What’s true is the failure of socialism — the lack of individual incentives, of common sharing (or collective interest), and of making equal what is inherently unequal that destroys productivity, innovation and responsibility.
What’s true is the success of Singapore, encapsulated by the following quotes of its founding father, the late Lee Kuan Yew: “The easiest way to ruin a country is to give out free things without requiring efforts” and “The task of the leaders must be to provide or create for them a strong framework within which they can learn, work, prosper, and give their children even greater opportunities.”
What’s true is the dramatic economic rise of China under Deng Xiaoping. Prioritising growth over ideology, ending collective farming, attracting foreign capital and technology, embracing market-based policies, restructuring state companies to be profit-oriented, expanding the private sector and investing in infrastructure.
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Introduction
The latest round of sales and service tax (SST) has triggered an avalanche of complaints and dissatisfaction from the people. And understandably so. The tax hike is just the latest in what has been a barrage of additional taxes in the past year and a half alone, all amid the rising cost of living (as these costs are passed through to consumers). It started with the low-value goods (LVG) tax (January 2024), higher SST rates (in March 2024 and again in July 2025) as well as expansion of what is taxable that now covers nearly all goods and services, the rollback of diesel subsidies in June 2024, the steep hike in medical insurance premiums earlier this year and, imminently, the removal of subsidy for RON95 petrol for some.
The majority of the prevailing narratives are focused on endlessly debating the pros and cons of the SST versus the goods and services tax (GST); comparing our lower tax-to-GDP ratio as well as SST and value-added tax (VAT) rates against other nations in the region; and rationalising the widening of Malaysia’s tax base, the need to boost government revenue and to reduce fiscal deficit and debts for the good of the future generations and so on. The Edge Malaysia’s recent cover story sums it up as: “We hate it, but the taxman needs it” (see Flashback).
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We think all of the above narratives miss the forest for the trees.
Here’s the thing: The taxman will “always” need and want more — so that the government can continue spending. Is there anyone who will turn down more money if they can get more? The more pertinent question is: “SHOULD the taxman get more?”
There’s spending … and there’s efficient and effective spending
We think the people’s pushback would be far lesser IF they perceive that their hard-earned incomes are spent efficiently and effectively, for instance on improving the quality of public services, especially for education and healthcare, and to generate economic growth — that will better their lives, raise standards of living and create wealth for all. That will generate income far in excess of the cost of adding debts.
The Auditor General’s reports on government spending have over the years consistently flagged an extensive laundry list of profligate spending and financial mismanagement, including many instances involving billions of ringgit wastages in overpriced purchases; irregular payments; white elephant projects where target outcomes were not achieved, unutilised or had very low utilisation; weak project management that led to delays, cost overruns and/or poor quality; lack of internal controls; poor governance and policy compliance and so on. Obviously, little effort was made to address the core issues since some version of the above inevitably appears in every report each year. Imagine that is the state of your audit reports each year as a publicly listed company.
What we would like to suggest is for government budgets to be presented in much the same way and purpose as how a public company would do for transparency and good governance, in the interest of its stakeholders.
Tabulate how the revenue collected is to be spent, for what purposes, to achieve what SPECIFIC measurable outcomes, how these outcomes will be measured, how the funds are to be disbursed and raised — and what the end goals are, how will it directly or indirectly benefit its stakeholders, what are the returns on these investments, and how will it be measured, audited and reported.
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Lest we forget, there are two ways to balance a budget. The best way is by cutting wasteful expenditure, plugging leakages and ensuring that every tax ringgit is well spent where it is needed most.
And, yes, we disagree with those who argue that it is not important how the government spends, as long as it spends more to add to GDP growth. We will write more on this in the future — and highlight real-world cases of the different growth trajectories to the people of these nations in terms of income, inflation, exchange rate and so on.
Malaysia has one of the most bloated civil service relative to our neighbours, in terms of the size of its public workforce as a percentage of total employment (see Chart 1). As a result, emoluments — and the accompanying pension obligations — have been growing consistently higher (ignoring the 2020-2021 distortions during the Covid-19 pandemic), eating up more and more of the annual budget (see Charts 2 and 3).
