Tag: Government

  • Modern Monetary Theory

    Modern Monetary Theory

    Reading Time: 7 minutes

    Is Printing Money Actually Okay?

    To cushion the blows of the coronavirus pandemic, many nations resorted to “printing money”, to stimulate the economy. 

    Printing Money: A more colloquial term for expansionary monetary policy, where central banks buy up securities (stocks, bonds) from the open market. When central banks do this, they inject more “money” into the economy, hence why it is referred to as printing money. Other terms may include Quantitative Easing.

    Now conventional wisdom would tell you printing money is bad, and critics would ask you to look at countries like Zimbabwe or the Weimar Republic in 1923. This is not unwarranted, it is what scarcity (a key tenet of economics) dictates — having more of something deems it less valuable (see the paradox of water). 

    But what if printing money is looked at through a different lens?  Could this potentially be a powerful economic tool to bolster our economy to greater heights? Primarily, by understanding how fiat currency operates in our modern economy, it shifts the debate from how to pay for it to what the people need.

    Now, it is worth exploring the ideas of a new school of thought that has emerged: Modern Monetary Theory.

    Modern Monetary Theory

    The basic idea of MMT is, nations with the ability to produce their fiat currency can issue as much as they want, (theoretically an unlimited supply) to finance deficits (D’Souza, 2021).

    Now, when we think about the Ringgit Malaysia, it is not backed by an underlying commodity like Gold, but its value is given as such because the government has deemed it so. Look at the banknotes and you shall see:

    “Wang Kertas ini Sah Diperlakukan Dengan Nilai RM100” or “This banknote is legally valued at RM100”

    This matters because, unlike individuals or businesses, the government is a Currency Issuer, not a Currency User. This is important because unlike a user, an issuer could spend the money first and find it later. This is best illustrated in the following example from Kelton’s The Deficit Myth on how the US government operates:

    “In 2018, an additional 80 billion was authorised for military spending. There was no rise in taxation of 80 billion or borrowing, the U.S congress simply had to pass that legislation.” (Kelton, 2019, pg.29)

    Now, once the money is authorised, government bodies can start working with businesses to supply the goods. Once the agreements are in place and money is about to change hands, all that happens is the US treasury (the government body who manages the money) tells the Federal Reserve (Fed) to mark up the bank accounts, and voila, money is in. An analogy that Kelton proposes is to think of the Fed as a scorekeeper. Much like a football match, the scorekeeper does not need to find the points, the keeper just adds them to the scoreboard (Kelton, 2019, pg.30-31).

    To assess this on a larger scale, take the controversial bailouts of 2008, post the financial crisis. The government assisted banks by buying “troubled companies’ assets and stocks” (refresher: the crisis was brought out by a collapse on bad mortgages). Now, this came with a lot of backlash, as people saw it as bailing out the banks with taxpayers money, but the Fed Chairman will tell you:

    It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed”

    This then begs the question of why taxation occurs. The first reason is perhaps to achieve a more equitable distribution of wealth to create a more just society. Another theory, proposed by Economist Warren Mosler, indicates that taxations are put in place for governments to “provision themselves”. 

    As we have discussed, the government does not necessarily use or need our money to fund spending. Provisioning itself means society can run. If individuals are being taxed, this in turn creates demand for the currency . Mosler illustrates an example where:

    – Mosler wanted his kids to do their chores, such as mowing the lawn, making the beds and washing the cars.
    – In return, he would reward them with his business cards, and the tougher the chore, the more cards they would receive.
    – Long story short, the chores were not completed and when asked by the kids, they replied “Why would we work for your business cards? They’re not worth anything”
    – With that, the whole model was turned upside down. Instead of requiring them to do work instead, he required payment of 30 cards a month.
    – If the payment was not made, they would lose their privileges; no TV, no pool, etc
    – Long story short, the children got to work, to procure these business cards.

    So, if governments as we have discussed do not technically need our taxes and can simply mark up the accounts, what is the consequence on the economy?

    Inflation

    Essentially, the constraints on any economy are the real resources, or it’s productive capacity. When there is too much money chasing too few goods, the economy “overheats”.

