital, many countries around the world which are not as blessed with natural resources have recorded significant growth above and beyond what we have achieved.

In light of the above, the DAP proposes legislating that at least 50% of our windfall revenues from the oil and gas sector shall be allocated to building human capacity, particularly in Education and Training, above and beyond their normal allocation. This will ensure that our windfall revenues will be productively invested in our most important assets, in particular, the young Malaysians.

We will give every child access to a first-rate education. In every school, the focus will now be on quality. More teachers will be deployed to ensure that there will be more time to plan for quality and innovation in teaching. Our schools must encourage creation of new ideas and creative thinking via different types of classrooms, different styles and different methods, but all with a strong emphasis in quality.

Building World Class Tertiary Institutions

The focus of higher education must be on the quality of the existing tertiary institutions instead of creating new universities for Malaysia. At this point of time, Malaysia has more than double the ratio of university to population compared to countries with better quality education system such as Singapore. As a result, further expansion of tertiary students intake at public universities, expected to reach 294,000 by 2010 will be absorbed into existing universities. To cope with this expansion, an allocation of RM1.2 billion should be provided to upgrade and improve facilities in existing universities.

Universiti Sains Malaysia, Universiti Malaya, Universiti Putra Malaysia and Universiti Kebangsaan Malaysia have been granted “research university” status. These leading Malaysian universities will be allocated the amount of RM200 million each to conduct research activities. In addition, to promote the universities' self-sufficiency and fund-raising capabilities, the DAP proposes that for every additional ringgit up to RM200 million which the universities, including all other local public universities are able to raise from the corporate sector or their alumni for research purposes, the Government should back the fund with an additional ringgit.

On top of the above, the DAP proposes that university academics and lecturers will have their pay de-linked from the civil service pay scale and structure. For a start, university academics shall enjoy an immediate 20% increase in pay. In addition, allowance for academics critical faculties which competes with the private sector is proposed to be raised by 300% from the current levels between RM200 to RM300.

A further study will be conducted to revise the remuneration packages for them to ensure that our universities are able to attract the best academics from around the world to teach and research at our universities. Without these global talents, whether Malaysians or foreigners to lead our academia, it will be difficult for our universities to excel in the increasingly globalised and competitive world.

To promote quality and competitiveness between the local public universities, for the 2008 university intake, each university will be able to evaluate their selection of students on the basis of the students' own preferences. Only if the students are unable to secure a place based on their preferences, will they be allocated a place by a central clearing agency at the Ministry of Higher Education. This change in university placement will result in greater university autonomy in forming the character as well as managing the quality of their own institutions. In the longer run, it will result in much higher quality institutions of higher learning.

To promote access to university education, in particular, those from poorer financial circumstances, we would like to suggest that student loans are made available to any and all student who qualifies for tertiary education. However, to ensure efficiency and transparency, as well as to minimise the risk of default, the education loan fund shall be managed and administered by all the local commercial banks in Malaysia at preferred interest rates subsidized by the Government. This move will ensure that all deserving students shall have speedy access to funds, preventing unnecessary anxiety caused by delays. At the same time, it will reduce the administrative cost borne by the Government as well as the high percentage of defaults faced currently due to poor and weak enforcement by Government agencies.

INVESTING IN RESEARCH AND DEVELOPMENT

In order to build up a world class economy, the nation needs to invest in the research and development of core technology and products. This will reduce our reliance on foreign expertise as well as increase the competitiveness of our country. Our expenditure on Research & Development has historically been low, but we should boost R & D spending to 2% by 2012, and 3% by 2015 of the country's GDP annually. For the 2008 Budget, we should have allocated RM3.2 billion which represents approximately 0.5% of Malaysia GDP. In contrast, the Government allocated RM1,370 million for various biotechnology and ICT funds and projects for next year's budget.

The reason for the gradual increase in R&D funding is for the simple reason that it will take time to attract and grow the necessary talents to and in Malaysia to lead Malaysia's infant R&D industries. The nation's R&D thrust goes hand-in-hand with our policy in building human capital, for without the necessary levels of skills and intelligence, no amount of money will deliver the necessary results from our R&D ventures.

Malaysia's primary focus to date has been to construct to buildings and infrastructure but we have often failed miserably in the areas of attracting the right quality of expertise and knowledge. Hence, for our R&D thrust to be successful, Malaysia must also invest not only in producing our own R&D scientists but also attract global R&D experts to pursue their research career in Malaysia. Many of these will be Malaysian researchers currently pursuing their careers overseas. It is only with a sufficient critical mass of top global researchers transplanted to the country, then the R&D movement within Malaysia will blossom. However, this means paying the right amount of money for the right quality of talent to set up their operations in the country.

Over the next decade, we expect this critical mass of top-rate researchers in Malaysia, who will create new intellectual property in our research institutes, universities and hospitals, and will bring in new, technology-driven activities which will spin off benefits to the rest of the economy. This way, Malaysia's economy can truly move up the value-chain ahead of the fierce competition from our neighbours such as Vietnam, Thailand and even China.

As the areas of research in engineering, biotechnology, ICT as well as other fields is vast and endless, it is also critical that Malaysia's investment is allocated to a smaller area where the likelihood of success is higher, based on our own competitive advantages. Any lack of focus in the areas of research will result in too little money spent on too many projects leading to negligible results. In addition, it is important that we recognise that we will never be able to spend a similar quantum of funds in R&D as compared to highly developed nations.

However, the sheer complexity as well as depth of knowledge and experience required to decide on sensible and viable policies render our local governmental agencies highly ill-suited to the task. Hence, the DAP proposes the set up of a Research & Development International Action Team (RADIANT), an executive council of internationally renown academics from the scientific community to steer the R&D direction, innovation and entrepreneurship focus for Malaysia.