Even though the number of civil servants has expanded at a slower clip in recent years, spending on emoluments has continued to rise. The median salary increase for the public sector, at 18.4% between 2019 and 2023, was almost triple that of the median salary increase for the nation (+6.6%) as well as CPI (+7.3%). Emoluments currently take up 31% of total government revenue while pension accounts for another 12%, or a hefty 43% combined.
There is no question that this situation is unsustainable. Pension obligations will continue to balloon as more civil servants — whose number expanded sharply between 2000 and 2015 — age out of the workforce. The government previously announced that the pension system will be replaced with Employees Provident Fund (EPF) contributions, but there appears to be some back-pedalling. The right to pension is enshrined in the Constitution. Consequently, only new government contract staff since January 2024 who do not qualify for the pensionable scheme are forced into EPF.
Not only is this bloated civil workforce exerting an increasingly huge burden on the people — higher taxes are quite likely necessary going forward — we have created a massive bureaucracy. Convoluted procedures and paperwork are needed to get most of anything done, multiple ministries/agencies/jurisdictions are performing overlapping work, often in silos, and there are excessive licensing requirements and non-transparent approval processes, to mention a few. All these red tapes create unnecessary angst for the public and, crucially, make starting and doing business difficult and costly, especially for micro, small and medium enterprises (MSMEs). This hurts our competitiveness in the global market, discourages investments and, ultimately, results in slower economic and income growth.
Obviously, cutting wasteful spending will leave more for critical public services like education and healthcare — which are not getting the funding required to meet the growing demand — without having to raise taxes.
Case in point, while public healthcare in Malaysia is generally well-equipped and has maintained a reasonable quality of care, service capacity has increasingly lagged growing demand. As a result, public hospitals are overwhelmed. Waiting times are getting longer and even emergency cases are being delayed care. Doctors and nurses are overworked and underpaid, driving many to the private sector and, worse, out of the country. Left unchecked, this problem will only get worse. Malaysia is an ageing society. Today, nearly 8% of the population is over the age of 65 years. By 2048, it is estimated that this figure will exceed 14%, meeting the United Nations’ definition of aged society (see Chart 4).
As we highlighted in our recent article (“Universal access to quality public healthcare is the right of every Malaysian”, July 14, 2025), instead of investing in a robust public healthcare system, the government has over the years chosen to outsource this critical service — pushing middle- and upper-middle-class families to costly, profit-driven private care. Malaysia’s current spending on public healthcare has fallen to just about 50% of the nation’s total health expenditure — lower than that in Thailand, South Korea, Singapore and even Indonesia. Even more tellingly, this percentage for most countries, save for China and Malaysia, is trending up, not down (see Chart 5).
Thanks to the chronic underfunding and increasing congestion in the public healthcare system, private hospitals have flourished, rapidly expanding their target market beyond the traditional ultra-rich patients. So has the medical insurance sector. Both private sectors enjoyed strong growth — at the expense of middle- and upper-middle-income household savings. Public hospital admissions fell from 77% in 2012 to 68% in 2023, with the corresponding rise in private hospital admissions from 23% to 32% over this period.
Some private hospitals went for listing, tapping into the capital market to support expansion plans. Scarcity and the promise of strong and recession-proof earnings growth led to premium valuations. These listed private hospitals are now able to expand even faster, whether organically or through acquisitions, including with their own highly valued shares. Valuations for target entities rose. Private equity got into the game, attracted by lucrative returns, further bidding up valuations — leading to subsequent market pressure on these listed entities to deliver even more profits. Meaning, patients are charged even more.
Accessibility to affordably priced medical insurance with generous limits — that we believe, in fact, were under-pricing risks — enabled this ecosystem growth by widening the customer pool. The cost of private healthcare escalated, due to the private hospitals’ profit-driven business model, ageing population, rising lifestyle diseases and the people’s behavioural changes, on top of general cost inflation. We all know how this story ended.
