Governments manage the health of the economy through

macro-economic policies namely through monetary and

fiscal polices

1. Comment on the objectives of a macro-economic policy.

(500)

Macro-economic policy is an important way that

government to control the marketing and to improve the

economic performance. Generally, the objectives of

macroeconomics are various and involve ensuring how to

increase economic growth and to avoid economic decline in

a best way. The practical objectives of macroeconomics

involve making decisions and enacting policies that have

positive effects on an economy, and others study

macroeconomics with the objective of predicting the

behavior of economies in order to make good business or

finance decisions. (Daniel Liden,2014) There have four

main objectives of macro-economic, which are involving

different factors which are contribute to the change of

economic.

Full employment

Full employment is a situation that all those people

who are able to work and willing to work can have their

own job in society. But full employment not means all of

them can get a job, there will still exist frictional and

structural unemployment. High unemployment will lead to

unrest, chaotic and unstable markets in economic ， make

the huge waste associated with economic and also will

cause decrease of national output. To achieve and adjust

this objective, the macro-economic Policy will use as a

tool or a weapon to control the situation by the

Government. For example, increases the Government

expenditure to create some project that can assist people

have more investment in the business and to training the

young people with basic skill.

Price stability

Another important objective of a macro-economic policy

is to keep a moderate level of inflation for a long

period of time. The Inflation will lead to increase the

prices of in the market, that make people will live with

high cost. And the result of deflation will lead to

decrease production efficiency, higher unemployment and

social unrest. If the inflation rate be zero, that will

make the price of commodity remain stable. However,

inflation is a good measure of 'price stability'. Zero

inflation is often undesirable in an economy. So a health

market needs the government to keep the steady levels of

low-moderate inflation. (Nayyara, 2007)

Balance of Payments in equilibrium

Balance of payments is composed of current account and

capital account, and equilibrium in the Balance of

payments means the exports are equal to imports. The

balance of payments can as an important indicator of a

country to show their status in the international trade.

Some data of the balance of payments are the key issues

that the macro-economic policies seek to deal with, and

these policies will affect the data of the balance of

payments in equilibrium. For example, a country may try

to keep its currency at an artificially depressed level

to stimulate exports and build up its currency reserves.

(Shachi, 2013)

High economic growth

The Growth of economic also is an objective of policy,

can through the GDP, GNP & NNP of the country to measure

it. Policies of macro-economic are force on increase

productivity, there have many different factors will

affect GDP, it can through change and control the

productivity and technology to achieve change the long-

term economy. The standard of living will enhance with

growth, it’s also a key indicator to create a better

standard which can increased income of people, timely

payments of debts and increase employment rate.

2. Explain how fiscal and monetary policies differ from

each other. (500)

The economy of nations is uncertainty and unpredictable,

therefore, the government must use monetary policy and

fiscal policy to stimulate or restrain the economies in

certain situations. To be completely effective, these

policies are ordinarily undertaken in concert with each

other. (Eric Tallberg, 2014)

Fiscal policy is aimed at the government through control

the spending and revenue collection to impact the

aggregate demand so that will make it can be adjusted

with aggregate supply. It is including financial revenue

policy and fiscal expenditure policy. When the demand

decreased the government can increase spending or taxes

cut, that can direct and efficient to stimulate demand

growth, optimize economic structure and to give people

and corporations more disposable income.

Monetary policy involves for realizing a certain

objectives of macro-economic, such as promote economic

growth and increase employment, that to through control

the interest rates of bank and reserve requirements to

adjust the supply of money. The policy-makers usually

through raise interest rates thus shrinking money supply

to slow and control high inflation.

There are three main differences between of fiscal and

monetary policies.

Different policy makers: Fiscal policy is instituted

and implement by the government. Monetary policy is

instituted and implement direct by the central bank.

Monetary policy has more and more popular for recently

decades and by reason of it is instituted by the

central bank, thus will reduces the political

influence in the economy.

Different policy levers: The levers of fiscal policy

including tax, fiscal expenditure and national debt.

The levers of monetary policy including interest

rates, credit scale and required reserve ratio.

Compare with monetary policy, the results of fiscal

policy decisions of the economy are more directly

effect on the individual consumer. Fiscal policy needs

more forces on supply side to take the effects in the

economy. For example, when the government needs to

reduce inflation, they won’t choose higher tax and

lower spending, due to reduce spending will led to

decrease public services and higher income tax, it may

result disincentives to work.

Different mechanism: The effect of fiscal policy is

fast. The effect of monetary policy is slow.

Generally, the effective effect of the change of

monetary policy will take a lag with three quarters to

two years. In this way, the lag of change in fiscal

policy is shorter than monetary policy, such as

compare with tax changes, the change of spending is

more directly can affect the economy.

