How Malaysians can help to reduce the income gap

PETALING JAYA: Malaysia should make fuller use of tax and transfers (redistribution of income) to reduce income inequality, World Bank said in its Economic Monitor report which puts Malaysia's gross domestic product (GDP) growth at 5.7pc for 2014 and 4.7pc for 2015."In Malaysia, inequality of market incomes (as measured by the Gini index) is 0.43; after taxes and transfers it remains at 0.41. For OECD countries the inequality index after taxes and transfers is 0.32, 0.14 points less than the market based inequality index of 0.46.

More progressive taxes, with higher tax rates for the upper income brackets, and more generous and targeted social safety nets can help reduce inequality further in Malaysia while meeting fiscal objectives," the report said.

According to the report, the aspirational group which makes up 51pc of Malaysian society are families that are not poor or at a meaningful risk of falling into absolute poverty, but not sufficiently well-off to consider themselves middle class.

The report noted that only 16pc of the aspirational group have post-secondary educations compared with 55pc of the middle/upper-class group.

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"Most higher-paying, 'middle-class' jobs require a bachelor's degree or at least a diploma. Expanding access to post-secondary education is therefore a cornerstone of creating pathways to the middle class," said World Bank senior country economist for Malaysia Frederico Gil Sander.

The report said income inequality within ethnic groups explains over 95pc of overall income inequality with gaps in access to post-secondary education being more pronounced between income groups.

"While the agenda of closing gaps between ethnic communities is not yet complete, broad policies such as boosting pre-primary enrolment and raising the quality of the poorest-performing schools, are likely to have the largest payoffs," it said.

The report said while the tax system has progressive features and government transfers help reduce poverty, with almost 50,000 households lifted from absolute poverty this year due to transfers, the impact on inequality is small.

The Malaysia Economic Monitor report projected 5.7pc and 4.7pc growth in the economy for 2014 and 2015 respectively, with robust domestic growth but a less favourable external outlook.

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It noted that low oil prices present a short-term positive but also a key risk to the outlook, as Malaysia took advantage of low oil prices to eliminate fuel subsidies.

In the short term, the fiscal impact is estimated at about 0.3pc of gross domestic product gain, assuming crude oil prices recover to US$75 per barrel in 2015.However, if oil prices fail to recover or fall further, this poses significant risks.

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