Malaysia's Najib announces new consumption tax in bid to curb debt

Al-Zaquan Amer Hamzah and Siva Sithraputhran
Friday, 25 Oct 2013 | 6:34 AM ET

(Recasts with details from budget speech)

KUALA LUMPUR, Oct 25 (Reuters) - Malaysian Prime Minister Najib Razak announced on Friday his government would introduce a new consumption tax in 2015 at a surprisingly high rate of 6 percent, taking a key step towards allaying concerns over the country's rising debt burden.

But Najib, in his annual budget speech to parliament, announced few major steps to cut subsidies that take up about a fifth of government spending, or deeper reforms such as reducing a bloated, but politically influential, civil service.

Najib had been widely expected to announce the new goods and services tax to cut the government's dependence on oil revenues and ward off pressure from rating agencies over a chronic fiscal deficit. But he had been expected to set the GST rate as low as 4 percent, which analysts said would have been revenue neutral since it replaces the current sales and services tax.

"The government has decided to implement a fair and comprehensive tax system that benefits all Malaysians," Najib said.

"The government believes that this is the best time to implement GST as the inflation rate is low and contained."

After securing his power base in ruling party elections last weekend, Najib had a freer hand to tackle a high fiscal deficit with unpopular steps to wean Malaysians off cheap fuel and food.

Just ahead of his budget speech, the government released an economic report that maintained its commitment to steadily cut the budget gap, from 4.5 percent in 2012 to 4.0 percent in 2013 and 3.5 percent in 2014.

The report forecast a slight pick-up in GDP growth to 5.0-5.5 percent in 2014 from 4.5-5.0 percent in 2013, underpinned by strong domestic demand.

The government expects to narrowly stay within its self-imposed debt limit of 55 percent of GDP next year, forecasting a ratio of 54.7 percent.

Najib said he would abolish the government's subsidy on sugar prices, but there were no fresh steps to reduce the country's hefty fuel subsidy bill. Najib trimmed fuel subsidies by 3.3 billion ringgit ($1 billion) per year shortly after ratings agency Fitch cut its outlook on Malaysia's sovereign debt in July to negative.

The government's economic report said that spending on subsidies, including fuel, would total 39.3 billion ringgit next year, up slightly from 37.7 billion ringgit in 2013.

To cool a surging property market, Najib announced that the country's property gains tax would be doubled to 30 percent for real estate sold within three years. The minium value of a property for foreign buyers was doubled to 1 million ringgit.

Malaysian property prices have risen by about a third in the past three years, with even bigger rises in hot spots such as parts of southern Johor state.

(Reporting by Siva Sithraputhran and Al-Zaquan Amer Hamzah; writing by Stuart Grudgings)