The Effect of Economy Trend & Tax Changes on Consumer Spending

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Consumer Spending in Malaysia increased to 115801 MYR Million in the third quarter of 2014 from 106122 MYR Million in the second quarter of 2014. Consumer Spending in Malaysia averaged 81878.23 MYR Million from 2005 until 2014, reaching an all time high of 115801 MYR Million in the third quarter of 2014 and a record low of 56768 MYR Million in the second quarter of 2005. Consumer Spending in Malaysia is reported by the Department of Statistics Malaysia. Consumers are set to go on a buying frenzy of big ticket items to avoid the higher prices expected once the controversial goods and services tax (GST) comes into effect in April, the Malaysian Institute of Economic Research (MiER) said in its 2015 economic forecast.The MiER also found that consumers will continue to be more cautious with their spending over fears of higher inflation post-GST, leading to lower growth in private consumption in 2015.

There is another contrary opinion which suggested that the introduction of the goods and services tax (GST) is timely to cushion any fall in the Government’s revenue collection amid falling crude oil price by Alliance Research. Its economist Manokaran Mottain wrote in the report that as the Government’s budget had long relied on the volatile oil and gas sector for revenue contributions, the sustainability of this dependency was now showing signs of cracking.

“The Government has to commit to trim operating expenditure and strengthen the revenue stream from GST for future fiscal sustainability,” he said. He noted that falling oil prices was a double-edged sword for the Government’s revenue and expenditure. It was positive for the fuel subsidy expenditure while negative for the Government’s overall revenue collection mechanism.

Consumers are likely to change their spending habits with the rising cost of living and the implementation of the goods and services tax, according to a survey. “Inflation has always been part of our lives. Consumers will not stop spending, but they will change how they spend,” said PHD Media general manager Jimmy Lim. The “Shrinking Wallet” study conducted by PHD Media in conjunction with Epinion and Media Prima collected responses from 500 online consumers aged 15 and above in October. Of those surveyed, 92% said they were worried about their financial status over the past year, 53% started to practise financial prudence and 42% scrutinise cost per unit to get the most out of their money.
Another theory argued that consumer spending will not change until a tax change affects take-home pay. Consumers measure the size of a tax change by its immediate effect on tax payments, not its effect on tax liabilities. Besides, consumer spending will react more strongly to a permanent than to a temporary tax change. Consumers will be reluctant to increase or reduce spending in response to a change in income unless they believe that the income change will persist.

MiER also forecast private investments to slow in 2015 based on this year’s trend, especially with declining growth in imports of capital growth. The drop will likely lead to lower export demand, which propped up third quarter growth as consumer spending eased following Putrajaya’s earlier round of subsidy cuts. MiER said Malaysia’s growth is relying upon the speedy recovery of rich economies although it noted that its major trading partners, the Euro and Japan, are still in economic limbo. But it said analysts generally agree that Malaysia would succeed in maintaining moderate growth for next year and 2016. Malaysia needs to sustain an average GDP growth of 6 per cent annually between 2011 and 2020 in order to meet Putrajaya’s imposed timetable to become a high-income and developed nation.