Fiscal and monetary policies are both useful and

effective policies that used in pursuit of higher growth

of economy and to control the inflation. But it is also

depends on the curve of demand and supply. When the

demand curve become flat, the money policy will be seen

as ineffective, at this time is needed to use fiscal

policy to solve the problem. Government must spend money

to move the demand and the economy. (Abd Rahaman Rasid,

2009) Thus, how to choose and use fiscal and monetary

policies need based on the reality of the economy.

3. The Goods and Services Tax (GST) is one of the

Strategic Reform Initiatives under the Economic

Transformation Programme. The proposed implementation

of the Goods and Services tax (GST) on April, 2015, a

fiscal policy is not generally considered as a fair or

good tax by everyone. As the country prepares for the

GST, arguments for and against the GST are numerous

and these include the issue as to whether it is

regressive or progressive tax.

i. Examine the arguments for and against GST. (1600)

Goods & Services Tax (GST) is one of value added tax

and sale tax, and it is also known as tax with

consumption of multi-stage of goods and services. It is

differing with general sale tax, GST is not only burden

by the customers, the producers and retailers also need

to pay this tax. The opinions of public are differ on

the goods and services tax, and it is increasingly

become to a strongly controversy in some countries.

Citizens who support the tax often reference the

positive aspects for the community and the nation as a

means of financial support. So, what are the causes of

the opinion about GST?

The Arguments for GST

Even though GST is a controversial tax, but it

still applied for over 130 countries around the world

now. The fundamental function of GST is it can achieve

self-policing, which is allows the enterprises to

indicate their accounting system will automatic to

deducing the input tax. It simplifies the part of

process of administrative of enterprises and the

Government. Thus, it will improve on the delivery

system of the government. If the GST is adopted, it

can greatly improve the tax administration for the

government. Compared with Sales & Service Tax, GST is

a better and fairer tax system. The following is some

of benefits of GST.

Revenue Source

The GST will add the consumption tax to the

purchase price of a certain goods or services such as

daily necessities, clothes and gasoline. Normally, the

revenue will forwarded to the local government, and

the tax revenue is collected by the taxed in the

processing of sales goods and services by producers

and suppliers. And the revenue of GST is usually used

to enhance community environment in the local of

various ways. For example, the government will use the

revenue to improve the operations of the local

schools, to help funding health care and to paying the

general operational costs of the government.

Lower business cost

With the existing Sales and Service tax system,

most enterprises need to pays multiple taxes and

higher levels of cascading tax. But under the GST,

the enterprises can reduce costs through get the

benefit of recovering the tax of input from raw

materials and incurred spending.

Improve global competitiveness

Due to the GST regime is exempts tax on exported

goods and services, the exports prices of the

countries will become more competitive in the

global market with GST, and it will help to

recovered along the supplies chain. It also will

enhance the export industry of the countries, and

helping the country can further improve the status

in the international market.

Enhance compliance

The exiting Sales and Service tax system is

difficult to administrate with many inherent

weaknesses. The in-built mechanism of the GST can

make self-policy for the tax administration, and it

can improve the compliance.

Decrease red tape

The businesses must need to apply for approval to

exempt the tax for the capital goods and the

materials with the exiting SST. But this system is

be abolished in GST because of the businesses will

counteract automatically the taxes of inputs in

their returns.

Fair pricing to consumers

Compared with SST, the customers can get the more

fairer prices of most goods and services with GST

due to the GST will eliminates the double taxation

of SST.

Greater transparency

The transparency is a positive aspect of the GST

system. The built-in control mechanism will help to

minimize the tax evasion by traders since the

hidden sectors and industries are encouraged to be

in the GST system. And it is different from the

exiting sales tax, the customers will benefit in

GST with known is the price of the goods and

services that they are buying is subject to tax or

not.

GST system is forces on to be an indirect taxation

system with simple, transparent and effectively.

Nowadays, the traditional separate taxation system

already cannot clear distinction between the existing

goods and services, so there comes GST, which is a

taxation system combine of goods and services in an

integrated manner. No matter it is be called GST or

VAT in the different place of the world, it will

affect every stage from the produce to sale to the

customers, and it is based on a tax-on-value-add

concept which avoids duplication of taxes and will

help in development of a common national market. (Hann

Liew, 2013)

Against

There have an online survey about “Do you agree that

Goods and Services Tax (GST) should be implemented in

Malaysia?” which is in the official website of Royal

Malaysian Customs. The result is about 76% people of

public are disagree with implement the GST in Malaysia,

the main reasons with it are:

May result in inflation as general products prices

may go up.

Increase the tax burden on low income working

group.

The government may possibly increase the GST rate

from 4% to 15% to increase revenue.

Worry that the GST tax may even higher than current

sales tax 10% and service tax 5%.

Worry that the effect of tax revenue re-

distribution may not be achieved.

(nbc.geoffrey, 2010)

From this survey we can find out one of the main

criticism of GST is that GST is exacerbating the social

gap between rich and poor. Due to the GST is regressive

tax in most of countries，some critics consider the poor

need pay more than the rich as a percentage of their

income. and most consumption of with the low-income

earners belong to necessities，they are hard to reduce the

spending cause of GST. On the contrary， the high-income

earners usually will decrease the unnecessary spending

under GST. Thus, GST will bring heavier tax burden for

the low-income earners.

And in some counties, the GST is used to replace a

hidden sales tax of manufacturer and often charge more

money than the tax which is replaced. The change of the

tax systems will lead to the heavier burden of taxation

for the customers, not for the producer and suppliers of

the goods and services. And usually there may will to

increase the rate of the GST that after it is introduced.

In countries with a GST, it was increased by an average

of 42.41% within 10-15 years of its introduction. Only

three out of 26 countries did not increase the rate.

Denmark and Sweden have increased the GST rate by 150%

and 125.23% respectively. (Sue Boland, 1998)

The existing tax system is based on capacity to pay.

By implement GST will eliminate the principle. Low income

people will pay 100% of their income in goods and

services tax, due to they need to spend almost 100% of

income to pay the basic expenses. Compare with it, the

high-income people only need to pay the GST with a small

percentage of their income, because they are spending

more on unnecessaries than living cost, and save the rest

or use them to invest.

Some people cannot get the compensated under the GST.

When the discharged or injured workers are wanted to get

the benefits from the government, they must to use up the

termination indemnity of employee or compensation money

of workers. If the GST rate is increase that will be

difficult for future governments to increase the

compensation. Once a GST has been introduced, it is very

easy for a government to remove the compensation in

future.

Tax evasion cannot stop by the GST. The big businesses

will be the main culprits. The GST is absolutely cannot

to stop the tax avoidance due to the enterprise will 100%

for business in the payment of any tax. GST will lead to

the rich people transfer massive wealth to the poor

people. Because businesses can avoid paying company tax,

they won't have to pay either a wholesale sales tax or a

GST.

The GST cannot increase employment. Although the GST

will surely enhance profits for private, but no one can

insure these profits can increase production and

employment. The factories are not at full capacity to

producing may lead to over-production of the world

market. They will cut the costs of bring new technology,

increased workload of workers and cutting jobs, not to

hire more workers

The GST is not helping with the governments to cutting

down funds for public services and also cannot to ensure

there have sufficient funding for pensions and benefits.

Funds for public services are being cut by both Coalition

and Labor governments. ‘The problem is not a lack of

revenue, because the total wealth in Australia (GDP) has

increased. In compare, both sides think the working class

as a whole (including the welfare of the unemployed

workers, pensioners and others) should provide the public

services tax revenue, while companies are only lightly

taxed or not taxed at all. ‘(Sue Boland, 1998)

ii. Is the Malaysian GST progressive or regressive tax?

(1000)

‘The Goods and Services Tax in Malaysia (GST) was

initially proposed by the federal government in 2011 to

replace the existing Sales and Service Taxes, and will be

effective on 1 April 2015, but many remain unsure whether

the GST is a progressive or regressive tax system and its

impact on the people.’ (PYTRAJAYA, May 29)

There have been many conflicting point of views about

the progressive or regressive. Some have been firmly

believe that it is regressive, at the same time others

disagreed. (gstmalaysiainfo, 2014)

The mechanism and implications of GST won’t be very

simple. When people talking about progressive and

regressive tax system while they have no idea what they

were, things become complicated. He also pointed out the

people with low and medium-income is bearing much of

burden under regressive tax system; high income people

pay more taxes under progressive tax system.

The goods and services tax as a broad-based tax is

usually be considered a regressive tax. The followings

things may explain the means of the regressive tax. In

short, through measure an inverse relationship between

the tax rate and the taxpayer’s ability to pay as

measured by assets, consumption or income we can find out

that a regressive tax will imposes more burden on the

poor people than on the rich people. Any consumption

taxes, including the Goods and Services Tax (GST), is

generally regarded as regressive because the poorer

households spend higher percentage of their income than

higher income earner households.

Household Income

Based on accumulated data, the tax burden on

households with an income of RM 2,000 per month is only

2.59% while for those with an income of RM 12,000 is

4.14% per month. With a GST rate of 6%, households with

RM 2,000 income should pay RM 39.16 per month, and the

households with RM 12,000 income should pay RM 345.06 per

month. Subromaniam also said households with RM 12,000

income only pay for GST exempted goods with 12.15% of

their total income, and spend 63.9% on GST imposed items.