FINANCIAL STRENGTH, ECONOMIC RESILIENCE

Maintaining Islamic Finance Leadership

As highlighted in the previous years' budget, Malaysia has progressed significantly in the development of Islamic financial services, especially in terms of the size of investments and an increase in the number of institutions. Malaysia was the first to issue a global sukuk in 2002, as well as the first country where supranationals have issued ringgit-denominated Islamic bonds, namely the International Finance Corporation with an issuance of RM500 million and the World Bank, RM2 billion. In 2006, Malaysia was the largest issuer of Islamic bonds in the global capital market, accounting for USD30 billion, which is more than 70% of the overall global issuance of USD41 billion.

With the continued growth of importance in Islamic finance, we want to encourage more of this business to come to Malaysia. There is approximately US$500 billion of funds within the Islamic finance system, growing at around 15% annually. In the Gulf and Asia, Standard & Poor's estimates that 20 per cent of banking customers would now spontaneously choose an Islamic financial product over a conventional one with a similar risk-return profile.

However the market's growth in importance has also attracted some of the largest capital markets in the world such as the United Kingdom and Singapore to develop financial services and products to capture this market, which will result in a loss of market share for Malaysia. For example, one of the largest sukuk to date issued by Dubai Ports was written out of the London office of Barclays Capital in January 2006. And in August 2006, the first billion dollar sukuk to be listed on the London Stock Exchange raised £2.5 billion (US$5 billion). In addition, ambitious plans have been announced to make London the western capital of Islamic finance as the government announced tax relief for sukuk in March this year.

Nearer home, Singapore is increasingly serving as a bridge between the Middle East and Asia. More Middle Eastern banks are setting up in Singapore, which is experiencing double-digit growth in funds originating from the Middle East, for investment in Asian capital markets and real estate. Given Singapore’s lead in the Over-The-Counter (OTC) derivative market as the fourth-largest foreign exchange trading centre in the world, they will certain provide stiff competition for Malaysia.

Hence, it is proposed that a joint working committee be set up by the Malaysia International Islamic Finance Centre (MIIFC) top officials from the key relevant Ministries, Government departments and agencies, financial and market regulators and representatives from the banking and takaful sectors. The main objective of this committee, shall be to help member companies of both organizations to establish key contacts and to find potential partners and clients.

As the practice of Islamic corporate securitisation increases, so must there by a corresponding improvement in trade and liquidity. While Malaysian Islamic banks have brought together a sizeable amount of financial deals based on Islamic instruments, the lack of liquidity and trade of these tools on a exchange will result in loss of deals in the future as clients move to markets which provides exchange liquidity, such as the London Stock Exchange. A committee comprising of investment bankers, BNM, Bursa Malaysia, Securities Commission and key broking institution discussing financial mechanism for increasing liquidity and trade of the financial instrument.

With greater global acceptance and maturity of Islamic financial instruments, it now becomes critical for Malaysian Islamic financial institutions to expand their business to global cities which attracts the greatest amount of financial deals. Of greatest importance is for Malaysia to make its presence felt in New York, London and Hong Kong, for otherwise, we will be destined to lose out to other financial institutions set up in these cities. Therefore, the DAP proposes that Malaysian Islamic banks and other related institutions be granted a double tax deduction on expenses incurred for setting up and promoting their operations in foreign financial districts.

Liberalisation, Competition & Growth of Financial Services

In part to reduce our extraordinarily high dependence on commodities and in the face of strong competitive pressures in the manufacturing sector from lower cost developing countries, it is highly important that we develop an advanced and mature financial services sector to move Malaysia up the value chain. A successful development of the Malaysian financial services sector will certainly compensate for losses in revenue due to decline in commodity prices or the depletion of natural resources in the future. Unlike commodities and natural resources, the sector is dependent only on a pro-active and accommodating government as well as its human resources to create value for the economy. The two key complementary pillars of a sound and forward-looking financial institutions as well as a broad and deep capital market are necessary to create a vibrant and dynamic Malaysian financial hub for the region.

In the light of globalisation, it has become imperative that Malaysia continues to liberalise, progressively but decisively, the financial services sector in order to regain Malaysia's position as a leading country in Asia Pacific for the sector. Ultimately, we want to establish a vibrant and dynamic global financial hub.

Capital Markets

While our stock and debt markets have performed credibly in the past year, it has not outperformed the bourses in the region, including Singapore and Hong Kong. It is critical that we acknowledge that our domestic markets alone will not sustain the depth, breadth and resilience needed by liquid capital markets. In fact, in terms of market capitalisation, Malaysia has declined substantially since the hey days of 1996 when we were ranked 2nd in the Asia-Pacific ex-Japan, and has since dropped in terms of ranking to a dismal 10th today.

It is thus critical for us to develop the equity and debt markets to help service Asian needs, and be linked up with global markets. We need to build up a critical mass of players and activity in our capital markets and to do that we must provide incentives and a conducive environment for foreign fund managers to carry out their transactions in Malaysia. Refining the rules, developing liquid capital markets and promoting the asset management industry will provide the basis for attracting this critical mass.

As one of the key policies, the Malaysian capital and foreign exchange controls will be further liberalised to remove obstacles from attracting and retaining foreign funds and investments. A more progressive and vibrant environment will enable foreign companies to list on Bursa Malaysia, or to issue bonds in the country. To do that Malaysia must prove that we possess the necessary competitive advantages in the region. These companies would want to raise capital at the lowest cost, and find liquidity and support for their securities in the secondary market.

Hence there must be 2 set of reforms. Firstly, reforms must remove non-financial and performance related conditions such as the 30% bumiputera equity requirement for listing on Bursa Malaysia. Few globally successful foreign companies will subject themselves to this tenuous condition in the light of competition from other countries which do not impose such restrictions. The government should then lead Bursa Malaysia to promote its bourse in the regional developing markets to encourage high quality companies to list themselves in Bursa. Only with a greater and more diverse portfolio of quality companies, will foreign investors be more attracted to the bourse.

