Plausible GST rate cut if oil prices move higher, says MIDF


MIDF Research believes that the government could reduce GST the rate by more than 1%, should oil prices climb above USD55pb, ceteris paribus.

“The government had made its intention sky-clear that the GST implementation last year was to broaden its tax base and continue with its fiscal consolidation plan. The move, though unpopular, manages tomitigate the shortage in federal revenue due to the rout in global oil prices starting mid-2014 and received global affirmation from international rating agencies such as Moody’s and Fitch,” said MIDF in a recent economic report.

“We estimate that if oil prices averaged at USD55pb in FY17, government could reduce GST rate by 1% bringing the rate to 5% (currently at 6%). At USD75pb, another 1% could be shelved while maintaining the current fiscal consolidation target,” it added.

Oil prices have rebounded significantly since January this year, from as low as USD28.9pb on January 15th to USD52.5 this week. Government recalibrated budget was conducted with the assumption of oil price hover between USD30-35pb.

As a result, MIDF added that it had calculated the possibility of oil price averaging around USD55pb next year and found that it is plausible for Government to reduce GST rate by 1% if the current fiscal consolidation level continues. If the oil price average at USD75pb, GST could be further reduced to 4%.

“We opine that fiscal policy should be in a counter-cyclical manner rather than to focus on the debt level.

“Reduction in GST rate should help to boost private consumption, providing a support to the domestic economy in the midst of slowdown in global trade activity,” added MIDF.

MIDF also said that fiscal policy should be counter-cyclical rather than focusing on the debt level.

“Despite debates among economists on the needs of government intervention in the economy, we opine that fiscal consolidation had the same effect as a contractionary policy. With the current economic environment – particularly with the weaknesses in global trade activity, we believe that an expansionary fiscal policy should be employed in order to support domestic economy in the short term,” concluded MIDF.

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