Government services like the issuance of passport,

license, healthcare services, and learning in school;

transport services like bus and train, highway tolls and

education services are exempted from GST.

GST Impact Based on One’s Spending

Someone misunderstand that the GST is based on income,

on the contrary, it is board based on expenditure. That

means when people spends more on the goods and services

which is subject to GST, in that way, they need pay more

taxes for it. With implement the GST, there will be many

exemptions or zero GST to benefit medium and low income

earners. Based on the medium and low income earners

consumption model, they hardly spend on non-essential

items and services, or items that do not enjoy GST

exemptions. The Royal Malaysian Customs and Ministry of

Finance have conducted intensive study on GST implemented

on 160 nations, the result is Malaysia’s GST model is

progressive in nature.

GST to replace SST (Sales and Services tax)

One of a general misunderstanding of the GST will work

with the existing SST at same time, it is impossible,

because it will bring a huge and repetitive burden of

taxes to the people, it is very dangerous to the

reputations of government in the public. Subramanian said

that GST will replace SST. He also said although both

these two taxes were progressive in nature, the

government wanted to restructure the national taxation

system continuously with GST. To restructure the national

taxation system is to overcome the loopholes with SST,

and ensure an efficient and transparent tax system to

improve nation’s competitiveness.

The shortcomings of current taxation system are

overlapping and multi-level taxation, transfer pricing

and value and no tax exemption on exports. He thought GST

is more efficient, because it can reduce the bureaucratic

hassle and enhance tax compliance.

The government has appeal to the public need to seek more

detail and knowledge on GST to understand the tax system

better and should avoid from listening to hearsays of the

analysis of partial. It is undeniable that GST has an

impact on the medium and low income earners but the

impact is very small on them compared with the impact on

high income earners.

It’s hard to defining the GST is a progressive or

regressive tax in Malaysia, it is a new tax of this

countries thus with a limited number of literature for

references, and these are different point of view between

the government and the public, but from analyzing these

references we can find out, basically, GST is a

progressive one rather than a regressive one in Malaysia.

Even though the Malaysian Model is a progressive one,

the Government has designed a compensation package to

offset any additional tax burden.

The offset package includes;

1. RM300 one-off cash to BR1M recipients as

household assistance.

2. Individual income tax rates reduced by 1% to

3% to increase their disposable income – 300,000 tax

payers will no longer pay tax.

3. Families of RM4,000 household income will not

pay tax any longer.

4. Cash assistance under the BRIM is increased

from RM500 to RM650 in 2014 and to increase it further in

2015

5. Chargeable income subject to the maximum rate of

exceeding RM100,000 will be increasing to exceeding

RM400,000. Current maximum tax rate of 26% will be

reduced to 24%, 24.5% and 25%.

(DATO SRI KHAZALI AHMAD , 2014)

iii. Compare the present Sales and Service tax with the

GST. (400)

Generally, compare with the present sales tax and

service tax, the GST will charge the each stage of the

consumption in the supply chain of goods and services,

and the customers will burned all the tax in the end.

The feature of GST is fundamentally changed from the

present single-stage sales tax and service tax levied

at only one stage of the supply chain.

Basically all of goods and services are subject to GST

only if there has special dispensation by the

government. The same concepts also applied in sales

tax, where all goods are taxable only if they are have

been remitted. And now some of the exemptions will be

reduced in the regime of sales tax. In another way,

the service tax is use to tax of those specifically

prescribed services only, and it is in a positive

concept. The GST regime will apply on a wider range of

services, because it have greater flexibility that

more attractive to governments as a revenue measure

and promises simplicity compared to the task of

administering exemptions and identifying taxable

services under the current sales tax and service tax

respectively. (Anthony See, 2013)

The range of the existing service tax rules is not

involve imported services and intangibles, so now the

imported services is not need to pay for service tax.

In the GST regimes, it will control the imported

services through “reverse charge”. The recipient of

the supply is requested to account for the output GST

on the imported services and report the amount in the

GST return submitted to the Customs. (Pwc, 2014)

There is a very important feature of GST regime is the

time of supply. It is determine in GST returns, when

people need account for GST. The existing sales tax

and service tax structures do not allow consolidated

tax filings. In service tax, ‘group relief’ is

available for certain professional services when

provided to companies within the same group and

subject to certain limitations. (Pwc, 2014)

The GST rules are due and payable with a sale or the

person who can dispose it and it is different with the

structure of existing sales tax. The service tax is

accounted for from the date of invoice issued to the

end of the 12-month period with only due when payment

is received, and where payment is not received. It is

very important for businesses to learn, how to deal

with the related problem when the change happened,

because it may change the cash flows of businesses in

the new tax.