Secondly, reforms are required to incentivise more asset and fund managers to locate their investment in Malaysia. Only a successful implementation of such a strategy will globally successful regional companies display a keen interest in listing on Bursa Malaysia. To this end, it is proposed that the Government implements a new scheme to grant tax exemption to a fund approved by Bank Negara Malaysia over the next 5 years, for specific income from approved investments for the life of the fund. In addition, it is proposed that investment banks be qualified for a 10% income tax rate for fees derived from providing investment advisory services to foreign investors or funds. This incentive should encourage more local financial advisors to seek and attract foreign funds to complete their capital and debt market requirements in Malaysia.

Harnessing Talent in the Financial Services Sector

The financial industry is a global industry driven by technology, innovation and competition. The pace of change is unrelenting. What is most critical to the industry is not just attractive financial incentives and progressive financial reforms. Instead, what the industry lacks critically today is insufficient and dwindling talent.

It is a well known fact that in the past 12 months, the number of professionals in the financial services industry that has been headhunted to the other more advanced capital and debt markets such as Hong Kong and Singapore have increased manifold. In order for Malaysia to even keep abreast of the financial developments and challenges in the region and the world, Malaysia must have a pool of highly skilled professionals who are at the forefront of their respective specialist areas. Therefore, it is imperative for the country to enhance our own local financial sector talent and redouble our efforts to attract and retain top international financial talent into the country.

As part of the plan to encourage greater interests in the financial services sector, the DAP will urge our local commercial and investment banks to offer bonded scholarships to top Malaysian students to pursue degree programmes at the top universities in the United Kingdom and the United States, home of the world's largest financial districts. To encourage these crucial long term moves, it is proposed that the Government should match the scholarship funds raised by the financial institutions on a RM1 to RM1 basis.

It is also proposed that the Government offers up to 10 scholarships a year for students contemplating postgraduate programmes in economics, financial engineering and other related courses to create “rocket scientists” in the financial services industry with the only condition being their return to the country to contribute to the financial services sector. These scholarships shall only granted to programmes conducted in the top 10 global universities of the respective fields, which will likely cost us up to RM1.5 million per annum. At the same time, up to 50 RM8,000 fee-grants shall be awarded to students seeking to pursue these courses in local universities per annum.

Local universities and colleges shall also be encourage to devise degree and postgraduate programmes which are not only more relevant to the fast changing financial services sector, but also improve the rigour of their courses. As experts in these fields are difficult to attract to our local academia, often due to obscene differential between the income of a practitioner and an academic, a supplementary grant fund shall be established to reduce the differential to ensure that our students will receive adequate and quality training, teaching and mentorship from successful practitioners.

The above measures should hopefully assist Malaysia in building up a critical pool of specialists proficient in sophisticated financial instruments such as financial modelling, structured derivatives, quantitative research methods, risk management and specialised insurance activities. At the same time, other related ancillary services such as legal support and financial advisory work will require the necessary support to ensure that Malaysia remain relevant in the rapidly changing industry.

In the short to medium term however, it is critical for local financial firms to increase their efforts to retain both young and experienced talent in Malaysia or all the Government's efforts in developing and strengthening the financial services industry will be wasted. In addition, it is important for Malaysian firms to scour globally for talent to lead our financial services industry. Just as how Hong Kong and Singapore are developing their highly successful and respected markets, we expect an infusion of foreign talent in this sector will lead to greater cross-fertilization of ideas and increased innovation amongst industry players. This will not only provide the cutting edge for our competitiveness, but also possibly assist in retaining our own local talent from moving on to greener pastures.

ROBUST LEGAL FRAMEWORK , ECONOMIC EFFICIENCY

If the budget is to succeed in bringing about a significant shift of our economy to the next gear, our economic policies and reform must also be accompanied by significant reforms in our judicial system to ensure that foreign investors will have the necessary confidence in not just justice meted out but also the speed and efficiency at which disputes can be resolved. Our judiciary system today leaves much to be desired. There are thousands of cases in backlog, and often it takes more than five years before commercial disputes are even brought to court for trial at the High Courts. Such inefficiency certainly benefits and incentivises the culprits and penalising the victims. What certainly wrecks the confidence in our legal system is when a 19-year old, Lee Kwong Yong was jailed for 6 months while awaiting justice for being unable to produce his identity card when caught by the police. The injustice would have been worse had it not been for a good Samaritan who chanced upon his case.

The DAP recommends that the Government do more to attract more experience legal practitioners as well as industry specialists into the judicial profession to resolve the twin problems facing the Courts, a shortage of judges as well as a lack of professionals to manage the mounting backlog of cases. It is understood however that there is a substantial disparity in income between the legal practitioners and judicial officers, making the latter procession unattractive to many. In addition, the disparity creates a natural misallocation of resources as the top quality legally trained graduates will certainly prefer a career in the private sector instead of serving under the judicial system.

Therefore, it is proposed that the remuneration of judicial officers be reviewed to match their peers in the private sector. In addition, experienced professionals which are recruited into judicial service shall be remuneration at the same or near their last drawn wages. Whilst this may involve substantial cost for the Government, its returns via a more professional, enlightened and efficient legal system will be immeasurable from both an economic and social perspective.

To assist in resolving the delays in producing legal judgements for cases which has been concluded, judges who are currently highly dependent on the assistant registrars to assist them, will be provided with legally-trained research assistants. High Court judges will be provided with 1 research assistant while judges in the Court of Appeal and Federal Courts will be provided with 2 research assistants each.

The proposed changes above will only be most effective it is matched with improved performances from the respective judges. To monitor the performance of judges and judicial commissioners, an Independent Judicial Commission will be established. Recognising the importance of such an commission independent of the executive branch of the Government, the British government has enacted a law setting up a Judicial Commission with plenary powers to appoint Judges in the higher judiciary in England. This commission will most certainly remove the mystery that surrounds the current appointment and promotion system. In particular there would be clear guidelines and greater transparency, which eliminates the potential for abuse when such powers are rested on the shoulders of a single person, particularly when vested interests may be involved.

It is understood that while there exist a legal aid bureau under the Prime Minister's Office, there is a severe lack of available lawyers to assist with the numerous cases which arise on a daily basis. To prevent cases such as Lee Kwong Yong from recurring in our legal system, it will be proposed that the Government should set aside an initial juvenile legal aid fund of RM10 million to provide ensure that young Malaysians will be able to secure legal representation. Lawyers who volunteer in juvenile cases will hence be paid a fee for their time and expenses. It is hoped that this move will clear the backlog of juvenile cases in the current legal system and prevent such injustices from occurring in the future.

Towards a More Equitable Highway Toll System

In January this year, the Government raised the toll fare for 5 privatised highways in the Klang Valley. The Bentong and Gombak toll on the Karak Highway was raised by 20% and 25% respectively. The 3 KESAS Highway toll was raised by 47%, while the Batu 9 and Batu 11 toll along the Grand Saga Highway was raised by 43% and 50% respectively. The highest increment however, was at the tolls along the Lebuhraya Damansara-Puchong (LDP), by 60%.

These 5 highways were constructed at a cost of RM4.13 billion. The toll rates have been raised excessively despite the fact that the Government has paid RM2.28 billion in compensation to date, as well as an additional RM2.59 billion over the next 5 years, or a combined total of RM4.86 billion. The compensation promised to date has already exceeded the construction cost of the highways by 18% or RM734 million.

As a further example, the total capital cost of construction of the LDP is estimated at RM1.327 billion inclusive of capitalised interest of RM142.3 million. However, the projected profit after tax (PAT) over 30 year concession period has been estimated at RM18.865 billion based on the agreement with the Barisan Nasional-led Government. The projected profit represents a 1,400% return on capital, which is excessive by any reasonable standards.

With the impending increase in toll rates for the North-South Highway, and in the light of the clear cut inequity in the concessionaire agreements, as well as in the overwhelming interest of the Malaysian public, the DAP proposes the renegotiation of all toll concessionaire contracts for Malaysian highways. It shall be proposed that the toll rates shall be decided in an open and transparent formula which takes into consideration a reasonable rate of return commensurate with the risk undertaken by the concessionaire. If for example, the traffic volume has been guaranteed by the Government, then clearly, there is little risk in the venture.

Future increase in toll rates shall in turn, be decided via a open, verifiable and transparent formula which takes into account inflation rates, global cost of building materials, traffic volume, maintenance as well as the operating efficiency of the toll companies. By using this formula, toll rate increases shall not be decided in an arbitrary manner by either the Government or the concessionaire, which often results in failure to take into account of public interests.

In the event that no amicable settlement can be arrived at with the toll concessionaires by June 2008, it will be proposed that the Government acquire the toll and highway assets of the concessionaires at a small premium to their book values.

Renegotiation of contracts or acquisition of assets is not unique in either the developing or developed world when conducted to serve overwhelming public interest. Just a month ago, the Irish Government has announced plans to acquire the copper network infrastructure from Eircom, Ireland's largest telecommunication provider. In 1983, the Spanish Government went to the extent of expropriating Rumasa, owned by Jose Maria Ruiz Mateos, which owned 700 businesses with 65,000 employees.

The Indian Government has been acquiring private banks as late as 1980 which gave the Government 91% control of the banking sector. Both Venezuela and Bolivia has successfully taken concrete steps to regain control of their country's natural resources such as oil & gas, as well as other minerals this year with most exploration and mining companies agreeing to renegotiated terms.

Should the highway assets be acquired, private companies shall be invited to an open, transparent and competitive tender to manage and maintain these highways. Profits to the Government arising from the operations of these highways shall be designated to Fund for Malaysian Public Transportation System or Dana Sistem Pengangkutan Awam Malaysia (DASPAM). This fund shall be managed by a Public Transportation Council, represented by the Government, the industry and the civil society to monitor the cost, efficiency and effectiveness of our public transportation system.

National Broadband Plan

Based on statistics made available by the Minister of Energy, Water and Communication as at 2006, broadband penetration rates for Malaysia is less than 3%, compared to more than 60% for South Koreans.

The BN Government's National Broadband Plan target of 25% household penetration by 2006 and 50% by 2008, has clearly failed miserably.

In the larger national interest of achieving the above targets, and its importance towards building a generation of enterprising and innovative Malaysians, DAP proposes that the broadband market be liberalised to allow for foreign competition.

To promote the building of high quality and reliable broadband network, DAP proposes favourable tax treatment for telecommunication firms undertaking broadband investments:

1) New broadband operators are allowed to deduct financing costs from their taxable income.

2) Investors are exempted from paying taxes on interest income from bonds specifically ear-marked to finance these investments.

3) Exemption from import duties for specific state of the art telecommunications equipment required for broadband infrastructures.

In addition, DAP also proposes direct grants to fund, valid for new connections signed up before 31st December 2008:

1) The cost of installation of the broadband connection between the business premises and the appropriate exchange for the amount not exceeding RM100 per connection.

2) First-time installation charges for connection to broadband services faced by all new residential subscribers for the amount not exceeding RM50 per connection per household.

3) First-time installation charges not exceeding RM100 per connection and monthly charges not exceeding RM50 per month, for broadband services faced by registered charitable organizations and community centres.

The lack of competition in the broadband industry creates disincentives for businesses and consumers to adopt ICT. A monopoly telecommunication service provider would be induced to charge a higher price at all levels of service quality than in an otherwise competitive environment, thus slowing broadband adoption in the economy.

Hence, fiscal transfer schemes via favorable tax treatment on telecommunication companies and grants cannot serve as catalysts for ICT development by themselves. The National Broadband Policy needs to promote both facilities-based and intra-platform competition.

Facilities-based competition, or inter-platform competition, would bring about competition between providers of the same or similar services, but where the services are delivered via different or proprietary means or networks. For instance, a new cable TV network may compete with a BPL (broadband over power lines) to provide broadband services.

Intra-platform competition requires the incumbent telecommunication monopoly to share their physical network with other broadband ISPs, who may wish to access the facilities of the incumbent telecommunications provider. This will prevent duplication of network infrastructure as well as eliminate the natural barrier to competition in the industry.

While the current limited local loop unbundling (LLU) policy in place already permit such sharing of facilities, it is understood based on the feedback from the industry that the incumbent monopoly still possesses undue influence over LLU and hence retarding the liberalisation of the broadband sector.

Therefore, the industry regulator, Malaysian Communications and Multimedia Commission (MCMC) shall be given more enforcement powers to prevent anti-competitive and negative collusion behaviour by incumbent telecommunication companies. Heavier penalties shall be imposed, particularly for price and non-price anti-competitive behaviours such as delays in processing of applications, unreasonable terms and conditions as well as other forms of anti-competitive manipulations.

Stimulus for Local MSC Companies

To promote the growth of ICT industry in Malaysia, as well as the success of the Multimedia Super Corridor (MSC) which was initiated in 1996, all MSC status companies shall be immediately qualified to bid and tender for all Government-related ICT projects. In the past, only companies registered and approved by the Ministry of Finance are qualified to tender for these projects.

By allowing additional competition in the provision of services to the Government, the Government can expect additional savings in terms of cost of implementing ICT projects as well as an increase in quality of services provided. At the same time, it will serve as a timely boost to MSC-status companies, particularly local ones with the expanded market as the Government represents one of the largest consumers of ICT products and services in the country. The stronger domestic presence of the MSC-status companies shall result in improved ability and credibility for these companies to compete in overseas markets.

In addition, as the entire concept of ICT is based on its ability to transcend physical boundaries, particularly with the advent of broadband and mobile technologies, the geographical requirements for MSC-Status companies to be located at specific sites shall be phased out accordingly. This requirement has been most heavily criticised by those employed in the industry, and the DAP is receptive to the voice of those affected by the current policies. Without geographical limitations, we expect Malaysian MSC-Status companies to continue to grow exponentially in terms of numbers and profitability, as their ability to service customers, attract global top talents as well as reduce operating cost will be enhanced substantially.

Increasing computer ownership

2. Household computer ownership in Malaysia continues to remain low at 21.9%. In order expedite the increase computer literacy as well as ownership, particularly among the lower income group who currently don't pay any taxes, all Malaysians above the age of 21 shall be entitled to computer purchase vouchers based on their income levels. Those with income RM1,200 and below per month shall be entitled to RM200, while those with income above RM1,200 and below RM2,500 will be entitled to RM100. Assuming a 10% take-up rate by those who are eligible, this exercise will cost the Government approximately, RM300 million.

3. To encourage the use of internet technology in Malaysia, DAP proposes to allocate RM250 million for a nationwide WiFi plan to create ease of connectivity to promote learning and innovation. The project will pilot in Klang Valley, Penang and Johor Bahru for 2008 and for all other secondary cities in Malaysia by 2010.

4. At the same time, the current RM3,000 tax relief policy for computers purchased every 3 years shall be abolished as it benefits wealthier Malaysians disproportionately, and does not benefit lower income groups who do not have to pay taxes.


THRUST 2: STRENGTHENING OUR SOCIAL SECURITY SYSTEM

A Healthy Population, a Prosperous Nation

The increased privatization of the health sector has resulted in the shift of health-related expenditures and risks from the society at large to that of the individual level. While it may be argued that it is proper for any person to bear a fair share of her medical expenditures, the shift in the sharing of such costs and risks has resulted in inequitable access of adequate healthcare to certain groups within the society. The paradox arises when those who can best afford healthcare are ones who need healthcare the least; it is the poor who can least afford to live in a healthy environment (e.g. lack of proper sanitation) and a healthy lifestyle (e.g. good nutrition). There should be increased public funding and investment in improving the standard of the public health sector by increasing the RM10.7 billion allocation in 2008 Budget or 8.3% of total estimates to at least 10% or RM12.8 billion.

One of the key mechanisms to keep medical inflation in check is to “right-site” healthcare. Thus, there needs to be a major paradigm shift from a near absolute focus on provision of medical care to one which minimises the need for costly medical interventions. Good health requires more than just access to quality and affordable medical care. Research has convincingly shown that medical care has played a less important role than other factors in improving health in countries like the UK. Healthy lifestyles play a bigger role than medical care in achieving good health. The Ministry of Health should do this by enhancing health promotion and education as well as disease prevention capabilities, carrying out health education and promotion initiatives like a National Healthy Lifestyle Programme, National “No to Smoking” Campaign, Nutrition Programme and a School Health Programme.

In line with the special salary readjustment for the police force on top of the revision of the civil service pay recently, the DAP proposes a 20% additional increment for all doctors serving in government service, and an additional 10% increment for all support stuff such as nurses and pharmacists. This forms a necessary step to incentivise doctors who are currently in service and attract more young doctors to service in government hospitals, at least for the initial years. The medical profession in Malaysia are certainly one of the most poorly paid medical professionals in the region, resulting in many qualified Malaysian doctors seeking greener pastures overseas where they are in demand. At the same time, low wages compromises our healthcare system with sub-standard doctors recruited from many Third World countries.

To strengthen the medical practice in Malaysia which has been in decline in recent years, there is a need to combine the strengths of academic and clinical practice via the creation of academic medical centres of excellence in UM and UKM campuses. The strong clinical research component within these centres would focus on the major diseases affecting the populace and would play an important role in the formation of national health and disease control policies. To ensure that the above targets are achieved it is necessary that the entry requirements for medical courses at these universities be uncompromising in terms of standards. It is proposed that a separate entrance examination for medical-related degree programmes be conducted to ensure that there isn't a disparity in standards between the various entrance examinations.

A team of independent academicians will be set up to evaluate the cost effectiveness of the privatisation exercises involving the public health sector. The findings, after making comparisons of the strengths and weaknesses in the systems of various countries, should be made available to the Malaysian public so that we can make an informed decision whether we wish to have any further privatisation of the health services in this country. Until the above study is released to the public, there will be a strict moratorium on all further privatization of components of the public health care sector.

Finally, a National Health Financing Oversight Committee will be set up to ensure that the funds allocated to health care are properly utilised and prevent waste via corruption or leakages. This committee will come under the direct purview of the Parliament.

Low-Income and the “FairWage” Initiative

The EPF is a social security institution formed according to the Laws of Malaysia, Employees Provident Fund Act 1991 (Act 452) which provides retirement benefits for members through management of their savings in an efficient and reliable manner. With rising costs of living, extended life expectancy and more expensive medical treatments, it is critical that Malaysians save as much as possible to ensure sufficient funds for retirement. It is also important for as many Malaysians as possible to be included in the system.

However, as studies have shown, low-income Malaysians are facing significant difficulties in saving enough via EPF. As a result, the Government must act to assist this group of Malaysians who face various challenges in the face of globalisation, particularly with a stagnant or declining real wages. This is clearly reflected in the 9th Malaysia Plan Gini co-efficient statistics where by income disparity among Malaysians has widened substantially. Malaysia ranked highest in terms of income inequality in Southeast Asia.

To assist low and medium-waged workers, DAP proposes to raise the Employer EPF Contribution Rate from the current 12% of total wages to 15%, representing a 25% increase. This will in turn raise the total contribution from the employer and employee to the fund to a total of 26%.

At the same time, in view of the increase in cost for the employers, which may in turn affect the competitiveness of Malaysian companies, it is proposed that a limit of RM8,000 per month or RM96,000 per annum be set to Employer contributions to the EPF. That means that for employees earning above the limit, their EPF contributions will continue to be calculated at the limit level.

However, for middle-age workers who are earning below RM1,400 per month , it is clear that they will continue to face severe challenges despite the increase in employer’s EPF contribution. Whilst younger workers may be learning the ropes and learn new skills to upgrade their income level, older workers will face difficulties in our fast-changing economic environment and are in the greatest need of assistance from the state to make ends meet.

With the oil and gas sector contributing handsomely to the state coffers, it only makes social sense to share part of these gains with the less fortunate and lower income tiers within our society. However, at the same time, we still need to continue to incentivise these workers to secure employment to avoid over-dependence on the state. Hence, DAP proposes “FairWage”, an integral component of MENUS in promoting social justice. FairWage has a 3-prong strategy for implementation:

1. To increase that take-home pay, workers will contribute a lower rate to the EPF. For with pay below RM900 per month, employee contribution to the fund will be waived while for those with income of not more than RM1,400 per month, the employee's contribution to EPF shall be reduced from the current 11% to 5%.

2. To make them more employable, employers will reduce their rate of contribution to the EPF. For workers above the age of 35 to 55, earning between RM900 to RM1,400 per month, the employer contribution shall remain at the current 12%. For those earning less than RM900 per month in the same age group, the employer contribution shall decline to 10%.

3. To compensate for the above, the Government should give workers FairWage income supplements to achieve a higher level of income. For workers aged 45 and above, receiving monthly income below RM900 per month, they will receive an annual income supplement of RM2,400. For those workers above the age of 35 earning less than RM1,400 per month will receive RM1,600 per annum. Of the supplement, a quarter shall be in cash form, while the balance will be channelled into the EPF accounts. By channelling a larger portion into the EPF, it will help the workers save for their future needs. An additional 10% on top of the income supplement shall be applied to those who live in the Klang Valley, Johor Bahru as well as on the Penang Island to cope with the higher cost of living.

As an example, a 48 year old worker in Muar earning RM800 per month used to take home RM712, will find his take-home pay increased by 19.4% or RM138 (RM88 + RM50) to RM850. At the same time, despite a reduction in employer contribution to 10%, the overall contribution to the EPF account will increase from RM184 to RM230, representing a 25% increment. His total monthly income will hence be RM1,080, an increment of 19.5% from before.

As a separate example, a 42 year old worker in Kuala Terengganu earning RM1,200 per month will find his take-home pay increased by 9.9% or RM105.33 (RM72 + RM33.33) from RM1,068 to RM1,173. At the same time, the overall contribution to the EPF account will increase from RM276 to RM316 monthly, representing a 14.5% increment. His total monthly income will hence be RM1,489, an increment of 10.8% from before.

“FairWage” is not an original idea but an adaptation of best practices successfully implemented in other advanced countries. For example, in the United States, “Earned Income Tax Credit” acts like a negative income tax for low-wage workers, supplementing their earned income. Similarly, the UK has implemented a “Working Tax Credit” which has helped to reduce poverty and encourage work. While most recently, Singapore has introduced “Workfare” which supplements the income of older low-wage workers.

In addition to assisting current workers registered with the EPF, FairWage will also provide incentives for more workers, particularly odd-job or ad hoc labourers to insist on registration with the EPF by their employers due to higher pay. As a result, the overall system will be more inclusive for Malaysians, particularly those from lower income groups.

On top of that, DAP proposes a “Malaysia Bonus” which will vary in accordance to the performance of the economy whereby poorer Malaysians will be able to share the fruits of the country's wealth. For 2oo8, the Malaysia Bonus shall be paid to those who have worked at least 6 months in 2007 based on their last drawn pay in December 2007. The Malaysia Bonus shall be channelled directly into the worker's EPF account and shall be available for immediate withdrawal.

1. Those earning less than RM3,000 per month but at least RM2,400 will receive RM300
2. Those earning less than RM2,400 per month but at least RM1,800 will receive RM600
3. Those earning less than RM1,800 per month but at least RM1,200 will receive RM900
4. Those earning less than RM1,200 per month will receive RM1,200

The FairWage scheme is expected to assist up to 2 million low-income Malaysian workers costing RM3.5 billion per annum while the Malaysia Bonus scheme will cost RM4.5 billion in 2008 benefiting more than 5 million Malaysians. We will review the above schemes annually to determine the best mechanisms to achieve a better living quality for all Malaysians without detrimental effects to a person's incentive to seek work. As an integral part of MENUS, the above policies will ensure that all Malaysians in need are taken cared of by the Government, the country's wealth is shared equitably and no community will be left behind.

Taking Care of the Elderly

As a responsible Malaysian and a considerate Government, it is very important for us to remember the contribution of our elderly population towards nation building. As a party that preaches filial piety as a value in our multi-cultural and multi-religious society, many of the senior citizens above the age of 60 in this country are finding it difficult to make ends meet.

The number of senior citizens in Malaysia almost doubled over the twenty years from 1970-1991 from 546 thousand persons in 1970 to 1.03 million persons. The numbers have increased by another 35 per cent over the last 10 years to 1.4 million persons or 6.3 per cent of the total population in 2000. Based on population projections, the number of elderly Malaysians will reach 2.13 million by 2010 or 7.4% of the total population.

Therefore, in conjunction with the Malaysia Bonus, DAP will put forward the Senior Malaysian Bonus. For a start, this shall be a two-tier programme for Malaysians aged above 60.

1. Those with not more than RM18,000 in annual assessable income and do not own a property valued above RM80,000 will be entitled to a RM1,000 bonus.
2. Those who has more than RM18,000, but less than RM36,000 in annual assessable income or do not own a property valued above RM150,000 shall be entitled to RM600 bonus.

The Senior Malaysian Bonus will cost the Government RM1.28 billion to administer. The bonus shall be credited into their respective EPF accounts, and made available for withdrawal immediately. This exercise will also serve to encourage more Malaysians to maintain an EPF account, irrespective of whether they are wage earners or self-employed.

Thrust 3: IMPROVING PRODUCTIVITY & COMPETITIVENESS OF DELIVERY SYSTEM

A Budget or a blueprint will only be as good as its execution. Over the past decade or two, we have seen many ambitious and well-designed plans developed by the Government. However, often these projects have ended at best, a qualified success without achieving its original objectives, such as the Multimedia Super Corridor project or at worse, an unmitigated failure such as the BioValley or the MSC e-Village. In the past year, the administration has also launched several large-scale blueprints for various projects in Malaysia, including the Iskandar Developer Region (IDR), the Northern Economic Corridor as well as the East Coast Corridor. These efforts will all be in vain if they are not implemented with competence and integrity.

Therefore the focus of this budget has to be on substantially improving the competence and integrity of our civil service and delivery system to ensure that the benefits expected from Government initiatives will be enjoyed by all Malaysians.

Centralised Agency for Shared Expertise

DAP proposes the set up of the Centralised Agency for Shared Expertise (CASE) department under the Ministry of Finance to consolidate common functions between the various Ministries. CASE aims to create synergies in Government which will bring costs down and achieve greater efficiency through economies of scale, standardisation and streamlining of procedures. A successful implementation of CASE will help the Government reduce up to 20% of its annual operating expenditure on the common functions such as human resources and finance functions.

CASE will also serve as an opportunity for the top performers in the civil service to climb the career ladder, upgrade and apply their skills on a broader scale, with an enhanced customer-oriented culture when providing value-added services to Government agencies. As this is a new department, only candidates with sufficient competence and integrity will be selected to lead the agency. If necessary, distinguished and proven personalities from the private sector will be head-hunted to join the agency. It will also at the same time, remove the “maverick elements” in the various ministries, removing the influence of the “little Napoleons”, corruption, inefficiency as well as abuse of power.

Civil Service Excellence Initiative

Malaysia has one of the highest ratios of government civil servant relative to it population at 4.68%. Even Japan, well known for its unwieldy civil service has a ratio of only 3.23. Others, including our neighbouring developing countries – Thailand (2.06), Korea (1.85), Philippines (1.81), Indonesia (1.79) - are all well below half the Malaysian ratio. To prevent the country from becoming the butt of jokes such as “the number of Malaysians needed to change a light bulb?”, it is essential that efforts must be made to contain the expansion of our civil service as well as boosting their efficiency and productivity. The bloated civil service has also become a substantial strain on the Government budget particularly with the recent wage revision, which increased budgeted emolument expenses from RM25.8 billion to RM33.8 billion or 27.9% of all operating expenditure. This amount hasn't yet taken into account pensions and gratuities which cost the Government some RM7.0 billion a year.

DAP proposes that a Civil Service Excellence Initiative (CSEI) be developed by the newly set up Special Task Force on Service Delivery (Pemudah) which includes private sector representation to achieve a leaner and meaner civil service sector. CSEI will aims to achieve headcount reductions through productivity improvements, job redesign or by re-prioritising functions. The CSEI will also develop plans on how non-performing staff may be procedurally retired from the Service. In the process of retiring or reassigning job functions of the civil service, it will also be mindful to ensure that it isn't the performers which are retired from the civil service, leaving behind the less competent.