    To control inflation there are various policies, including controlling the interest rate. But with the tools of MMT, inflation can be tackled head-on. If the issue is the real resources, why not expand the capacity of the economy? This means, using MMT to create an economy that works to increase the real resources. This can be done by spending on infrastructure, research and development, and investing in training a more skilled workforce to increase productivity (Mazzucato, 2021, pg. 148). 

    Now, in reality, all this is easier said than done, hence why it is a theory. It is important to consider various drawbacks, namely, that this does not apply to all nations. Countries in the European Union use a shared currency and are thereby currency users, not issuers. This however does not mean that deficits do not matter, a miscalculation in spending could lead to rapid inflation. Furthermore, most nations probably have the best intention to expand their economies capacity, but unforeseen circumstances can occur. Spending on increasing the real resources will also take a while to materialise and to an extent, inflation is inevitable.

    But changing our thinking of how the economy operates is about realising that governments have the power to do right by the people and serve society at large. An example is viewing the world through the lens of MMT, which could bring about a Federal Jobs Guarantee, where those who are looking for jobs can come to the government with a set minimum wage and ideally, these jobs would be productive for the economy at large. 

    It is also worth discussing the feasibility of MMT in Malaysia. The actual concern towards the economy is inflation, and if Malaysia were to embark on an unprecedented expansion of government spending, this may trigger fears of inflation from investors. A big contributing factor to inflation is future expectations. Therefore, if spending is not done with care and the economy fails to grow, it may bring about inflationary pressures instead. Moreover, inflationary pressures may be exacerbated if institutional reforms are not put in place to curb corruption. A study by The Institute for Democracy and Economic Affairs (IDEAS) and Coalition for Business Integrity Bhd. (CBI) found that corruption adds 14.8% to the cost of your property (MalaysiaKini, 2021). Again, any form of government spending will result in inflation so to put it simply, projects must be done as efficiently as possible to reduce inflationary pressures. 

    Furthermore, whether we have “complete monetary sovereignty” is debatable, as noted by an Edge Columnist (Yahya, 2020), Malaysia has perhaps curtailed it’s monetary sovereignty due to its “exchange rate policies and debt ceilings”.

    However, this does not change the prospects of Modern Monetary Theory. Especially during the pandemic, we have heard that there is simply insufficient money to go around, hence the reduction in spending on essential services. By looking at the economy from a new perspective , perhaps we could start moving towards building a more socially beneficial economy by investing in the right kind of spending, be it in infrastructure, healthcare or research and development.

    Source : https://twitter.com/StephanieKelton/status/1362427117523382272

     


    Researchers: Muhammad Bahari

    Reviewers: Millen Lau

    Editors: Nadiah Mohd Sobri

    Download the article here: [download id=”5876″]


    [yikes-mailchimp form=”1″]

  • Soda Tax-Route to Healthier Malaysia

    Soda Tax-Route to Healthier Malaysia

    After the introduction of Sales and Services Tax (SST) on September 1, 2018, the idea of implementing a brand new tax caught the attention of Malaysians. The mystery tax that the Malaysian government is going to implement is the famous soda tax or sugary drink tax which has already been imposed in half of the ten ASEAN countries in Southeast Asia for years.

    At first, this idea was a suggestion from the Damansara MP Tony Pua to increase government tax revenue. After the press release, the Domestic Trade, Cooperatives and Consumerism Minister, Datuk Saifuddin Nasution Ismail commented “I think it is a good idea and worth it. It is what the government wants to look into,” and suggested that the government provide more innovative methods to raise government tax revenue.

    At the Cities 4.0 + Business 4.0 Conference and Exhibition 2018, Tun Dr Mahathir reinforced the suggestion by saying “The diabetes rate in Malaysia is very high because we take too much sugar”. This statement proved the intention of our new government to tackle the health problems caused by sugar-related disease and raised the possibility of Malaysia having a tax-focused on sugary drinks.

    Is soda tax the route forward to a healthier Malaysia? Let’s jump into the analysis of soda tax and how it will affect all Malaysians including you.

    What is Soda tax?

    Soda tax or sugary drink tax is a specific tax imposed only on drinks with high sugar content e.g. carbonated soft drinks, isotonic drinks, and energy beverages. With the tax, a normal soda drink will be much more expensive than its regular price which encourages the consumer to consider healthier selections such as tea and plain water. The burden of the tax will mainly be on the low-medium income families as soda drinks are considered a treat that is affordable for them with their income level. Other than that, soda lovers will also be heavily impacted by the tax as they are one of the largest consumer group of sugary drinks.

    Why Soda tax?

    Health Concern and Healthcare Cost

    High sugar content in drinks is one of the major causes of obesity and diabetes in Malaysia. National Health and Morbidity Survey 2015 indicates that almost one out of five Malaysian adults has diabetes. Health issues amongst Malaysians have become a serious headache for the government. Diabetes which is normally caused by excessive consumption of sugar will cause fatigue and lack of energy to the sufferer. As a result, the sufferer may lose concentration and affect their productivity levels.

    Sugar-caused chronic illnesses also need hefty amounts of medical fees which aggravate the burden of a typical Malaysian household. In addition to that, the Malaysian government needs to allocate an amount in the national budget for public hospitals to improve the standard of healthcare facilities designed particularly for diabetes patient.

    By implementing the soda tax, Malaysians will tend to choose drinks with less sugar content due to higher prices of sugary drinks. This policy will slowly and virtually improve the eating habits and health status of Malaysians that are at the verge of becoming a victim of the chronic disease. Workers with better health conditions will deliver higher productivity, higher productivity brings higher GDP, higher GDP at last leads to higher economic growth.

    Going a step further, one of the positive spillover effects of a healthier Malaysia population is that it eases the burden of the government’s budget on refining healthcare services which aims to solve the threat of diabetes and other sugar-related chronic illness. The living standard of an average Malaysian will also be improved as the purchasing power of Malaysians rises when unnecessary wastage of money on medical bills are avoided.

    Argument and Suggestion

    Human beings are often portrayed as rational beings that make decisions to maximize their own benefits and utility. In this case, many people oppose the idea of the government imposing this soda tax as this policy is a paternalism action that interferes with one’s will and right. Paternalism is a system in which the government thinks that people are not rational and smart enough to make their own decisions. This contradicts most people’s beliefs that they should be free to make their own decisions, especially on a trivial matter such as drinking soda. Besides that, people may fear that the approval of the soda tax meant that they are approving government intervention in their everyday lives, which may lead to catastrophe in the future. 

    Before implementing the soda tax, the government could have provided educational programmes to create awareness and gain support. Other than that, tax exemptions to soda or soft drink companies that are able to reduce the sugar level in their drinks to a healthier level may be provided. The government can also provide subsidies to research initiatives from the soda industry to develop alternative soda with natural sweeteners. 

    Government Implementation 

    Following the announcement by the Finance Minister Lim Guan Eng, the soda tax (named as sugar tax in Malaysia) has finally taken effect on 1st July 2019, with a postponement of two months after facing outrage from the manufacturing sector. There are several differences and modifications in the soda tax compared to the normal soda tax implemented in other countries.

    1. Sweetened beverages (includes carbonated, flavoured and other non-alcoholic beverages) with over 5 grams of sugar or sugar-based sweetener per 100 millilitres will be levied an excise tax amount of 40 cents per litre.   
    2. Juice or vegetable-based drinks with over 12 grams of sugar per 100 millilitres will also be taxed. 

    One important point is that now that the government of Malaysia has only exercised the tax on the manufacturing sector and has no plans to extend it to the consumer-direct-related sector for example eateries and supermarkets. This is wise as although the tax is levied on the manufacturing sector, the tax burden will distribute across both the consumers and the producers. The policy ensures that no massive public resistance will occur as the majority of consumers would not think that the tax burden is on them. As a result, more efforts can be used on improving the tax implementation and the design of the usage of the tax revenues.    

    The tax revenue collected via the soda tax will be used to provide free and healthy breakfast for all primary school students as stated by Prime Minister Tun Dr Mahathir. The breakfast programme aims to provide students with a healthy start to their day while fostering teacher-student bonds. This may be an indirect solution to a healthier Malaysia that inculcates healthy eating habits in students. The programme also takes students from different backgrounds into account to ensure equality in both urban and rural communities. The breakfast programme is one of the programmes where the tax revenue is utilised. With the tax revenue’s expenditure whereabouts known to the public, people’s trust is earned and less resistance are faced by the government for implementation of the soda tax. 

    Conclusion

    Although half of the ASEAN countries have already imposed soda tax in their countries, the soda tax may not have significant outcomes for Rakyat Malaysia as there are multiple sources of unhealthy foods and drinks. Every country has differences in their economic condition and socio-political background which indicates that the same tax implemented in our neighbouring counties may not necessarily have the same effect in Malaysia. Is soda tax suitable and beneficial to our country? The final answer will probably be positive but it depends on how the Malaysian government carries out and supervises the progress of the soda tax.

    [tw-toggle title=”References “]

    The Star Online. (2019). RM800mil to RM1.67bil to be spent on Free Breakfast Programme for primary schools. Available at: https://www.thestar.com.my/news/nation/2019/10/09/between-rm800mil-and-rm1-67bil-to-be-spent-on-the-free-breakfast-programme-for-primary-schools-says-education-minister-dr-maszlee-malik [Accessed 24 Nov. 2019]

    New Strait Times (2019). Sugar Tax revenue to provide for free breakfast for primary school children. Available at: https://www.nst.com.my/news/nation/2019/03/470787/sugar-tax-revenue-provide-free-breakfast-primary-school-children. [Accessed 24 Nov. 2019]

    Free Malaysia Today. (2018). Dr. M: Government mulling soda tax to encourage healthy living. Available at: https://www.freemalaysiatoday.com/category/nation/2018/08/27/dr-m-government-mulling-soda-tax-to-encourage-health-living/ [Accessed 29 Sep. 2018].

    Malaymail.com. (2018). Malaysia mulls soda tax already imposed by other Asean countries | Malay Mail. Available at: https://www.malaymail.com/s/1668975/malaysia-mulls-soda-tax-already-imposed-by-other-asean-countries [Accessed 29 Sep. 2018].

    Malaymail.com. (2018). ‘Soda tax’ merely suggestion to increase revenue, Pua clarifies | Malay Mail. Available at: https://www.malaymail.com/s/1663162/soda-tax-merely-suggestion-to-increase-revenue-pua-clarifies [Accessed 28 Sep. 2018].

    Nst.com.my. (2018). Almost 1 in 5 M’sian adults has diabetes: Health Ministry. Available at: https://www.nst.com.my/news/2017/04/228106/almost-1-5-msian-adults-has-diabetes-health-ministry [Accessed 29 Sep. 2018].

    Nst.com.my. (2018). ‘Soda tax’ idea gets thumbs up from Domestic Trade Minister. Available at: https://www.nst.com.my/news/nation/2018/08/402595/soda-tax-idea-gets-thumbs-domestic-trade-minister [Accessed 28 Sep. 2018].

    SST Malaysia. (2018). SST Malaysia – Sales & Service Tax Guide in Malaysia. Available at: https://sstmalaysia.com/ [Accessed 28 Sep. 2018].

    [/tw-toggle]

    Download the article 

    [download id=”4135″]


    Writer: Piong Chyi Wei

    Reviewer: Vyleen

    Editors: Bryan


    Subscribe to us now! 

    [pum_sub_form name_field_type=”fullname” disable_labels label_submit=”Subscribe” placeholder_name=”Name” placeholder_email=”Email” form_layout=”block” form_alignment=”center” form_style=”default” privacy_consent_enabled=”yes” privacy_consent_label=”Notify me about related content and special offers.” privacy_consent_type=”radio” privacy_consent_radio_layout=”inline” privacy_consent_yes_label=”Yes” privacy_consent_no_label=”No” privacy_usage_text=”If you opt to subscribe to us, we will use this information to send. “]

Subscribe to us now!

Interested in achieving financial literacy?