The steep escalation in medical bills has turned into a growing burden on middle- and upper-middle-income families. The security protection promised by insurance too proved to be an illusion — many policyholders were caught when insurers raised premiums sharply higher earlier this year.
We expect healthcare costs and insurance premiums to go higher, further draining the savings of many of these middle- and upper-middle-income families. It surely raises the question of whether private hospitals should be allowed to list at all. Should guardrails be imposed on something as important as public healthcare? Should the cost be made transparent? We do not sell policing to the highest price bidder — so why healthcare and education?
What is worse than insufficient spending on a critical public service is ineffective spending
Malaysia spends a lot more of taxpayer money on public education than on public healthcare (see Chart 6), but is getting poorer outcomes for the money spent. Our students’ Programme for International Student Assessment (PISA) scores — organised by the Organisation for Economic Cooperation and Development (OECD) — were lower in all three assessments for reading, mathematics and science in 2022 than back in 2012, and registered among the sharpest drop between 2018 and 2022 when comparing all nations. Even though we are spending significantly more per capita than Thailand, Indonesia and the Philippines, our students are only achieving comparable results. Vietnam spends considerably less but its students are performing far better than ours (see Chart 7). Malaysia’s scores are also below what would be expected based on income levels (at this stage of the nation’s development).
There is little argument that the quality of public education in this country is deteriorating at a concerning rate. Equally concerning is the growing educational gap between public and private schools, which is driving worried middle- and upper-middle-income parents to the private sector and eating up yet another significant chunk of their savings. It is also widening the gap between the privileged and under-privileged (see Chart 8).
The job market’s response is even more telling. Amid the intense global competition for talent, why are Malaysia’s new graduates facing a high unemployment (and underemployment, holding jobs that require less education that they have) rate and commanding entry-level salaries that are well below that in 2018, and barely above the minimum wage? Is Malaysia not generating high-paying jobs or is there a serious mismatch in terms of the graduates’ skill sets and market requirements?
This secular deterioration in human capital development — alongside the nation’s savings rate decline — has huge implications for Malaysia’s future productivity gains and economic growth potential. Recall the recent report published by the World Bank in collaboration with the Malaysian government, “Reducing Inequality and Enhancing Mobility in Malaysia” (Feb 5, 2025), which states worker productivity must grow at twice the rate of the past three decades in order for GDP per capita to grow at 5% annually from now to 2050, for Malaysia to achieve high-income nation status. Can we?
Our point is this — raising taxes is not the only solution to reduce the nation’s fiscal deficit. In fact, it would be in conflict — high taxes discourage investments and hard work, leading to slower GDP growth and, therefore, lower tax revenue to be collected. Cutting unnecessary and wasteful spending is by far the better way. It also means more money can be diverted to where they are most needed, such as public healthcare. Worse than wasteful, inefficient spending is ineffective spending. Case in point, spending more money will not address the issue of deteriorating quality of public education. That is akin to throwing good money after bad. What’s urgently needed is education reform. And please, let’s not set up yet another committee (that will only spend more public money going overseas for case studies) to undertake yet another study. Enough research and studies by educational professionals have been done over the years, along with the policy recommendations and action plans. What is lacking is the will to execute. The political capital to make difficult decisions.
Contrary to popular narratives, Malaysia’s tax revenue as percentage of GDP is NOT low
Yes, total tax revenue as a percentage of GDP, of 12.5%, is lower than that of Vietnam, the Philippines and Thailand. But this is not comparing apples with apples. Vietnam, the Philippines and Thailand are all non-oil-producing nations. Hence, they need a wider tax system; in this case, higher VAT or GST (see Chart 9).
Malaysia, on the other hand, is a net oil and gas exporter. Our tax revenue as a percentage of GDP is very similar to that of Indonesia, which is also an oil-producing country. Tax revenue as a percentage of GDP for oil-rich Middle Eastern countries such as Saudi Arabia and the United Arab Emirates is very low, in the low-mid single-digit range. The commonality for all these countries? Oil is a national resource, and it is a policy choice for oil revenue to play a bigger role in funding public spending, and as a means to create competitive advantage to foster investments and job creation.
