There is a new element for the Malaysian Government to “Look East” towards Japan, and it is this : to not to repeat Japan’s folly to introduce consumption tax when the economy is fragile.
Japanese Prime Minister Shinzo Abe called for early elections yesterday just two years into office after the Third Quarter 2014 figures showed that the growth rate was negative as a result of the hike of national sales tax from 5% to 8% in April.
The tax hike reduced consumer spending and killed whatever growth potential in the already listless economy. It was a major shock to Japan that the April sales tax hike could damage the economy so much.
Abe is now calling for elections on the platform that he needed a new mandate to postpone a second sales tax hike from 8% to 10%, originally scheduled for 2015.
Prime Minister Datuk Seri Najib Razak must do his utmost to understand the lessons from Japan’s precarious move and defer the introduction of GST indefinately.
The reasons why GST or a national sales tax is bad when growth is fragile are simple. Both in Japan and Malaysia, the economy depends significantly on domestic consumption. When consumption is taxed, it eats into the already meagre disaposable income of ordinary consumers hence discouraging consumption.
I have previously warned that the introduction of GST will cause stagflation – where inflation and stagnation happen the same time . The Japan lesson is so clear that even the dumbest policy maker can now see the perils of introducing a sales tax at a time of slow growth.
On another note, I welcome the 20-cent reduction of RON97 prices and await the reduction of the RON95 price as well. I had called on the Government to commit to reduce the pump price of RON95 in view of falling crude oil prices. For the short term, reducing the pump price will help the economy with more domestic demand as people have more cash to spare.
In view of the disasterous outcome of the Japan sales tax hike, Najib should postpone the introduction of GST to avoid the collapse of domestic demand.