A critical component of CSEI will be to incorporate the “stick” element for the civil service after the “carrot” in the form of higher pay has been provided. In any organisation, private or public, the “stick” element is critical to ensure that workers will perform their tasks competently and efficiently, as well as to prevent a culture of doing the “minimum to get by”. A dynamic and forward-looking public service will have to be nurtured through high quality training and development.

Revitalising E-Government

To improve customer satisfaction and investor confidence, we will need to develop a flexible and responsive government delivery system. As part of this programme, we will:

a. Make available government services via the Internet wherever possible,

b. Integrate e-services to make them more customer-centric for public access 24/7,

c. Improve accessibility of public services via the Internet and other digital channels through initiatives such as the Self-service Internet Terminals at government departments, particularly at the local town and city councils where the greatest amount of transactions takes place.

While the above initiatives are not new, Malaysia's drive towards an e-government appears to have faltered in recent years as the global E-Government readiness ranking compiled by Waseda University showed that Malaysia has declined from 6th in 2004 to 14th in 2005 and 15th in 2006. A separate ranking prepared by Brown University which covered a broader range of countries placed Malaysia at 36th position in 2006. It is hence critical that for Malaysia to move up the value chain in the face of competition from other developing countries, our drive to create a more effective and efficient government must not compromise in the pursuit of excellence.

REVENUE STRUCTURE FOR THE FUTURE

Corporate Tax Structure

To maintain our competitiveness as well as to attract multinational companies and foreign direct investments into Malaysia, we will expect our corporate tax rates to be reduced further to 24% over the next 3 years while it should decline to 20% over the longer term.

In the past decade, Malaysia has become increasingly reliant on income from natural resources as well as commodities, which has clearly resulted in lacklustre small and medium enterprises (SMEs). To revitalise our SME sector which played a crucial role in the country's economic growth in the 1990s, it is proposed that the taxation policy for SMEs be further improved. Currently, SMEs with paid up capital of not more than RM2.5 million is taxed at 20% on their first RM500,000 chargeable income. Statistics from the 2000 census shows that SMEs constitute 99.7% of total enterprises in Malaysia, with a collective contribution of up to 29.1% of the country's total output.

To assist our SMEs to compete with their global counterparts, the tax rate for SMEs on their first RM500,000 chargeable income shall be reduced to 18%. In addition, a new partial tax exemption threshold shall be set at RM200,000 with effect from 2008 year of assessment will be set at 12%. This measure will enable the Government to widen its reach across all sectors to assist SMEs reduce its cost of doing business. It means that a SME with a chargeable income of RM900,000 will be taxed at an effective rate of 18%, in line with its competitors across the causeway in Singapore. While, revenues will be expected to drop in the immediate term, it is anticipated that in the medium term, this reduction in tax for SMEs will bring Malaysia more investments, and correspondingly more employment opportunities.

In order to encourage and nurture a more entrepreneurial economy, DAP proposes that start ups enjoy full tax exemption on the first RM200,000 of their chargeable income for each of their first three years of assessment.

Personal Income Tax Structure

Similar to corporate tax rates, personal income tax throughout the work has also been on the decline. As we maintain a relatively high tax rate of 28% at the top bracket, it serves as a deterrence for foreign talent moving to Malaysia, particularly in the critical knowledge intensive industries. At the same time, it serves as a “push factor” to our local brains in specialist sectors to seek employment overseas which not only pay significantly better, but also tax less. Thus, DAP proposes a 1% reduction in personal income tax to 27% for 2008.

On top of the tax cut, it is also proposed that the top tier of the income tax bracket be raised from RM250,000 chargeable income currently to RM300,000. To assist the Malaysians cope with the rise in living expenses, particularly in urban areas, it is also proposed that the first RM15,000 chargeable income will be tax exempt, with the subsequent RM15,000 taxed at 7%. Currently, only the first RM2,500 is tax exempt while the next RM2,500 is taxed at 1%. Based on the new tax structure, a married worker with RM3,000 pay per month, a full-time housewife who looks after 2 young children will pay no taxes, whereas under the previous tax structure, he will be expected to pay between RM55 to RM445 depending on his insurance premiums and medical expenses for his family, including parents. The full tax schedule is attached in Annex E.

New & Future Sources of Revenue

To meet the challenges of every reducing income tax rates, which is partially compensated by rising income, we will need to seek new revenue sources. For example, currently, some 70,000 vehicle import approved permits (APs) are issued annually for fully imported cars. It is proposed that these APs are auctioned off to the highest bidders who wish to import cars, with the exercise conducted monthly. Based on an estimated market price of RM25,000 per AP, the auction will provide an additional RM1.75 billion to the Government's coffers.

A “carbon tax” of say RM25 per tonne of CO2 equivalent and a 5% minerals and forestry extraction severance tax should also be imposed to promote better environmental management. Green taxes will partially compensate for the decline in personal and corporate income taxes.

The tax system should also be further fine-tuned to ensure a fair system for everyone. For example, vehicles should be taxed on the basis of vehicle usage rather than ownership. A car which is only used during the weekends should be taxed less than an equivalent car which is used on a daily basis. Such a system will also encourage increased utilisation of public transport and reduce congestion on our roads.

Besides realigning and reforming our taxation system, there should be improvement in the utilisation and allocation of existing revenues via savings from improved delivery system – such as the increasing savings from a open, competitive and transparent tender management system. Such savings will be to the tune of billions of ringgit enabling the Government to spend less for the same goods and services, with improved quality of delivery. Measure put in place to streamline the government administration to create a lean and mean civil service will also contribute significantly towards lower government expenditure.

Finally, DAP's proposal to renegotiate exploitative contracts by licensed monopolies such as the toll concessionaires and the independent power producers will not only result in a lower cost of services to all Malaysians but also expenditure savings for the government. These savings will then cross-subsidize public interest projects such as the development of the public transportation system or alternative energy implementation exercises.
 

(10/9/2007)