Yes, in comparison to developed nations like the US, Canada and Scandinavian countries — their tax revenue to GDP is a lot higher at the 25% to 40% range. But that is really comparing pineapples with durians. Scandinavian nations have extensive social services, universal welfare systems, high levels of public education and healthcare services and are wealthy nations.
As mentioned, high taxes are a disincentive for businesses to invest and individuals to work. Malaysia already has high personal tax rates relative to our far richer neighbour down south. And our corporate taxes are the highest in the region, hampering the nation’s global competitiveness (see Chart 10). Collectively, corporate and personal income taxes as a percentage of GDP (the blue and orange bars in Chart 9) is the highest among our closest neighbours. While we may not agree with all of US President Donald Trump’s policies, his prescription of lower taxes and a smaller, less interventionist government (Department of Government Efficiency [DOGE] spending cuts and layoffs, deregulation) are correct — and will be positive for the US economy in the long term (though perhaps not when tax cuts are insufficiently funded).
The economically important middle- and upper-middle-class Malaysians are being hammered
Why bother working hard if more of your income goes to the taxman? And more so if your tax ringgit is spent frivolously and you are not getting any obvious benefit from the spending. Worse, you are asked to pay for the benefits others now get for free. This is certainly the feeling of many middle- and upper-middle-income families today, as they struggle under the burden of rising taxes and rising cost of living, including for education and healthcare.
We analysed the taxes versus benefits received by the average B40, M40 and T20 households (see Chart 11). It is a very lopsided picture — with the B40 getting most of the benefits relative to the taxes they pay and the T20 paying the lion’s share of all taxes, including the effective “tax” for private education and healthcare, while getting marginal benefits in return. Take, for instance, the RM18 billion revenue to be collected for government coffers from the latest round of SST and savings from the diesel subsidy rollback. Where and to whom is the RM18 billion going (see table)?
Successive Malaysian administrations have been leaning progressively left over the years. We understand, this is popularism. The government of Prime Minister Datuk Seri Anwar Ibrahim has further emphasised “progressive expansion of tax revenue” and rationalisation of blanket subsidies in favour of targeted support. In other words, raise taxes further for middle- and upper-middle-income households — who are already contributing to nearly all the current personal income taxes of the nation and get no direct government cash aid — and redistribute income to the poor (B40). Ending petrol (RON95) subsidies will take away one of the last and major benefits available to these hardworking, tax-paying households.
The rich can well afford to send their children overseas for Ivy League educations and pay for the best that private healthcare can offer. We have no argument with that. But when the government tacitly — indeed not so discreetly — pushes middle- and upper-middle-income families towards private education and private healthcare, it adds to their growing burden. The cost of private healthcare is already at levels similar to public healthcare spending — about 2% of GDP — while private education costs amount to another 1% or so of GDP. That is 3% of GDP being placed on the shoulders of middle- and upper-middle-income households.
The rising cost of private education is perpetuating the brain drain — not only are graduates leaving for higher-paying jobs overseas, but parents too are migrating, for the sake of their children’s future, to countries with affordable education, where access and rewards are based on meritocracy. And the government’s solutions to escalating medical bills and insurance premiums? Average out the premium hikes over several years and propose yet another private insurance scheme for people to buy using their EPF savings — instead of taking the private hospitals and insurers to task, holding them accountable for the cost escalation and implementing concrete measures to control runaway inflation.
Contrary to populist narratives, this group of taxpayers are not rich, save for the very small percentage of millionaires-billionaires. The T20 households have monthly incomes of over RM11,820 while the M40 have monthly household incomes of between RM5,250 and RM11,819. That is barely sufficient to cover expenses for a small family with one to two children, especially for those living in cities. Indeed, the majority of the M40 no longer meets the global definition of “middle class” based on standard of living. According to Khazanah Research Institute, three-quarters of the M40 are in fact economically vulnerable, having to make trade-offs between essential and aspirational goods.
