RM40 billion oil revenue loss this year

Malaysian Prime Minister Najib Tun Razak shared a moment with US President Barack Obama. He was in Southern California for a working visit. Source: The Star

The Prime Minister's Speech

Sometime in February this year, the Malaysian Prime Minister, Dato Seri Najib Tun Razak, stood before a crowd of Malaysian students in Southern California. He was there for a six day working visit, to meet 16 fund managers from 11 US firms in San Francisco.

The Prime Minister was quoted in New Straits Times as saying:

If you look at the oil price today and what it was one year ago, it means we would lose RM40 billion. Can you imagine, without GST, what kind of adverse impact it would have on not only the economy, but also the people’s welfare?

It was his way of addressing the recalibration of the Malaysian 2016 Budget, in response to a projected revenue loss due to the dropping price of oil per barrel. It is not clear whether it also took into consideration the drop of the Ringgit.

Where did the RM40 billion figure come from?

Analysts had compared the price of oil (in February 2016) with the price of oil a year before. In 2014 (yes, more than a year before?) the average price of oil was USD100 (RM415) per barrel. The 2016 Budget was drafted with the assumption that the price of oil would be about USD48 per barrel. It worked out to about RM30 billion in revenue losses. The government's revision of its assumed oil prices to USD35 per barrel meant a further drop of RM9 billion.

All of this is projected, of course. But why include the GST in the report? I guess, in touching on the Budget, the PM could not avoid touching on the GST.

Datuk Chua Tee Yong was the Deputy Finance Minister of Malaysia in April 2016. Source: The Star (see link below)

But the GST is not to offset oil revenue loss!

On 1st April 2016, the Star reported that the Deputy Finance Minister had said that the GST is merely a taxation system to replace the existing tax system. In short, it is a type of "upgrading" of the existing tax system. It was never meant to offset the loss in oil revenue.

Here is an excerpt from the said report (link below):

“GST is a tax system to replace the former Sales and Services Tax (SST),” Chua told The Star in an interview.

Attempting to clear the misconception, he said the RM39mil tax revenue collected from GST could not cover the drop in revenue due to plunging oil prices.

“In 2014, when crude oil price was at US$100 per barrel, the revenue from Petronas, crude oil tax and royalties was RM66bil.

“But in 2016, the expected revenue from crude oil is between RM20bil and RM30bil. If we take the ceiling of RM30bil, that is a minimum loss of RM36bil,” Chua said.

As the additional revenue in the change from SST to GST was ­expected to be only RM22bil this year (RM39bil – RM17bil), it was not enough to cushion the revenue loss from the drop in crude oil prices, he said.

He pointed out that as such, the Government saw the need to recalibrate Budget 2016.

Datuk Chua was then the Deputy Finance Minister, but his portfolio has been reassigned to the Ministry of International Trade and Industry. The guy has an MBA and a background in finance. I guess he must have approached it from the numbers perspective.

What he said makes sense (in its own context). But we won't really know the numbers until the end of the year.

Soft landing bags help to cushion a fall, and may save a life. Source: THXUK.

Even So, GST Does Help Cushion Fall of Oil Revenue

Towards the end of 2015, there was an Economic Report issued that discussed the merits of the GST. Among its benefits was the fact that it "reduced reliance on oil-related revenue and cushions the impact of lower crude oil prices." (Source: Daily Express. See link below.) Here is an excerpt:

It said the introduction of GST was an important tax reform as it was a fair and efficient tax system, and broadened the tax base, and added that the GST was implemented with minimal disruption due to close cooperation between the government and businesses, as well as wider public acceptance.

References

1. New Straits Times, 15th February 2016. 'RM40b in oil revenue loss in 2016'
2. The Star, 1st April 2016. Chua: GST not to offset loss in oil revenue
3. Daily Express, 24th October 2015. GST cut reliance on oil revenue