MIDDLE-CLASS PAIN

KUALA LUMPUR – Salary earners in the “sandwiched” middle-income group will soon find themselves at the losing end as the government continues its fiscal consolidation.

The middle-income group is defined as individuals who earn between RM2,300 and RM7,000.

This group forms 40% of the country’s workforce. The middle-income earners are mostly taxpayers and are the vast majority who drive consumer spending – a main growth engine for the domestic economy.

Sadly, a majority of the middle-income earners belong to the category that is not entitled to financial aid from the government and is facing the rising cost of living and escalating property prices.

According to estimates by The Edge Financial Daily, a monthly gross income of RM6,000 for a family with two children can barely make ends meet each month (see ‘Reality bites’ table).

CIMB Research director of economic research Lee Heng Guie agreed that the middle-income earners will face a painful adjustment to realign their lifestyles with rising prices.

Dining out could soon be a luxury. The middle-income patrons of gourmet coffee outlets will have to either cut down their visits or opt for cheaper alternatives. A decline in quality of living could be inevitable, should the goods and services tax (GST) be imposed without adjustments in income tax rates.

“The middle-income squeeze is highlighted worldwide. But in Malaysia, a large proportion of the population comes under the middle-income category. There is no doubt this group will experience price pressure (from the subsidy cut and increase in cost of living) and as a result they have to spend less than before,” said RAM Holdings Berhad group chief economist Dr Yeah Kim Leng.

He said the challenge for policymakers now is to minimize the impact of rising prices.

Bank Negara Malaysia (BNM) last week warned of inflation rearing its ugly head soon as a result of the subsidy cut.

A consensus by economists forecast the overall inflation rate for the year to climb to between 2% and 2.2% from the current 1.7%. But BNM noted that the rise in inflation is from “a low level” and will be mitigated by the stable external price environment, expansion in domestic capacity and moderate domestic demand pressure.

Still, the consumer price index is the average aggregate of prices nationwide. Like it or not, city folks often feel the prices in urban areas, especially the Klang Valley, are much higher than the benchmark’s indication.

“Income growth needs to be above the rate of inflation in order for consumers to cope with rising prices. Right now, the nominal income growth is still exceeding the inflation rate,” said Yeah.

To sustain domestic consumption, according to the chief economist, the challenge is to get the high-income bracket group, who is not as much affected, to spend.

Lee said the dent on consumer spending as a result of the recent oil subsidy rationalization should only be a short-term impact.

“This time, the hike was 20 sen. But back in 2008, petrol price was raised by 80 sen. We observed that consumer spending then was not really affected by it,” he said.

Economists said there is a need for the government to focus on some relief for the disgruntled middle-income group.

Lee said this is not fire fighting. The issue needs to be looked at comprehensively, he added.

“Malaysians have a high savings rate because we need a contingency plan. If the government can provide, for example, education, healthcare and affordable housing, we won’t have to save so much,” Lee told The Edge Financial Daily.

Yeah opines that the government should widen the safety net to include this group.

“What can be considered is to broaden the tax band. This will help offset the tax burden on the middle-income group.”

“There should also be consideration for some shift from a general tax relief system to a targeted one. For example, the government can provide more relief for health, education or those with families,” he said.

Some quarters said the tax relief, for instance lower tax rates, can only be implemented when GST is imposed. This is because government revenue will shrink with the lower taxes and this will widen the budget deficit.

Last week, Deputy Finance Minister Datuk Ahmad Maslan said the government may raise the income bracket by between RM3,000 and RM4,000 to be eligible for financial aid. This had been given to lower-income earners in the form of a RM500 cash handout.

The government’s proposal to raise the income bracket for financial aid has been viewed positively by economists.

“The government needs to ensure that welfare reaches the targeted group. Direct cash transfer is one of the best forms of support because it stops leakages and is targeted at the affected groups, unlike subsidies.

However, the administrative burden for this is higher,” said Yeah.

Economists said this should be temporary and timely, and not to be doled out continuously.

“It is crucial for the middle-income group to graduate to high-income earners. On a weighted average basis, if 60% of those at the bottom of the middle-income bracket do not progress forward, it will affect our target to reach a high-income status country,” said Yeah.

This article first appeared in The Edge Financial Daily, on September 09, 2013.