The economically important middle- and upper-middle-income families in Malaysia are being hammered. Not only are they consumers with the highest propensity to spend, but they are also savers. We think this is one key contributory factor to the secular decline in the national savings rate.
To be clear, we do not begrudge more aid for the poor. It is absolutely necessary for the government to help the poor, to ensure they have a home within a safe environment, access to quality healthcare, education and equality of opportunity in life. But we must also not create a culture of envy and begrudging those living in relative comfort because they have worked hard, saved, made sacrifices or are simply more brilliant — they deserve what they now have, and their values and culture help to make life better for everyone as well. By all means, go after the rent-seekers, those who steal or are corrupt or made their fortunes corrupting the system, that is, the givers. Those with billions of ringgit of assets that cannot be accounted for.
An increasingly progressive left government, laser focused on taking from the middle- and upper-middle class and giving to the B40 is not the answer. Simply giving handouts to the poor will make some people happy in the short term, but inevitably ruin people and the nation. Appreciation will become expectation and entitlement, before finally turning into hatred and resentment when it is no longer sustainable and stops. The real solution is one with a long-term plan for helping these people improve their living standards and livelihoods, so that they too can earn a living with pride and dignity. To save and invest, instead of borrowing to spend. As the saying goes, “Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime.”
The all-important role of every government is not to redistribute income-wealth — it is to foster a free-market environment conducive to private investment growth, which is most often more efficient and productive, that will drive innovation and create opportunities and better jobs so that all Malaysians can enjoy a higher standard of living. In short, the government must turn its focus on creating, not redistributing, income-wealth.
Let’s be honest, we are not created equal. We cannot all be Steve Jobs or Elon Musk or Warren Buffett. Therefore, there must inevitably be some inequality. It is the hope of getting ahead in life that drives innovation and productivity, and economic activity. This is why capitalist-driven America is so successful, if somewhat ruthless. It is about having equality of opportunity in a competitive free market environment where rewards are based on meritocracy. Enforcing equality of outcome will lead to punishing high performers and rewarding low efforts — that, ultimately, keeps everyone mediocre and poor. This is why we said, it is better to be unequal but where everyone is richer than for all to be equal but poorer together (see “Better to be EQUAL and POOR or UNEQUAL but RICHER?”, Feb 10, 2025). Indeed, it is not just a question of “better” but the “only” pathway for a sustainable, progressive and prosperous outcome — whether as a nation, or a company. Scan the QR code if you wish to refresh your memory. A larger, increasingly left and interventionist government has serious repercussions on the dynamism of our economy, and future growth potential. The effects are already in evidence.
The Malaysian Portfolio fell 0.3% for the week ended August 6, led by losses from Hong Leong Industries (-3.3%), Kim Loong Resources (-3.0%) and United Plantations (-0.7%). Maybank (+1.9%) and LPI Capital (+1.1%) are the two gaining stocks last week. Total portfolio returns now stand at 180.5% since inception. This portfolio is outperforming the benchmark FBM KLCI, which is down 15.8% over the same period, by a long, long way.
The Absolute Returns Portfolio was up by a marginal 0.04%, lifting total portfolio returns to 31.0% since inception. The three gaining stocks were Tencent (+3.6%), SPDR Gold (+3.2%) and ChinaAMC Hang Seng Biotech ETF (+0.7%) while the notable losers include JP Morgan (-2.8%), Crowdstrike (-2.5%) and Trip.com (-2.1%). As previously mentioned, this portfolio is now sitting on 40% cash.
Meanwhile, the AI Portfolio ended in the red last week, down 1.6%. The losses pared total portfolio returns since inception to 2.5%. RoboSense Technology (+6.9%), Horizon Robotics (+6.5%) and SAP (+0.4%) finished higher while Datadog (-8.0%), ServiceNow (-6.7%) and Workday (-3.6%) were the three biggest losers last week. The AI Portfolio is fully invested.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports
