Asking the wrong questions on Budget 2016 recalibration

Almost immediately after the government announced adjustments to Budget 2016 last week, many zeroed in on the reduction in the EPF contribution rate for employees.

Chat groups and notice boards were abuzz with conspiracy theories on how this was all a plot to, among others, increase income tax sneakily, bail out the EPF, use EPF money to bail out other government funds, and so on and so forth.

Now, the problem with free advice is, because there is little liability attached to it, people often say whatever is on their minds, which sometimes may be imaginary.

Most of these calculations come up with a final figure of about RM100-RM200 as additional income tax that will now have to be borne by the taxpayer because of the 3% reduction.

These calculations usually ignore a few points – firstly the cap value of the EPF exemption from income tax of RM6,000; second, the inclusion of life insurance in that RM6,000; third, the fact that the reduction is voluntary and not mandatory; and fourth, and most important of all, the other item in the same budget recalibration that grants income tax relief for those earning below RM8,000 per month, which would more than offset any income tax increase brought about by the 3% EPF employee contribution reduction.

There were even posts that confused an employee’s contribution with an employer’s, assuming that the reduction was on the employer’s side. Others claimed a matching reduction (3% reduction on employer’s side) despite EPF going to great lengths to explain that this wasn’t the case.

So really, the 3% reduction in mandatory employee contribution is not an issue at all. Employees can choose to do whatever they wish to do with the money that they are now not obligated to deposit with the EPF, including opting to, if it bothers them that much, to simply continue placing that money with the EPF.

There are, however, more important questions to ask, about the amendments to the Budget.

For example, why did the Federal government insist on the optimistic projection in crude oil price of US$48 per barrel even though most other oil producing nations and leading financial institutions had lowered their projections for 2016 well in advance? Did it not learn from Budget 2015 when they planned it while oil was priced at US$110, only to have it crash to US$54?

If the 6.7% reduction in public expenses could have been done earlier, why wasn’t it?

Why does the Prime Minister’s Department still require the third highest budget, higher even than the Higher Education, Defence and Home Affairs ministries?

Given all these uncertainties, shouldn't we increase the contingency allocation?

How are priorities worked out in the budget? If other considerations were possible before the removal of, for example, the Public Services Department (JPA) scholarships, why were they not considered in the first place, rather only as a response to public backlash and popular politics?

We should also be asking what are the government’s long term plans to weather what appears to be a prolonged drop in oil prices?

And how do we intend to gap the deficit, given we are technically now a net oil importer, and that even with full implementation, the goods and services tax (GST) only managed to contribute less than 18%, making us still very much dependent on oil to fuel our economy.

Back to the EPF, there are some questions that we ought to be asking but are not.

Why is it that the EPF still gives out an average dividend rate lower than most Private Retirement Schemes (PRS)?

While PRS are much smaller and are far more dependent on contributor discipline, the EPF has a statute-guaranteed stream of income every month.

Why is it that a similar, yet again, a smaller retirement fund for the armed forces, LTAT, was able to pay out a 15% dividend last February for the year 2014, and which was more than double what EPF declared for the same period.

Compared with the EPF, the LTAT is not only a much smaller fund, but ti also has a shorter average contributor term – armed forces personnel serve as short as 11 years, compared with the average private sector employee who works an average of about 25 years.

In my humble opinion, these are the questions we should be asking. – February 2, 2016.

* This is the personal opinion of the writer, organisation or publication and does not necessarily represent the views of The Malaysian Insider.